SEC — No Help For Mortgage Borrowers
The news is now filled with SEC accusations that Goldman Sachs defrauded investors who bought mortgage-backed securities, allegations Goldman Sachs strongly denies.
But nowhere in the news do we hear of any effort to help the mortgage borrowers whose screwing made the financial meltdown possible. While the SEC is concerned about helping securities investors who lost $1 billion, no one gives a damn about the people who lost their homes.
Let’s look at what really happened:
*We have millions of foreclosed homes, a downsized economy and massive job losses as a result of the financial meltdown.
*The federal government had to bail out Wall Street because big banks and brokerages were stuck with mortgage-backed securities (MBS) they were unable to unload on pension funds and various investors.
*The MBS were insured in case their value eroded, but the insurance was no good because there were few if any reserves set aside for claims.
*To create mortgage-backed securities, Wall Street needed an ongoing supply of mortgages. Since lenders could sell virtually all the loans they originated it made sense to lower application standards and introduce non-traditional mortgage financing and popularize option-ARMs, interest-only loans, financing with little or nothing down, piggy-back financing and “stated income” loan applications which allowed borrowers to essentially guess their income.
Bottom line: There would not have been a financial melt-down if the mortgage origination process was effectively regulated at the point of sale, the moment when loans are sold to borrowers. With good loans the mortgage-backed securities would have been fine, the ratings would have been justified, few insurance claims would have arisen and a Wall Street bailout would have been unnecessary.
Best Rates And Terms
Anyone who has ever looked for a mortgage naturally wants the best possible rate and terms for their financial situation. And lenders are happy to offer such rates and terms, at least that’s what they say. After all, no one would use a mortgage lender who advertised the second best rates in town.
In other words, virtually all borrowers rely on mortgage lenders for product options, rate information and counseling. And lenders, for their part, have no obligation under federal rules except to maximize their profits.
Don’t believe it?
“Some have proposed,– said Harry Dinham in 2007, then president of the National Association of Mortgage Brokers, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ?best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.
“Simply put, a mortgage broker should not, and cannot, owe a fiduciary duty to a borrower. The consumer is the decision maker, not the mortgage broker,– says Dinham.
John Robbins, then chairman of the Mortgage Bankers Association, explained during June 2007 congressional testimony that “notably, MBA does not believe that a disclosure of function and fees is warranted for mortgage lenders. Unlike a broker whose role may be uncertain — agent or loan provider — a lender’s role is clear. A lender underwrites, approves and funds the loan. The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”
No Help For Borrowers
While the SEC is busily doing battle with Goldman Sachs, who is fighting for the borrowers who lost their homes? The SEC claims that 99 percent of the residential mortgage backed-securities (RMBS) in one loan portfolio had be to downgraded. Is there any possibility that loans which fail with such frequency were tainted from the moment of origination? Can lawyers claim an unconscionability defense on behalf of borrowers with such mortgages?
Lenders point out that borrowers signed all the paperwork and were free to decline loan offers. But who was the authority figure in the room? Upon whom did borrowers rely? Has anyone actually read their loan papers?
Mel Martinez, an attorney and former HUD Secretary under George W. Bush told the Washington Post, “you know if I’m a lawyer and the secretary of HUD and I’m not reading this junk, you know there’s work’ to be done fixing the system.” (See: “HUD Chief Seeks Simpler Sale Closings,” June 2, 2001)
Attorney and also a former HUD Secretary under George W. Bush, Alphonso Jackson, told the Washington Times that “I’m an attorney and I’ve had eight houses and I didn’t read all that mess. If I didn’t read it — and I doubt anyone around this table read it — then we can’t hold people responsible for not reading every line when they were closing their loan.’” (See: “Jackson: Mortgage fine print not read,” March 20, 2008)
What lenders won’t point out is this: Every loan, without exception, is underwritten. The lenders create qualifying standards for each mortgage product and have in place an extensive process to assure that the borrowers met all requirements. Lenders can decline questionable loan applications, something that no doubt would have happened were it not so easy to sell such paper on Wall Street.
To their credit, many small lenders did not and do not regard homebuyers as prey. Few community banks or credit unions, as examples, offered toxic loan products.
Think about it the next time you need a mortgage.
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