Lending a bad hand
Much of Clark County’s foreclosure crisis can be traced to a small number of loosely regulated, nonbank lenders
Sunday, April 5, 2009
How this story was reported
The Columbian used data from Vancouver-based appraisal firm Riley & Marks to identify every mortgage-backed home sale in Clark County in the month the real estate market peaked, June 2006, and to determine the lenders that had financed those transactions. Those 956 homes were then researched using Clark County Appraiser and Auditor documents to identify which had since been sold again, which were still owned by the same buyer, and which had entered the foreclosure process because of the June 2006 loan. Of these properties, one in 10 has received a foreclosure notice.
The newspaper created a database to analyze these findings and to identify lenders that had contributed to the most foreclosures. Of 186 lenders that issued mortgages in June 2006, 49 made loans that resulted in foreclosure; only three of these were banks. There were 18 nonbank lenders that had a foreclosure rate of 50 percent or higher.
We then used county property records to look at Clark County mortgages issued by these lenders since 2005, to confirm their foreclosure histories. For example, Argent Mortgage has made 108 loans since Jan. 1, 2005, with 30 entering the foreclosure process. The Columbian also researched these lenders’ history in the greater Portland-Vancouver area using documents filed under the Home Mortgage Disclosure Act, which does not include foreclosure details.
A mounting local foreclosure crisis has threatened one out of every 63 Clark County homes, emptied hundreds of houses and condos, and left the county with the highest foreclosure rate in the state. Much of the blame rests with loosely regulated lenders that have so far avoided the spotlight, an investigation by The Columbian has found.
A review of 956 home sales made during the peak of Clark County’s housing boom found that one in 10 properties sold in June 2006 has since been threatened by foreclosure, nearly every bad mortgage was issued by a nonbank lender, and for 18 of these lenders at least half of all loans resulted in a foreclosure notice.
With names like First Franklin Financial, Argent Mortgage and The New York Mortgage Co., these were not the well-known businesses at the heart of recent financial turmoil. Selling loans soon after issuing them, these lenders were not subject to the same oversight that banks and brokers receive. And when prosecutors began to target mortgage fraud, these lenders were bypassed in lieu of easier targets such as Countrywide Home Loans and Ameriquest Mortgage Co.
Recently, Washington state started holding these nonbank lenders to a higher standard. But the reforms are part of a piecemeal effort that has been challenged by some federal agencies, and also could be undermined by laxer states’ laws. Without federal reform, Washington state-level efforts to limit more bad lending may be stymied.
Now Argent is out of business, as is The New York Mortgage Co. First Franklin lending was shut down by its parent company, Merrill Lynch, which itself was taken over by Bank of America. It is too late to prosecute many of the mortgage lenders that created Clark County’s foreclosure crisis. But it’s not too late to change the rules that allowed these businesses to make fortunes from unsound loans.
Lax oversight created an opportunity for businesses to issue subprime and other risky loans with little concern for the consequences.
Doing business as Millennium Funding Group, in 2003 California-based American Mortgage Express leased the full sixth floor of downtown Vancouver’s 10-story Bank of America Financial Center. That year, it closed two home-purchase loans in the Portland-Vancouver metro area, according to federal lending documents. The next year it issued 545. Staffing boomed, peaking above 150 at an office filled with loan originators who were rewarded for closing deals, regardless of the borrower’s ability to pay.
More common than downtown storefront lenders, however, were businesses such as Argent Mortgage, headquartered in Irvine, Calif., which never opened a Clark County office.
A wholesale lender, Argent reached out to local mortgage brokers by advertising in industry newsletters. Wholesale lenders often offer payments to brokers who get customers to sign up for more expensive loans — everyone profits but the borrower, as long as the borrower pays on time.
Though many brokers opted not to work with subprime and stated-income lenders, plenty did.
In the greater Portland-Vancouver metro area from 2005 through 2007, Argent funded 2,066 home purchases, according to Home Mortgage Disclosure Act documents.
“People don’t realize that most mortgages aren’t issued by banks,” said Ray Davis, president of Umpqua Bank.
