Some 40 mortgage brokers and real-estate agents are gathered at the Long Beach Hyatt on a balmy Friday in January to attend a seminar conducted by broker Allen Brodetsky and local real-estate attorney Steve Vondran. The mortgage business might have collapsed, but those assembled in the glittering ballroom have each paid $195 so Vondran and Brodetsky can teach them a fresh way to make money off of other people's debt.
"The Department of Real Estate has granted brokers a whole new product line you never had before," says Vondran, as the Dockers- and Ann Taylor-clad crowd read from fat binders and ponder the unfamiliar terms in Vondran's PowerPoint presentation -- "LOAN AUDITS," "QUALIFIED WRITTEN REQUEST."
The new product is a loan modification. When borrowers are unable to pay their monthly mortgage bills, a frequent occurrence in this era of self-destructing subprime loans, loan modifications allow the borrowers to renegotiate the terms of their mortgages. They pay a lower monthly charge and keep their houses, and the broker earns a paycheck for arranging the new deal.
Besides doing so-called loan mods themselves, Vondran and the San Fernando Valley-based Brodetsky help others get started in the business. Vondran also has another niche within the field: Brokers hire him to eyeball borrowers' mortgage papers to see if their original lenders committed improprieties in making the loan. Many of the lenders did, and loan mod brokers who can promise their clients a legal review have an edge on the competition. Pitching his services to the room, Vondran works up a lather against predatory lending, which he denounces, quite accurately, as "an unlawful attack on home equity."
Brodetsky then shows the group at the Hyatt a redacted photocopy of a loan modification he recently secured. It cuts the borrower's monthly payment to about $1,500 -- half of what it would have been if he or she had to pay the full amount owed.
Unfortunately for the borrower, however, is that the remaining debt doesn't vanish. Those unpaid tens of thousands are waiting there to be reckoned with down the road, plus years of additional interest. "Isn't that predatory lending?" gasps one of the attendees at the Hyatt. Vondran and Brodetsky change the subject.
By the Obama administration's account, its new housing rescue plan, which goes into effect on Wednesday, will pull up to 4 million homeowners back from the brink of foreclosure. It also offers another 5 million or so excessively indebted borrowers the chance to refinance into lower-interest loans.
But the biggest winners in the government's $275 billion homeowner bailout just might be the mortgage brokers who were largely responsible for creating the disaster in the first place. Many are now reinventing themselves as heroes of the mortgage crisis by offering loan modification services. And between its new cash support and the refinancing program, through which they can benefit from the federal aid via brokers' fees, the Obama homeowner bailout might as well be a full employment program for them. The Treasury Department's FAQ for borrowers warns, "Borrowers should beware of any organization that attempts to charge a fee for housing counseling or modification of a delinquent loan, especially if they require a fee in advance." But nothing in the homeowner bailout prevents these middlemen from stepping in and taking a cut.
In California, home to nearly one-fourth of all the foreclosures in the country, there are now applications pending from some 500 brokers and real estate agents seeking to get in on this new line of business, which hardly existed six months ago (but now has its own trade group). California's Department of Real Estate, which licenses mortgage brokers and real estate agents, has so far authorized more than 200 companies to negotiate with mortgage lenders to modify loans, and the list grows longer every week. They may charge borrowers whatever they choose for this service, as long as they only collect a portion of the fee upfront and take the rest once the job is completed. The going rate ranges from a flat $2,985 to about 1 percent of the amount of the mortgage, or $4,000 on a $400,000 loan.
The problem is that the majority of loan mods are lousy deals for homeowners. Federal banking regulators recently determined that more than half of all mortgages that were modified by lenders in early 2008 ended up heading into foreclosure again in less than six months. Most loan modifications, in fact, dig borrowers deeper into debt.
