When They Stick the Knife In: The Subprime Mortgage Con

I recently got a call from a guy who wanted an FHA streamline refinance. He had already talked with two other lenders and he was then referred to me by his brother, for whom I had done a loan a few years ago.  We discussed his deal a bit and he finally asked why he should use my services. I immediately told him, "Look, there isn’t much pricing leeway on FHA loans, but if you go with me, you can be assured that I will treat you honestly."

There was a long silence as he evaluated this obviously unexpected remark. I'm sure that he was like the millions of people who get loans every year who think that they are ALWAYS dealing with someone who will not take advantage of them.

Wooops! Helloooooo! It's time for a reality check.

America is currently reeling from the economic tsunami that was triggered in part by massive borrower abuse by the subprime lenders. But it wasn't just the subprime lenders; it was a significant chunk of the entire mortgage origination industry. Even executives at otherwise ethical companies could see this highly profitable business and they could not resist the temptation to set up incentive compensation plans for loan officers that, bluntly, encouraged them to take advantage of the borrowers' ignorance wherever and whenever possible.

Even though there are enumerable laws at the federal and state levels that are designed to protect consumers, they are simply not enforced. As a result, the mortgage industry attracted tens of thousands of loan officers and executives who wanted to gorge themselves at the mortgage table without interference from pesky regulators.

So why were those loans so profitable? In large part because the borrowers were ignorant of the process and they didn't really know what they were qualified for. Every person I ever met who was involved in subprime lending said that 40 percent of borrowers would have qualified for a normal A-paper loan at attractive rates if they had just gone to a normal lender, like their bank.

The subprime lender who took the application knew this too, but his company didn't offer normal loans so he wasn’t going to say, "You ought to go to your bank." If he had said that, he would have said goodbye to that fat commission, and he certainly wasn't going do that.

Even A-paper borrowers don't understand how lenders increase their commissions by delivering above-market-rate loans. Congress thinks that "competitive market forces" will keep everyone honest. Not true. It seems that once a borrower chooses a lender, he has so much faith that he will be treated honestly that he forgets about caveat emptor – buyer beware. We now know that such trust was misplaced.

How did this happen to so many people? The simple truth is that people who are con men are good at tricking people and people are so gullible that when the loan officer stuck his knife in, the borrowers didn’t even feel it.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.