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Elizabeth Warren Wants to Simplify Your Mortgage Paperwork

Michael Hudson — 2010-09-22T10:29:00 00:00

When I saw that Elizabeth Warren had begun her duties as President Obama's consumer-protection watchdog by holding a forum Tuesday on simplifying mortgage paperwork, one of the first things that popped into my head was a neat trick that a few mortgage professionals liked to pull back in the heady days of the home-loan boom.

When a customer insisted on a fixed-rate loan, but the mortgage workers could make more money by selling her an adjustable-rate one, the folks handling the paperwork had an easy solution. They positioned a few fixed-rate loan documents at the top of the stack of paperwork to be signed by the borrower.

They buried the real docs -- the ones indicating the loan had an adjustable rate that would zoom upward in two or three years -- near the bottom of the pile.

Then, after the borrower had flipped from signature line to signature line, scribbling his or her consent across the entire stack, and gone home, it was easy enough to peel the fixed-rate documents off the top and throw them in the trash.

This bit of bait and switch was just one of the many examples of the derring-do dreamed up by the bad boys of the mortgage industry. Of course, the Department of the Treasury being the Department of Treasury, its press release about Tuesday's paperwork reform meetup didn't give much sense of the creativity and audacity of mortgage professionals who seek to take advantage of unsuspecting borrowers: "Event Brings Together Stakeholders to Discuss Path Forward to Simplify Mortgage Disclosure Forms, Empower Consumers With Better, Easy-to-Understand Information."

Salon's Andrew Leonard notes that, after all the excitement in Washington over whether Warren would be appointed chief of the new Consumer Financial Protection Bureau, streamlining disclosure rules seems, well, boring. It has, Leonard says, a "closing-the-barn-door-after-the-farm-has-been-foreclosed-upon" feel to it.

Leonard's a smart writer, but in this case, I think, he's a bit off base.

Now that she's been named as a presidential assistant charged with helping set up the new consumer bureau, Warren is right to focus on the most basic of concerns: making sure mortgage borrowers know what they're getting.

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Can't Get No Satisfaction

The complexity and volume of the paperwork associated with signing up for a home loan makes it easy for unscrupulous professionals to abuse consumers - misleading them about how much they'll pay and what flavor of loan they're getting and slipping in all manner of junk fees. My favorite junk fees are a pair of charges that sound important (and even seem to hint at romantic bliss) but are in fact meaningless: "commitment fees" and "satisfaction fees."

One reason the mortgage market is in bad shape now is that millions of borrowers were misled or mistaken about the details of their loans. Without a clear-eyed understanding, it was impossible for them to make informed decisions about whether to go through with the deals.

"Too often, families come to understand the legalese only when they get bitten by it," Warren noted Tuesday. "This is particularly true in the mortgage market, where borrowers receive stacks of incomprehensible paperwork when they're looking for a loan."

Buyer Be Wary

Anybody who's in the market for a mortgage these days should take note of the Harvard law professor's words. And don't wait for the bureaucrats to simplify the paperwork before you commit to becoming a smart - and skeptical - consumer.

Here's what I like to tell friends who are getting ready to go through the mortgage process:

Don't let yourself be intimidated by a stack of documents. Read every page.
Hire a lawyer who represents you - not the lender - and will go over the contracts with you. Or at least bring along a trusted friend or relative who understands money and mortgages.
Demand that your lender take out junk fees. Be prepared to push away from the table and walk out if something in the paperwork doesn't seem to be on the up and up.
Above all, don't let the professionals rush you through a loan closing. If somebody is trying to rush you, that should be a red flag.

I know. Reading through all that paperwork is boring. It can make your head hurt. But it's necessary - and vital to protecting yourself in a marketplace where bad practices still linger.

Michael Hudson is a staff writer at the Center for Public Integrity and author of a new book, "The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis."

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Mortgage Fraud: The Untold Story of the Housing Meltdown

Michael Hudson — 2010-08-31T15:39:00 00:00

Filed under: News,Economy

Was the financial crisis caused by "systemic failure" or mortgage fraud? Or a combination of the two? And why are so many American homeowners still paying the price?

