Less than three percent face disciplinary action during subprime crisis
September 14, 2009
This story was written and reported by Jaime Lutz, Lyle Moran, Christie Musket, Maggie Mulvihill and Joe Bergantino of the New England Center for Investigative Reporting at Boston University.
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Since the day he emigrated from Colombia 37 years ago, it was Jaime Alvarez’s enduring dream to own his own home.
This may explain Alvarez’s eagerness when he was approached by a friendly Latino mortgage broker at his children’s school and told his dream was within reach. Alvarez ended up buying a home in Brighton for about $580,000, financed with two mortgages. His monthly payment of $4,300 totaled more than 127 per cent of his gross income.
His plan was to refinance, take in boarders and possibly add on a rental apartment to generate enough income to pay the mortgages. But the refinancing the mortgage company said would happen in six months never did; Alvarez’s plans to add a rental apartment never materialized. Before long, Alvarez’s desperation to make the monthly mortgage payment forced him, his wife, and kids to live in one room of the cavernous two-family house while foreign students boarded in the rest.
While Alvarez and his family suffered the consequences of his decisions, the mortgage brokerage company, Your Home Mortgage in Chelsea, did not. The firm collected $10,000 in fees, including a $6,090 brokerage fee not adequately disclosed to Alvarez, according to a complaint letter sent by his attorney to the broker.
In 2007, Virginia Pratt, a non-profit foreclosure prevention specialist, filed a complaint about the company’s lending practices on Alvarez’s behalf with the Massachusetts Division of Banks, which regulates mortgage brokers and lenders. It was one of two complaints Pratt sent to the Division about Your Home Mortgage that year.
“The (Alvarez’s) loans appear to be based on no income verification,” Pratt wrote. She also stated that Your Home Mortgage did not fully disclose the terms of Alvarez’s loans. State regulations prohibit that practice.
The Division of Banks told Alvarez in a January 2008 letter that a review of his loan documents indicated that while his experience with Your Home Mortgage was not “ideal,” the company’s business practices did not warrant agency action. The Division has broad latitude in regulating mortgage broker conduct.
“I felt like a mountain came over me,” Alvarez said. “I was hoping that I was going to get some help, but it never happened.”
As the subprime mortgage crisis has exploded over the past two-and-a-half years, wreaking havoc on families and tearing through urban neighborhoods, Massachusetts banking regulators took serious punitive actions against only a tiny fraction of the brokers and lenders it licenses , according to an analysis by the New England Center for Investigative Reporting at Boston University.
The Division took its most stringent actions—revoking, suspending, or forcing a license surrender—against 43 mortgage brokerage firms between Jan. 1, 2007 and June 1, 2009. That’s less than three percent of the average number of firms it licensed over that time period and it puts Massachusetts last compared to the number of similar actions taken by each of the other New England states.
For instance, during the same time, Connecticut took punitive action against 24 percent of its licensees; New Hampshire, 11 percent of its mortgage brokers and lenders, the analysis shows.
While Massachusetts, compared to the other New England states, ranks last in the number of revocations, suspensions and forced license surrenders against mortgage brokers and lenders, it ranks second in its foreclosure rate.
No one knows the exact number of brokers and lenders engaged in unfair or deceptive practices but state regulators have acknowledged since at least 2007 that those practices by brokers have been a significant problem in Massachusetts and a major factor in contributing to the state’s foreclosure rate. Other factors include the economic recession and high unemployment.
John Taylor of the National Community Reinvestment Coalition, which assists victims of deceptive mortgage practices, believes state regulators should have been much more aggressive in policing the mortgage industry, especially brokers dealing in subprime mortgages—usually high interest loans given to applicants with poor credit.
“A lot of the licensees (brokers and lenders) have thus far gotten away with murder when it comes to these foreclosures,” Taylor said.
An April 2007 report issued by the Division of Banks acknowledged that subprime loans, were “at the center of the mortgage lending and foreclosure crisis.”
Several months later, a state audit found the Division lacked the resources to fulfill its oversight function even as it handed out more than a thousand additional mortgage licenses. The audit recommended the Division double the number of staff devoted to conducting examinations of brokers and lenders. An examination involves inspecting the licensees’ books, reviewing loans made and ensuring compliance with laws and regulations.
The Division successfully lobbied the Legislature for more funding and boosted the number of examiners permanently assigned to scrutinizing the mortgage industry from around 28 to 35. But despite that extra manpower, the number of examinations of mortgage brokers and lenders dropped by 74 between 2006 and 2008. Not until 2008 did the agency set up a special unit to investigate mortgage fraud.
Compared to the other New England states, since 2007, Massachusetts has had more than double the number of examiners assigned to the mortgage industry but, with the exception of Connecticut, more brokers and lenders to regulate.