Like many other former mortgage brokers, Shawn Kolahi of Irvine, Calif., now runs a company licensed by the state of California to help borrowers negotiate loan modifications. His company, Loan Processing Center Inc., employs nearly 80 sales reps and case processors in a sleek office in Irvine. Up through 2007, Irvine was the subprime lending capital of America, home to infamous powerhouses like Ameriquest and New Century. For a fee of several thousand dollars, Kolahi's company pores through loan files; assembles financial documents from borrowers; haggles with lenders -- the kind of vital scrutiny that these borrowers' mortgage brokers didn't provide in the first place. The brokers at the Loan Processing Center are now working in reverse. In seeking mortgages on behalf of borrowers, they used to provide a bare minimum of evidence to lenders that applicants could make a monthly mortgage payment. Now the brokers spend their days trying to prove that borrowers can't make their loan payments, and need to renegotiate their mortgages.
"We had to try to stay alive," explains account executive Sam Carlson, who recruits brokers from across the country to join the operation. He formerly worked at a mortgage brokerage. Now his new company blitzes homeowners who have subprime and other high-risk mortgages with junk mail and telemarketing calls. Carlson reports that Loan Processing Center is currently working with some 1,700 clients. "We're the biggest," he boasts.
Just a couple of years ago, Carlson's boss Kolahi was a broker for Dana Capital, which sold loans on behalf of Irvine subprime behemoths like Option One and New Century under its own brand name. Dana Capital specialized in the most noxious of all mortgages -- "cash out" refinancing, in which homeowners with bad credit were urged, through a barrage of junk mail, faxes, telemarketing calls, late-night TV ads and Web phishing, to take out new loans based on the swelling value of their real estate. Dana's brokers often skirted the edges of the law, working without licenses to sell mortgages in the states where they peddled them. For selling loans without a license in New Jersey, Kolahi was named in a cease-and-desist order prohibiting Dana Capital from doing business in that state. By 2007, nine states had ordered Dana Capital to get out. Facing hefty fines from regulators, the company shut down.
But by then the damage was done. It's largely thanks to cash-out mortgages like Dana's that recent homebuyers in California, more than anywhere else in the country, owe far more in mortgage debt than their homes are actually worth. Because Dana Capital loans typically carry adjustable rates that start at 8, 9 or even 10 percent and jump sharply after two years, and include hefty fees for late payments as well as prepayment penalties making it prohibitively expensive to refinance into cheaper new mortgages, a huge number of Dana Capital's borrowers are doomed to lose their homes. In the company's backyard in Orange County, of the roughly two dozen mortgages Dana Capital sold to borrowers in 2006 and 2007, at least 10 are already in foreclosure. Even for California, that's a lot.
Now Shawn Kolahi heads a fire brigade battling the inferno he helped ignite. Following Dana Capital's business model, Kolahi's loan modification enterprise relies on subcontractors -- some 480 brokers nationwide selling its loan modification services. Many are recruited via mortgage broker message boards, the places they went to not so long ago to find lenders willing to make ridiculously risky mortgages (as in "CAN ANYONE PLEASE HELP? I DESPERATELY NEED A LENDER THAT WILL DO 100% FINANCING PURCHASE LOAN ON A NON OWNER OCCUPIED IN NJ 668 FICO, STATED").
These subcontractors, or "affiliates," each operating under their own company names in Florida, New York, Texas, Michigan and other states, as well as in California, promise to help homeowners in financial trouble restructure their loans -- that is, negotiate with the company handling their mortgage payments to work out some kind of deal to head off foreclosure. Carlson's iPhone is flooded day and night with text-messaged scenarios from these brokers, each checking in to see if a beleaguered homeowner might qualify to cut a deal. If it's mathematically possible to bring homeowners' mortgage payments to somewhere under 40 percent of their monthly overhead, they're probably in. The brokers send the cases to Loan Processing Center, and pay Loan Processing Center a sizable fee per file to get the job done.
Some of the "affiliates" appear to be in pretty desperate shape themselves in these hard times for the mortgage industry. One subcontractor recently went into default on his Irvine condo -- the first stage of foreclosure -- after missing nearly $20,000 in mortgage payments. Kolahi's wife, an attorney who works with Loan Processing Center to identify illegalities committed back when the borrower first got the loan, is in similar straits. She's now heading for foreclosure on a loan for nearly $1.2 million on a home in an exclusive gated community in the Irvine hills.