When Travis Paules worked as a branch manager for American General Finance in Pennsylvania in the late 1990s, he tried to do things by the book. He didn't cut corners, he recalls, because his bosses at the finance company made it clear that it didn't want him to cut corners, and that he should balance the need for loan production with the need to make sure his front-line staffers weren't sticking borrowers into deals they couldn't afford. Back then he liked to say: "My personal morals aren't good, but I have good business morals."

Things changed for Paules in 1998.

Ameriquest Mortgage, one of the nation's most aggressive home-loan shops, lured him away from American General. At Ameriquest, Paules recalls, he found an employer that encouraged - and rewarded - his unscrupulous instincts. Paules pushed his underlings to do whatever it took to book loans, and they responded by employing a variety of tricks, such as inflating borrowers' incomes on official documents. In some instances, he says, he even allowed his workers to alter the dollar figures on elderly borrowers' Social Security award letters.

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"You're a creature of your environment," Paules told me. "You don't have to be. But most people fall into that trap."

I thought about Paules recently after I read an article in The New York Times by Chrystia Freeland, a global editor-at-large for Reuters. Freeland praised the work of investigative reporters who had exposed wrongdoing in the financial sector, but added that "the bigger, more complicated truth about the financial crisis is that it wasn't caused by evil businessmen. The overarching story is one of systemic failure, not individual wrongdoing. It wasn't the Bernie Madoffs who plunged the world into recession. It was low capital requirements, weak limits on leverage, over-the-counter traded derivatives, soft rules on mortgage lending and global financial imbalances."

Freeland is correct that all these factors contributed, in a big way, to the making of the crisis. But her argument has some holes in it.

First, it doesn't acknowledge that real people were behind the systemic failures. The financial crisis wasn't an act of nature; it was a man-made disaster. Corporate executives lobbied hard to get regulators to weaken oversight of banking and lending, pushing for the "soft rules" that helped create the home-loan mess.

Second, it minimizes the role that deception and corruption played in the debacle. As the housing market heated up, and the hunger for mortgage-backed investments grew, Travis Paules and other mortgage professionals cut corners and crossed lines. Appraisers falsified property reports. Mortgage brokers and loan officers forged borrowers' signatures on key paperwork and faked tax documents to qualify homeowners' for loans that they couldn't afford. Lenders and Wall Street banks misled investors about the quality of the loans and the quality of the securities that were backed by those loans.

Ameriquest agreed to pay $325 million to settle a nationwide lending-fraud investigation. Goldman Sachs, Wall Street's leading investment bank, will shell out $550 million to settle federal charges that it deceived investors about mortgage-related investments it created and peddled around the globe.

The parties responsible for the U.S. financial meltdown weren't cartoon villains. They were real people working on Wall Street and other corners of corporate America who were inspired by an anything-goes spirit and emboldened by the "systemic" changes that threw off many of the historic limits on banking and mortgage practices. You don't have to believe all businessmen are evil to take a look at the facts on the ground and conclude that fraud and irresponsible practices thrive in unchaperoned settings.

This lack of oversight allowed companies like to Ameriquest to embrace bait-and-switch salesmanship and other "boiler room" tactics. Paules and other Ameriquest employees became creatures of this environment. It was only after Paules left the company that his conscience began to kick in. He found religion and has tried since then to do what he can to set things right, by telling the story of his own "wickedness" as well as the mortgage industry's ugly behavior during the home-loan boom.

Understanding the history of the mortgage meltdown isn't an academic exercise. Officials in Washington and beyond are still working out the details of how financial reform will be put into action in the real world. Recognizing that fraud played a central role in the disaster is crucial to ensuring that reform succeeds. You can't cure systemic flaws without understanding that, when it comes to money, people will do just about anything if left to their own devices.

Michael Hudson is a staff writer at the Center for Public Integrity, a nonprofit journalism organization, and author of new book, "The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America-And Spawned a Global Crisis," which will be published in October by Times Books.

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