Less than a third of Clark County home loans were issued by banks or credit unions at the peak of the housing boom. As long as nonbank lenders kept interest rates below 12 percent, they did not have to open their books to regulators.
Making loans and making money are cornerstones of the American economy, but the business choices that Argent, American Mortgage Express, and 44 other nonbank lenders made during the peak of the housing boom have caused lasting damage in Clark County.
From 2005 until it stopped issuing loans in 2007, Argent funded 108 Clark County home loans, and 28 percent of those homes received foreclosure notices, according to county records.
By contrast, Vancouver-based First Independent Bank has funded 215 loans since 2005. Only 4 percent of First Indy’s loans resulted in a foreclosure notice.
Nonbank lenders contributed disproportionately to Clark County’s mounting foreclosure rate, which is now the highest of Washington’s 39 counties.
“Lenders sold loans to people that were not in those people’s best interest,” said Dave Huey, a Washington assistant attorney general for consumer protection. Huey led Washington’s efforts to prosecute several national mortgage retailers. “Predatory lending was largely a result of unfair, deceptive practices by these lenders. Things got completely out of hand.”
There’s evidence that some lenders hid the true cost of loans from borrowers.
“They were selling loans on convenience, features, anything other than interest rate,” Huey said. “The result is hurting a lot of people.”
In Clark County, 2,541 houses entered the foreclosure process in 2008. Of more than 4,000 local homes for sale in mid-March, 5 percent were bank-owned, according to real estate listing service RMLS. In some neighborhoods, entire clusters of homes have lost to foreclosure.
“The number of distressed homes on the market, and it is inordinate, takes everybody down,” said Carol Curtis, associate broker with Windermere Real Estate/Stellar Group in Vancouver.
New business model
Two decades ago, this could never have happened.
“In the old days, you’d go into the local bank in Vancouver, you’d talk to the loan officer you know from church, he’d assess your character and check with the credit union, and he’d lend you that bank’s money,” Huey said. “What revolutionized the lending industry was the secondary market and the rise of nonbank lenders.”
That secondary mortgage market was born to satisfy investors looking for solid returns. Fannie Mae and Freddie Mac had long purchased home loans, freeing banks to issue more mortgages, and as home values steadily climbed, so did the value of these loans.
In the 1990s, investors increasingly joined Fannie and Freddie in buying loans — and not just from banks. This created opportunities for lenders to make money with little risk.
“They made their fees from originating a loan, and they might make a profit from selling the loan to investors,” Huey said.
The more loans they issued, the more they could collect. And risky borrowers, who might not qualify at traditional banks, were happy to get a loan.
“When you stop to think about subprime lending, it’s not a bad idea, but it’s a limited idea,” Huey said. “There are people out there who have blemished credit, who can afford to buy at higher interest rates and pay higher costs to get a home loan, but it’s a finite number of people. By my estimation, you probably sold those people a home or refinanced their mortgage by 2005. But there was all sorts of money being made, so there was still a huge demand for the end product. To keep issuing mortgages by 2006, you had to be more easygoing and tolerant of risk.”
That was not difficult for Argent Mortgage and First Franklin, which unloaded risky Clark County home loans on investors almost as soon as the ink on the mortgage was dry.
“Some of these outfits, the only reason they were in the business was to try to make a lot of money,” said Jerre Broselle, owner of Vancouver-based Cascade Mortgage and Financial Co. of Washington Inc. “They did that by flipping loans. They were simply body shops; the only thing they knew was how to sell a product, and they got a huge paycheck every month.”
Meanwhile, efforts to crack down on dishonest lenders overlooked most mortgage wholesalers.
Nonbank lenders like Argent are much harder to build a case against than retailers such as Ameriquest, owned by the same parent company as Argent, said Huey of the state attorney general’s office.
“People who sold Ameriquest loans were in storefronts, they were Ameriquest employees, and they responded to Ameriquest managers,” he said. When consumers complained about bad loan practices, it was relatively easy to trace Ameriquest lending agents to the corporate apparatus, and in 2007 the attorneys general of 49 states reached a $325 million settlement with the company.