"Why do you think so many loan mod companies are here in Orange County?" asks Sam Carlson brightly. "We've got cheap office space and out-of-work loan processors!"
Carlson and his boss Kolahi are far from the only exploding-mortgage salesmen now reinventing themselves as licensed loan doctors. California has also allowed an O.C. company called Mortgage Bailout Assistance -- 1-866-BAILOUT -- to charge borrowers to repair their bad loans. Don't be fooled by its eagle logo; this is no federal agency, but a spinoff from a lender called Amtec Funding. Amtec, like Dana Capital, specialized in aggressive marketing of subprime loans nationwide, a practice that won the company an FCC citation for violations of the Do Not Call registry. Amtec, which is still in business, was co-founded in 2005 by Samy Khoury, a former V.P. of sales for First Alliance Mortgage, one of the most notorious of the first wave of subprime lenders in the 1990s.
Following a training program run by Khoury's then-wife, First Alliance salesmen adhered to a script that, as a federal appeals court concluded, "was unquestionably designed to obfuscate points, fees, interest rate, and the true principal amount of the loan. First Alliance's loan officers were taught to present the state and federal disclosure documents in a misleading manner, and the presentation was so well performed that at least some borrowers had no idea they were being charged points and other fees and costs averaging 11 percent above the amount they thought they had agreed to." That court ruling held Lehman Brothers liable for bankrolling "fraudulently obtained loans" sold by First Alliance -- the one time ever that an investment bank marketing mortgage-backed securities has been found legally responsible for the harm they caused to subprime borrowers.
Amtec loans followed in the same tradition. In Chicago, Amtec charged one borrower a starting interest rate of nearly 10 percent, and for the privilege ladled on fees amounting to 5 percent of the entire loan amount. An Amtec loan that went into foreclosure last year wasn't unusual for the lender: stated income, interest only, adjustable rate after two years, one of two mortgages, and borrowed by an investor who owned several other properties. Even the initial teaser payments on the one loan amounted to nearly half of the investor's alleged income. The starting interest rate was 11 percent. His 752 credit score was sufficient to get this Amtec loan to pass muster with subprime titan New Century, and from there go into a Morgan Stanley mortgage-backed securities pool.
Mortgage industry veterans now joining the ranks of loan modification specialists don't apologize for the products they used to sell. Ty Youngblood, a mortgage broker with 10 years' experience who now does loan mods with state approval in foreclosure-ravaged Riverside County, says it was impossible to stay in business in Southern California unless one was willing to deal in no-doc, option ARM, cash-out and other toxic mortgages, some of which were still advertised on his Web site earlier this year, but are no longer. "I'm just a waiter at a restaurant," Youngblood explains by way of metaphor. "I didn't make the food. I didn't grow the food. I'm just presenting the menu to the borrower. A T-bone steak? I'm just saying it's on the menu. We didn't invent these option ARMs -- the banks did."
Their history in the trenches lets these brokers advertise themselves as experts on the mortgage business, and government-approved loan modifications as a chance to redeem themselves as heroes helping save homeowners from the recent excesses of their own industry. They've certainly found a growth opportunity. County clerks are recording more than 600 mortgage defaults each week in San Bernardino County; more than 550 in Orange; 1,050 in Riverside; almost 1,700 in Los Angeles -- on track to 200,000 defaults this year in the L.A. region alone, each one of them a potential customer. Most will go into foreclosure. (To motivate Loan Processing Center's sales force to close deals with their highly distressed customer base, Carlson requires each of them to Google "mortgage suicides.")
California's state regulator urges borrowers to use loan mod advisors from the state's approved list, if they're going to pay someone for help. "Log on, look 'em up, check 'em out," says Tom Poole, public information officer for the Department of Real Estate. "Folks ought to be going to the [department] Web site and verifying the licensing status of the company."
