Mortgage companies caused the market decline but are not held accountable.

Charles County/Washington D.C. Area

During the last several years mortgage companies in general and mortgage loan officers in particular have capitalized on industry loop holes that existed at the time. In our area, Southern Maryland there were several companies that targeted people with questionable credit. Here's how the deal would work  A perspective customer would walk into a builders' model. They would be informed that they could purchase this beautiful home with no money down. The new home salesperson would put the prospective purchaser in touch with a mortgage loan officer. The purchaser would explain that their credit was not that great. "No problem", said the loan officer," we have a plan that will give us time to clean up your credit".

"We are going to get a construction loan in your name and inflate the value of the lot so you will not need a down payment. To the investor it will look like you have 20% in the deal so we will not need mortgage insurance. We don't care what the interest rate is on the construction loan is because the builder will be paying the payments. We have you approved for an end loan at a high interest rate (sub-prime) but you will never have to pay that rate. In the six months that it takes to build the house we will clean up your credit and you will have an A loan at a low interest rate". "Sign here."

Of course, when the time came to settle on the home, the credit was not cleaned up, (it takes more than 6 months to repair credit in most cases.) The customer had to buy the home at a sub-prime rate. Well, the person should not have signed and closed at that rate - right? Let us remember that he is on the hook for the construction loan and he signed an agreement that the builder would only pay the payment until the home was completed. The construction loan terms were worse than the sub-prime loan. "Don't worry, says the loan officer, in 6 months we will refinance you and all will be well."

Well, the client could not afford the mortgage and instead of getting better his credit got worse. Not only that but he owed more than the home would appraise for (remember the inflated lot value?). And usually in 6 months when the purchaser is trying to locate the mortgage company. surprise, its out of business.

Unfortunately, these same people open up under a new name and quickley figure out another way to scam people. The people who fell for this are left holding the bag and most people blame them for signing for a sub-prime loan.

One way to avoid this type of thing happening is to required mortgage brokers and loan officers to have licenses. If they are involved in any illegal or misleading practices they can at least be located if their firms are out of business. Realtors must be licensed and can loose their licenses or face criminal charges if they are involved in any type of fraud. Mortgage companies would have to post bonds or have insurance to cover losses of people involved in fraudulent practices. In short, they would be heald accountable.

I will be outlining another scam that has gotten us into this mess next time.

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