Drawn into real estate frenzy - Part 1
A neighbourhood finds loans too good to be true
By Adam Geller - Associated Press
Upstairs at Victory Chapel Church — a cinderblock bunker converted from a long-ago Ford dealership — the pews are reserved for praising heaven.
But downstairs, in a basement rental hall, a pair of women preached of worldly wonders.
At 11 a.m. on alternating Saturdays, they set out rows of folding chairs and spread tables with urns of coffee and boxes of Dunkin’ Donuts. And they offered testimony to the bounty of real estate, encouraging their growing flock to buy the wood-frame walk-ups and rowhouses surrounding this workaday stretch of Columbia Road, just down from the OJ Car Wash.
The key was trust, they told the faithful, as the voices of the practising choir rang through the building.
Still, Valerie Hayes was a little skeptical.
“I really was thinking it would be at least a year before I’d get a mortgage,” says Hayes, an executive secretary and mother of two. She was wary of borrowing because she was saddled with her own student loans.
But “on Saturday I went to the seminar,” she says. By Sunday, she was pre-approved to buy.
Soon after, Hayes did buy. The problem, prosecutors say, is that the women put Hayes and others into homes they couldn’t possible afford. They did so by filling their loan applications with details of jobs, paycheques and bank accounts that were all so much fiction.
What happened in this church basement was no fluke; it happened elsewhere, too.
Much has been made of the very questionable lending that accompanied the rapid growth of sub-prime mortgages, a phenomenon that made homeowners of so many people. But less attention has been paid to the gimmickry and manipulation that delivered the loans an industry craved.
Some say this was nothing short of fraud. Those accused reject the charges. The case also raises tough questions of whether borrowers, too, should bear some responsibility.
But the bottom line is beyond dispute. Valerie Hayes can tell you about that. Just don’t go looking for her at the home she bought, thanks to the women at Victory Chapel Church.
It’s owned by the bank now, and there’s a real estate agent’s lockbox on the door.
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Over the past decade, the mortgage industry has turned itself into a very big tent.
People who might have had trouble borrowing found it much easier to get a loan. Lenders devised new types of loans and eased standards to bring buyers into the market.
As a result, homeownership reached record levels. But as interest rates rise and the market cools, it becomes clear many people were put into punishing loans they couldn’t afford.
That is particularly evident in the enormous growth of what the industry politely calls “stated income” loans — also known as “liar’s loans.”
Stated loans — whose borrowers list income and assets without having to prove anything — were meant for solidly self-employed buyers. Then they “morphed into a huge monster,” says Connie Wilson of Interthinx, a maker of mortgage fraud detection software. “Now we have stated income programs for everyone.”
The loans have become a huge piece of the sub-prime market. Last year, nearly half of sub-primes required little or no documentation of income, a share that has nearly tripled since the start of 2000, according to First American LoanPerformance.
But in its love of these quickly processed loans, the industry overlooked the pitfalls.
A study by the Mortgage Asset Research Institute Inc. of 100 stated loan applications last year found almost 60 per cent exaggerated incomes by at least half. A study by BasePoint Analytics found that 70 per cent of mortgage defaults were linked to “a significant misrepresentation on the original loan application.”
Mortgage fraud is most visible in the spectacular cases that draw prosecutorial muscle, involving fake buyers, property flipping, vast amounts of money. But that overlooks smaller-scale foul play now costing many sub-prime borrowers their homes, experts say.
Often it’s not considered fraud. It’s pushing the envelope. It’s a dollop of distortion topped with a measure of creative exaggeration. It’s doing whatever it takes.
“There’s a huge amount of broker fraud out there,” says Kerstin Arusha of the Fair Housing Law Project in San Jose, Cal., which represents low-income homeowners stuck in such loans. “When you look at the applications of many of these borrowers, I see it reported that they make $10,000 or $12,000 a month, sometimes $20,000 a month. They always have $100,000 in personal assets … You can see that these things are created by the broker.”
Of course, most real estate agents and mortgage brokers are honest.
But there have been too many in the last few years “who stretch the truth … that make deals happen that really shouldn’t happen,” says Jim Croft, founder of the Mortgage Asset Research Institute.
“And they always have the fallback that they’re not dishonest,” he says. “They’re just helping Jill and Joe Six-pack get into the home — and realize the American dream.”
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