Disputes rising over use of risky loans

Angry disputes are erupting between struggling homeowners, who claim they didn’t understand the terms of their loan or the risk they were taking, and lenders and loan brokers, who say they fully informed all their clients and point with pride to the many homeowners they helped get a loan.

Not in dispute, though, is the heartache striking families and small investors across the North Coast and nationwide as they lose homes to foreclosure.

“In so many ways, what we’re seeing today was caused by all this crazy borrowing and lending,” said economist Christopher Thornberg, who has repeatedly warned of a looming real estate crisis. “I can’t emphasize this enough. This was imminently predictable.”

The breakdown of trust between borrowers and lenders is already forcing changes to the way home loans are made, and more are on the way.

Lenders are tightening standards that once allowed borrowers to get a subprime loan without documenting their income, proving employment, having decent credit and coming up with a down payment.

Congress is debating bills that would outlaw many of the practices that led to today’s mortgage meltdown. Although parts of the bills are controversial, the National Association of Mortgage Brokers is on board with many of the provisions, including national standards for lenders and loan brokers and clear disclosure of their fees.

“The reforms will help modernize the regulatory system and drive bad actors from our industry,” the association’s president, George Hanzimanolis, said in a statement.

The changes also would make it tougher for subprime borrowers, who don’t qualify for a conventional loan, to get a mortgage.

While the problems with subprime loans are well documented, the relaxed loan standards at the height of the housing boom also benefited many people by letting more Americans buy homes.

“Subprime helped a marginal borrower become a homeowner, when he may not otherwise have been able to,” said Don Bunch, a mortgage broker for 25 years and a subprime specialist for the past decade. Today Bunch is co-owner of Affinity Mortgage, a Santa Rosa company that specializes in mobile and manufactured home loans.

In many cases, subprime mortgages gave borrowers a few years to repair their credit so they could then refinance into a lower-rate, prime loan.

“Sometimes in the industry we called them a stepping-stone loan. They were never the end-all, best-loan-in-the-market solution for anybody,” Bunch said.

He argues that it would be a mistake to totally remove those options. “We provided the financing vehicle for that family to get into a house. I feel great about that,” Bunch said.

While many Americans benefitted from the loan opportunities, others abused them, an outcome that’s becoming painfully clear in Sonoma County where foreclosures and fingerpointing rile the industry.

As stressed borrowers seek help, every link in the chain of loan production is coming under attack, from the borrower, to the real estate agent, to the mortgage broker, to the lender.

Many borrowers claim they didn’t understand they had an adjustable-rate loan that would go up so quickly, that payments would go up so much, and that they could face a prepayment penalty to get out of the loan.

Or they say they understood their loan but not the risk because their broker or lender never told them that home values might decline and they would not be able to refinance out of the high-rate loan.

Some say that their broker put them into the risky loan just to earn a higher commission. Latino borrowers say their weak English skills made them particularly vulnerable. Small investors say they followed advice to borrow from their home and buy a rental or two and now they will lose everything.

Brokers and lenders say the criticism is unfair. They maintain that they provided an important service, plowing through scores of arcane loans to find the best one their client could qualify for. They say they were under pressure from borrowers and from real estate agents who could take their business elsewhere. They say it was the lender’s job to decide if the borrowers were qualified and able to repay the loan.

No one takes responsibility for the inflated incomes that many borrowers submitted to justify a mortgage, especially in 2005 and 2006 after three years of soaring home prices. The practice was common with a type of loan that did not require borrowers to document their stated incomes, according to several Sonoma County brokers. One lender’s review of 100 loans made without proof of income found that nine out of 10 applications overstated the borrower’s income.

Bunch believes the vast majority of mortgage brokers in Sonoma County served their clients with integrity. Still, he concedes some in the industry put themselves first.

“There will always be, in any occupation, a few who are not looking after the best interests of their clients,” Bunch said.

Brokers hearing from people who may lose properties they bought during the bubble say some of the borrowers clearly did not understand the risky nature of their mortgage.

“I believe a good percentage of the subprime individuals were not fully informed,” said Anna Macias De Leon, owner of a First Priority Financial office in Santa Rosa.

“Lenders had a fiduciary duty to do the right thing for their people,” said Bob Accornero, a real estate broker with Creative Property Services in Santa Rosa. “Lenders needed to get warm and fuzzy with their people and say, ‘Can you really do this?’ That’s what they didn’t do.”

Some of the criticism is aimed at established loan agents and brokers who made large commissions during the housing explosion. Some is aimed at the new people who poured into the business in the last three or four years, attracted by the red-hot real estate market and the easy entry.

The only requirements to become a mortgage broker in California are two years of experience, $165 to pay the fee and passing grades on a test and a background check.

“A lot of new people got into the lending business, people making half a million dollars who had never made anywhere near that,” said Accornero. “This is shaking a lot of people out of the business. They can’t make money any more.”

While some borrowers may have been misled, others were eager to get a loan regardless of the cost or the risk, several real estate and loan brokers said.

“I know a lot of lenders who suggested to people not to proceed with the loans. Sometimes they’d go somewhere else, to someone who would give them the loan,” Accornero said.

“Those are the same individuals coming back and saying, ‘We should have listened. Is there anything we can do?’” De Leon said.

The lesson learned is that consumers must take responsibility for their own actions, because they are the ones whose credit will be ruined if they lose a home to foreclosure, said Rick Harper, director of housing for Consumer Credit Counseling Service of San Francisco, which has an office in Santa Rosa.

Homebuyers need to make sure they understand the terms of a loan before they sign on the dotted line, Harper said.

“The lenders are trying to make the biggest mortgages they can. It’s up to you to say, ‘Wait a minute. I don’t think that makes sense for me to bite off this much,’” said Harper, whose service has seen a 300 percent increase in demand for housing counseling this year.

People don’t ask enough questions, he said.

“Simply because a lender tells you that you qualify for a certain amount doesn’t mean you can afford it,” he said.