The Hutchens Blog

Sandy Hutchens takes a look at the mortgage mess.

Who is to blame for the mortgage crisis? America, go look in the mirror! You don’t pay your bills and if you do, you let interest and late fees accumulate until you can’t pay them. This means that your credit score gets lower and lower with each missed payment or increase in debt. Then you whine because no one wants to lend you money anymore and the bank is taking back the house you bought with no money down and the seller paid your closing costs.

As a mortgage professional, I have seen it all! There are so many stories; I had a lady tell me she had good credit and then yell at me because I told her that she had been late every month for the last year. She said she didn’t think that being slow on payments should make a difference on her credit and that it wasn’t fair, at least she paid her bills.

I caused many an argument between husband and wife because they kept bad credit secrets from each other. I once had a man claim that he had excellent credit, only to learn that his credit was in the low 500’s because his wife hadn’t paid the bills on time and they were carrying a balance of $16,000 to Nordstrom’s, not to mention the other $25,000 of debt they were carrying. I believe that was the beginning of divorce proceedings because she was only reachable at the vacation home after that.

During the 1990’s, the sub-prime markets were born. This was creative financing to help those that had fallen on hard times, to re-establish credit and still be able to buy the things that those with “good credit” could buy, just at higher interest rates. Wall Street was selling these loans, in bulk, like hot cakes on the secondary market and investors were singing all the way to the bank.

It got to the point that you could file Chapter 7 bankruptcy on Monday and on Tuesday, with 15% down, could go and buy a new house. The bankruptcy laws being as forgiving as they were, you probably still had your home and could sell it and use the equity as your 15% down payment. If you still managed to keep your credit score at 580 (creditors only report to the credit bureaus every 3 months), this same deal could be done with just “stating” your income instead of actually verifying that you could make the payment.

After 9/11 the economy took a major hit and lenders once again came up with more creative financing to help struggling buyers. These programs combined with low interest rates that the Federal Reserve kept dropping, got to the point that I was able to put families into a new home with zero money down, the seller paying up to 6% of the closing costs and get the buyer 100% financing. I had one buyer walk out of escrow pocketing $800 for buying a condo because the seller had paid all the closing costs and she was credited by her real estate agent.

The most lucrative thing lenders came up with was the Adjustable Rate Mortgage or ARM.

These were a good deal for the lender, the loan officer and the buyer, if they were disciplined and listened to an ethical mortgage professional. There were two types; those that had the possibility of negative amortization and those that didn’t. This was an ethical issue for most loan officers because lenders were paying up to 4 points yield spread premium on the loans that had the negative amortization clause. This is money that most buyers aren’t even aware of because it doesn’t always have to be disclosed, depending on the licensing of the broker and the money doesn’t come out of the buyers pocket at escrow. Mortgage companies were selling these to anyone and everyone, regardless of whether it made sense. This means on a $400,000 loan, $16,000 could be paid to the broker in addition to the other fees charged. Everybody got fat and happy and the borrowers had no idea what they had done, until the payment adjusted and they couldn’t make the new payment.

Regardless of whether this was explained to you or not, America, you didn’t want to listen! You saw a $1500 per month payment for a $400,000 house and went for it because you wanted to impress your wife, family, neighbors and co-workers. Buying a home is the American dream and you wanted your piece of it, now! Not when you could save enough money because America doesn’t save money anymore. You spend it all and live paycheck to paycheck.

Just in my own experience, I explained and explained and disclosed and you didn’t listen. However, my borrowers got the loans that didn’t have the negative amortization clause. It still meant they had to pay their mortgage and bills on time. At the point right before the loan adjusts in rate they were to call to see what rates are doing and either stick with it because rates are down or refinance because they qualify for a lower rate.

However, as much as I hold the American home buyer responsible, I have to say that the mortgage industry is also guilty. It is rampant with criminals and liars. The Department of Real Estate can’t keep up with the complaints and the fraud that just keeps escalating.

The scheme is common in big and well-know retailing companies and it’s quite simple: salesperson writes duplicate bill and sells it to an invoice factory or employer, who wants to optimize taxes. Such scheme can be used only when cash register allows issuing duplicate receipts without note on them on it.

Alo Ivask, the CEO of Rautakesko which operates K-Rauta said that the company is familiar with that.

“Tax and Customs Board (MTA) sent an enquiry on a duplicate receipt. We started to investigate it and it came clear that by now a former employee has done that,” Ivask said.

He noted that that employee said that “a friend asked” and “I didn’t think” as explanations.

These false receipts amount to about EEK 20,000.

Much more risk-free is the case where employee uses receipts a client didn’t want.

“I can’t exclude it hasn’t been done since it’s nearly impossible to check what happens to receipts customers don’t take along or throw away,” Oleg Gross, the owner of Gross store chain said.

He added that you don’t have to be a salesperson to make that scheme – a buyer can grab thrown receipts along as well.

Egon Veermäe, the head of audit department at MTA said that the management usually hears of such schemes from MTA, since people are clever. MTA has caught more than ten such companies in the past months.

“We haven’t done separate action for it. There just have been questions with some receipts when auditing some companies and we’ve found companies and people who have been issuing them,” he said.

Usually the companies are caught when auditing the company which buys the service. Veermäe said that a “service provider” may have more than one customer.

Fee for such a service isn’t big – about EEK 30-50 per EEK 1000 receipt.

Quite common are cases where customer asks to write goods to the receipt, which won’t match the purchases and salesperson does that. Veermäe noted that salesperson often don’t think there’s something illegal in it.

Sandy Hutchens said that because of the difficult times we are experiencing more employees are likely to make money with invoice frauds and useing fictitious duplicate bills.