Argent loans are harder to trace to their source, Huey said. “When people complained about their loan, they didn’t complain about Argent, they complained about their broker.”
With nobody tracking the foreclosure rates of nonbank lenders, prosecutors did not know the severity of the problem, and could only trace problems as far as brokers.
Told of Columbian research into Argent’s Clark County track record — 28 percent of its mortgages issued since 2005 have entered the foreclosure process — Huey reconsidered.
“The numbers you’re talking about make it much easier to believe maybe it wasn’t just the brokers,” Huey said. “In hindsight, I think the case is there to be made. But Argent isn’t there to have it made against.”
By the numbers
952: Mortgage-backed residential properties sold in Clark County in June 2006.
95: Number of these houses that have since entered the foreclosure process.
186: Banks and other lenders that wrote Clark County mortgages in June 2006.
41: Number of those lenders whose loans that month ended in foreclosure.
2: Foreclosure-linked lenders with “bank” in their names. Indymac Bank, Lehman Brothers Bank.
28: Percentage of Argent Mortgage’s Clark County home loans since 2005 that resulted in a foreclosure notice.
4: Percentage of First Independent Bank’s Clark County home loans since 2005 that resulted in a foreclosure notice.
SOURCES: “benchmarks” report from Riley & Marks, Vancouver; RMLS, Portland; Clark County Auditor; Clark County Appraiser; RealtyTrac.
Argent failed in 2007, as did New York Mortgage Co. The same year, American Mortgage Express laid off 150 people working in downtown Vancouver under the name Millennium Funding Group. First Franklin’s lending was shut down by its parent company, Merrill Lynch, which — suffering because of its over-exposure to subprime loans — was purchased by the Bank of America.
As homeowners have fallen behind on payments in growing numbers, the investors who bought packaged mortgage loans have lost billions.
With the collapse of those lenders, prosecutors have turned their attention elsewhere.
Meanwhile, the Washington Legislature has passed a number of rules aimed at limiting future foreclosures. Bans have been placed on certain types of subprime loans, lenders must disclose more information about the fees they charge, and mortgage brokers are now legally required by the state to act in the best interest of borrowers.
For the first time, the Washington Department of Financial Institutions is examining all nonbank lenders — or trying to.
Its authority, which was previously limited to lenders that charged over 12 percent interest, was expanded by the state Legislature in 2008. The consumer services team that inspects these businesses has doubled its staffing to 60 in the past year.
“We now go out and do compliance exams on all these companies selling mortgages in the state,” said Deb Bortner, director of consumer services. “If we see a deceptive practice, we make lenders pay fees back and waive pre-payment penalties.”
But the federal government may get in the way of state efforts to crack down on bad lending practices.
The Office of the Comptroller of the Currency and the Office of Thrift Supervision, which regulate different groups of banks, have stopped Michigan, California and New York officials from regulating some lenders that have close business ties to these banks.
It could be a matter of time before something similar happens in Washington, Bortner said.
Federal regulators argue that they, not states, have jurisdiction over these nonbank lenders, but it is an authority that has rarely been used.
“The federal government has taken a handful of actions in the last five years, and we’ve ordered thousands and thousands of dollars back to consumers,” Bortner said. ”It would be the state’s position that they’re not overseeing these lenders like we do.”
It would take a change in federal administrative rules or an act of Congress to allow the state full oversight of the nonbank lenders that caused so much damage here.
Congress would also have to act to create broader regulation of these lenders, which often operate nationally but are overseen locally.
“Some states do regulate these mortgage bankers, and some states don’t,” Bortner said. “Some only regulate when there are loans over 12 percent. There is a gap.”
Even if federal hurdles are cleared, closer scrutiny of lenders could catch individual instances of predatory lending yet miss the big picture. Nobody is tracking the foreclosure rate of nonbank lenders.
If a next-generation Argent begins working with brokers to sell its loans in Clark County, that lender will have to open its books to regulators, follow a tighter set of rules, and tell borrowers more about the costs of each loan. But if 28 percent of that lender’s loans wind up in foreclosure in less than three years, or 50 percent, or more, nobody will ever know.