The Underwriter in the transaction may not have underwritten the appraisal, but we do not know if the appraiser did provide good comps because of the renovations done to the property. Also when a file is run through DU and is appraised by the lenders appraisal there will be a guarantee from the company (for instance) Landsafe appraisal that says they back the appraisal and does not need to be manually underwritten.

We do not understand fully the entire story. But if all parties where aware of what happened then they all were at fault

Evdryone in this story just threw their hands up… sort of a “its not my job” mentality. There was a complete lack of responsibilty on anyone’s part, its still too easy to just point to the other guy. So, unfortunately, Tanta is right, mortgage fraud will still continue to be way too high in 2008 and beyond.

Fraud and corruption are present in the good and prevalent in the bad. Until the penalty outweighs the crime…unless you hold yourself to a different standard.

This was a huge red flag that someone missed. No doc loan or not the appraiser should have commented on it and the underwriter should have caught it as well. I have no problem with someone buying a home at the auction as a foreclosure and fixing it up and selling it for a profit, but $320,500 profit should have raised some questions somewhere and this should have caused them to dig a little deeper before doing this loan.

One is that I am all for underwriting performed by human beings. If that was the case here, I would have loved to hear the underwriter’s comment.

The second is a comment I made earlier on the difficulties of placing true values of homes in foreclosure heavy neighborhoods. I saw something on TV a few weeks ago down in Florida. The reporter was interviewing a lady who was the only homeowner left on her whole block of what used to be fully occupied identical town homes built in early 2006. Her complaint was that her daughter had nobody left to play with…If she were in a position where she needed to or wanted to re-fi, how would you find value on her property?

That was then in California, this is now in Washington. So it comes as a surprise that in light of what has happened in our state this past year, none commented on the roll fiduciary responsibility on the part of mortgage brokers and their LO’s would have had. Nor did any comment on what is now different.

Two indicated that we need or would benefit from tighter regulations. One said that the new national licensing system should help. None commented on the fact that SB 6381 took effect on June 12, 2008, fundamentally altering the relationship between LO’s and borrowers and the fact that the exercise of such responsibility would likely have prevented this situation and situations like it.

One essentially blamed the borrower for not reading the fine print more closely. Clearly, borrowers are, in general, poorly equipped to be able to protect themselves – they find the language and the accounting involved in these transactions to be quite inscrutable. That is why the passage of SB 6381 is so important. When the transaction described in this article was completed, no one was responsible to the interests of the borrower – except the borrower. That is now different.

One commenter correctly observed that only the buyer, seller, and loan officer really understood what was going on.

Think about it for a moment.

The lender serves its own interests. The lender approves loans according to its own risk analysis and investment criteria. The lender may make good choices or bad choices, but its choices have nothing to do with what is in the best interest of the borrower. Whether Wells Fargo did a poor job of underwriting this loan or not, they were under no obligation to serve the interests of the borrower. One might hope that the lender would step in to prevent a situation that does not well serve the interests of the borrower, but there is no legal responsibility for them to do so.

The escrow company serves all parties in making sure that the documents are properly signed and notarized and that the funds are properly received, dispersed, and accounted for. Whether the escrow company was reckless or not, they were under no obligation to serve the interests of the borrower except to the extent that they honestly and accurately account for all details of the financial transaction. One might hope that the escrow company would step in to alert the borrower that something stinks in this transaction, but the escrow company is under no legal obligation to do so.

Whether the appraisal was objective and professional, or biased and fraudulent, the appraiser was under no obligation to serve the interests of the borrower. The appraiser serves the public by following specific practice standards in the assessment of the estimated market value of the property. The appraiser serves all by properly evaluating and reporting the estimation of the property value. The appraiser cannot be concerned with whether that value estimate supports the buyer, seller, or lender. His duty is to the general public.

In this transaction, the borrower was on his own. His only protection was the ream of paper provided that almost certainly disclosed everything in a proper and legally compliant manner. The borrower may have recourse if something in that ream of paperwork was amiss, but he had no one looking out for his interests in the course of the transaction. Tanta concludes, “The problem is that there are no comparable sales of any kind that are a reliable measure of market value if they all involved transactions in which nobody ever actually bothered to verify and analyze the terms of the sale”. I disagree. The problem is that there was NO ONE looking out for the interests of the borrower! The problem is that NO ONE, in the interest of the borrower, examined this deal to see if the borrower could afford it. NO ONE examined the transaction from the standpoint of the borrower’s best interests.

