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, what federal agency is trying to get back the money lost by mortgage borrowers?
This is hugely important because 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 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
Under federal rules lenders have no fiduciary obligation toward borrowers, no requirement to get them the best possible rates and terms. And since most loans are originated by federally-regulated lenders -- national banks and their mortgage subsidiaries -- it's the federal rules that count.
John Robbins, then chairman of the Mortgage Bankers Association, said 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."
Really? Borrowers know this? Have you ever seen an ad from a lender saying they would not help you find the best rates and terms? Would you use such a lender? Would anyone?
No Help For Borrowers
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 are nothing but financial lemons, products that ought to be recalled like toys with lead paint or cars that suddenly accelerate?
Lenders point out that borrowers signed all the paperwork and were free to decline loan offers. So what. Consumers freely bought recalled cars and toys but such products were still recalled. Besides, who is the authority figure when loans are made? Upon whom do borrowers rely? Has anyone actually read their loan papers?
Mel Martinez, a 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)
Another 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. Lenders have qualifying standards for each mortgage product and an extensive process to assure that borrowers met all requirements. Lenders can decline questionable loan applications or refuse to offer toxic financing in the first place -- that's the route taken by most community banks and credit unions.
Lead-covered toys. Dangerous cars. Toxic loans. Recall 'em all.
(Peter G. Miller is the author of The Quick & Dirty Guide To Successful Mortgage Modifications. For more real estate news and commentary, visit OurBroker.com.)