But sorting real loan modification companies from phantom ones may be almost beside the point. Loan mods, in general, don't offer much long- or short-term relief for the borrower. Among the 3.5 million subprime and other high-risk loans for which Wells Fargo oversees mortgage-backed security pools, one-third of the loan modifications in the fall of 2008 reduced the monthly payment, but nearly half actually increased it within a matter of months, according to an analysis by Alan White of Valparaiso Law School. The average interest rate after modification was 6.9 percent, and fewer than one in 10 got a reduction in even the late fees they owed. Among the loan modifications reported by HOPE NOW, the mortgage industry effort to help homeowners in foreclosure, even fewer modifications are lowering monthly payments -- just 1 in 5.
The Obama plan aims to improve that dismal track record, by promising lenders that if they and a borrower can work out a deal bringing monthly mortgage payments down to 38 percent of the homeowner's income, the feds will kick in money for five years to bring down the bill even further, making it more likely the borrower will be able to keep paying.
For many borrowers, a lower payment will be all the difference between staying in one's home and going into foreclosure -- for now. But the Obama plan is a short-term fix. It doesn't do the one thing that would actually help homeowners in the long haul, and that is reduce the amount of principal they owe. The loan mods that these brokers are selling, and that the Obama administration is now promoting, are new and improved variations on the exotic mortgages that seduce borrowers in the first place. They charge a manageable amount now, and then hit the borrower with higher costs down the road.
Most problematically, the total amount of money owed doesn't shrink -- in most cases, it grows, even with the new federal aid. Getting an actual debt reduction "[is] like a Bigfoot sighting," jokes Allen Brodetsky.
"Loan modification success rates are ridiculously low," agrees Debra Zimmerman, an attorney with Bet Tzedek Legal Services in Los Angeles who represents borrowers. "Until banks are ordered to reduce principal too, there will be no solution." Congress is voting this week on "cramdowns," giving bankruptcy judges the power to order lenders to reduce mortgage debts just like they already do with car or student loans that a borrower can't pay, but resistance among the financial industry has made that prospect uncertain.
As real estate values plummet, borrowers who get loan mods are signing up to pay ever-more-insane sums for increasingly worthless real estate. Since the bill doesn't come due until much later, they either don't care, don't know or harbor delusions about future price appreciation.
Loan Processing Center is there to encourage such wishful thinking, openly discouraging clients from seeking reductions in the debt they owe. Follow Sam Carlson's math: "Let's say you have a loan for $900,000. Now, 30 grand off that does nothing to lower your payment. A borrower needs immediate monthly relief, and the only way to significantly do this is a lower interest rate." The only goal is to hang on to the home, right now. After all, Carlson explains with an enthusiasm that might have sounded convincing in 2005, the homeowner will gain in the long run. "America is coming back!" he cheers. "Interest rates are going down! That home is going to be worth a lot."
His projection is far more optimistic than that of most real estate experts. Even economists for the home building industry, pathologically predisposed to positive spin, project an additional 29 percent national average home price decline this year alone -- in hyper-inflated California, likely more. None dare to venture a guess about when, if ever, values will return to their bubbleicious heights. California real estate broker Ramsey Su recently offered another view of the equation in the Wall Street Journal: "Loan modification is not only ineffective, it is evil. Coercing borrowers to continue paying a mortgage on a home that is hopelessly overvalued and not informing them of alternatives is predatory lending."
Just like mortgage brokers, loan mod companies are under no obligation to act in borrowers' financial interests, short- or long-term. Under California's model contract, which brokers are encouraged to emulate in their dealings with borrowers, almost any change to a mortgage is an acceptable result, whether or not it saves a borrower money. And while the client has to accept the proposed deal in order for the company to get paid in full, the sales forces at these firms are veterans of pressure pitches to people in tough financial situations. Both Carlson and a spokesman for Mortgage Bailout Assistance indicate that their clients almost invariably take the offers they are given.
The proverbial fox is helping the hens hold on to their coops, and not just in California. Seventeen states now have laws on the books effectively banning "foreclosure consultants," but most make an exception for mortgage brokers. As consumer complaints about fraudulent loan mod operations proliferate across the country, other government officials, including New York's City Council, are now following California's lead and exploring the creation of an official registry of mod brokers.