If this happened in the state of Washington today, what would be different? Many of the comments said that tightened underwriting standards and program guidelines in effect now would have prevented this. Maybe. As I see it, we have created (at least on paper) the best situation for preventing this kind of mess through the passage of SB 6381 this past year. In Washington today, unlike in California when this situation occurred, the mortgage broker would be the ONLY player in the transaction acting solely on behalf of the interests of the borrower. In Washington today, this borrower in choosing to work with a broker, has a knowledgeable ally working on his behalf in what is for most people a very complicated transaction. That is huge! A broker, acting as fiduciary, cannot simply be satisfied that the lender approved the deal, as was the broker in California situation. The broker, as fiduciary, would have reviewed the P&S agreement and highlighted any discrepancies in that document that were not in the client’s best interests. The broker, as fiduciary, would have examined the borrower’s ability to make payments on the loan proposed and subsequently approved. Regardless of whether the lender approved the loan, the broker, as fiduciary, has a duty to determine affordability. While a lender looks at debt to income ratios to protect their interests the broker must make a judgment as to whether the client can afford to live on what’s left after the payment is made and a judgment as to the impact of potential changes to the mortgage payment or to the borrower income. The broker, as fiduciary, may well come to a different conclusion than the lender with regard to affordability. A broker, as a fiduciary to the borrower, would have questioned source of down payment, even if the lender did not. The broker, as fiduciary, would have questioned the $30,000 concession and the concession to help the borrower make payments, even if the lender did not. Had the borrower been working with a mortgage broker who was bound to act in the best interest of the borrower, it is inconceivable that the borrower could have been surprised by the fact that the payment estimated did not include taxes and insurance. This deal may still happen even if the borrower is working with a broker who is a fiduciary, but the broker would have put in writing a strong recommendation against it. And this is important: we all know that the broker in this case probably earned more that $5,000 on the deal – but as a fiduciary, even with a fee of that size on the table, the broker must be willing to say this deal is not in borrower’s best interest and recommend that the borrower not do it. In other words, the interests of the borrower must come first, even if that means giving up the opportunity to earn a substantial fee for doing “what the borrower wants to do”.

Seller’s serve their own interest. They want to close a deal at the highest price possible. They have, as is clear in this example, an incentive to do things that are not necessarily honest and above board. They most certainly are not obligated to serve the interests of the borrower, though they are required by law to be honest in their dealings.

Buyers/borrowers serve their own interests. In most cases, borrowers are inexperienced and unknowledgeable in the details of the real estate transaction and, in particular, the loan origination process. As was observed, the seller, buyer, and LO are likely to be the only ones who fully understand what is going on. Too often, the buyer/borrower does not fully understand everything that he might need to understand to protect himself. This is why the new law is so vitally important. The loan officer by training, experience, and relationship to the transaction is in a position to have a pretty clear understanding of the whole transaction. The loan officer is arguably in the best position to serve and protect the interests of the borrower. When the transaction described in the article occurred, the broker had a choice as to whether to serve the interests of the borrower. Today, in Washington, the broker does not have such a choice. Today, in Washington, mortgage brokers are legally bound to do more that just originate loans and birddog the process through to closing. They have a duty to use their considerable knowledge and experience to do due diligence on behalf of the borrower and to evaluate the transaction from the perspective of the borrower’s best interests. The broker has a duty to advise the borrower of elements in the transaction that do not serve the borrower’s interests.

We don’t need more or better laws and regulations. What we need now is for mortgage brokers in Washington to recognize that they now have fiduciary duties to their borrowers. We need the mortgage broker industry to develop practice standards that, if lived up to, will serve to protect the interests of borrowers. No other changes to laws and regulations can come close. As long as industry players are looking to minimum disclosure standards borrower’s interests are inadequately protected and unserved. Only when brokers make it their business to look for and find better ways to serve the interests of borrowers will borrower’s interests truly be served. Then situations like those in the article will become all but non-existent, regardless of the recklessness of lender’s programs and underwriting.