Division of Banks Commissioner Steven Antonakes declined repeated requests to be interviewed, but the agency’s Chief Operating Officer David Cotney defended the Division’s enforcement work. He said other states appear more aggressive because they pull mortgage licenses for infractions Massachusetts considers minor, like failing to file an annual report.
“I think we have an excellent record of taking action when we’ve found a problem and keeping people out of the business so they won’t perpetrate this fraud,” Cotney said.
Cotney could not say how many of the Division’s formal actions, ones that are more serious and made public, relate to predatory lending practices– brokers luring borrowers into mortgages they can’t afford. But he said the division is so aggressive in weeding out unethical mortgage brokers and lenders that problems don’t often rise to the formal disciplinary stage.
The Division has stripped brokers of their licenses for a number of legal and regulatory violations. In 2009, state regulators suspended a Plymouth mortgage brokerage company’s license for, among other things, making false or misleading representations of a borrower’s income on loan applications. In 2007, a Haverhill broker had her license suspended for failing to report that her license had been revoked in New Hampshire and denying regulators in Massachusetts access to her office. That same year, a broker in Brockton lost his license for altering financial statements, among other violations.
Cotney said the agency has taken 210 “informal” or less stringent actions during the past two and a half years, such as convincing a company to hire auditors or revise internal practices. Massachusetts keeps those actions secret.
Housing and banking professionals who interact frequently with the Division of Banks said the agency is considered aggressive when it comes to strengthening policy and legislation.
But Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, said the Division may have focused more during the housing crisis on the other financial institutions and professionals it oversees.
“Maybe the Division of Banks wasn’t nimble enough to switch and pull resources from the banking, the credit union world and say ‘Our major concern has got to be the mortgage companies,” Callahan said.
Your Home Mortgage aggressively marketed itself, through advertising and word of mouth, to working class Latino clients, including immigrants like Alvarez, who said his lack of education and his trust in company co-founder Mauricio Osorno, a fellow Colombian, put him at a disadvantage.
“Even if I didn’t understand these terms, I have all my trust in him by the way he talked to me,” Alvarez said of Osorno. “He was treating me like a member of his family. I trust him completely and he never took his time to explain to me what I was going through because it wasn’t to his benefit.”
Alvarez’s foreclosure prevention specialist, Virginia Pratt, also wrote to the Division of Banks on behalf of Aresenia Rodrigues. Pratt stated Rodrigues, who was on disability and living in public housing before obtaining a mortgage, was “very much taken advantage of” by Your Home Mortgage.
Pratt told the agency the brokerage firm gave Rodrigues false information about the loan terms and told Rodrigues the closing attorney would represent her when in fact he represented the lender. Rodrigues has sued Your Home Mortgage, alleging the firm rushed her into signing a blank mortgage application for a $485,000 home in Somerville. At the time, Rodrigues earned $27,000 annually. The Division’s own regulations ban brokers from misleading buyers and having them sign blank applications.
When asked about Rodrigues’s complaint, Cotney said the agency had no record of it but later a Division spokesman acknowledged receipt of the complaint. No formal action was taken against Your Home Mortgage. Informal actions are not public record. Cotney declined to comment on the complaints against Your Home Mortgage.
Your Home Mortgage is run by brothers Diego and Mauricio Osorno. Reached by phone, Diego declined to comment on the allegations in the complaints or the lawsuit. In an interview at his Chelsea office, Mauricio Osorno denied the allegations.
“I can get you more than 100 or 200 letters from people who can vouch for our name and our reputation,“ Mauricio Osorno said.
In June, the Osorno brothers voluntarily surrendered their mortgage brokerage license claiming they are insolvent, Massachusetts Secretary of State records show.
Rodrigues’ lawsuit against Your Home Mortgage and a real estate firm called Su Casa Y Mas, also owned by the Osorno brothers, includes a second plaintiff. Carmen Mendoza, an El Salvadoran factory worker, claims a Su Casa employee assured her she could afford a $500,000 home in Somerville despite her $25,000 income, the suit states. She also alleges the Osorno’s employees told her to put her brother and son on the mortgage application to make sure she would qualify.
Your Home Mortgage arranged two mortgages for Mendoza for the $489,000 two-family Somerville home she eventually bought. Mendoza did not fully understand the terms of the loans, and when she protested the $4,000 monthly payments, she was told she would lose her deposit, the lawsuit claims.
“It was a terrible experience,” Mendoza said as she headed out for her night-shift job.
Since 2005, nearly half of Su Casa Y Mas’s 11 residential sales, in which the firm represented both buyer and seller in the same transaction, have faced foreclosure action, according to real estate records.
“It’s absolutely appalling. That’s the kind of person or that’s the kind of business that state regulators need to do something about,” said Ira Reingold of the National Association of Consumer Advocates.
In the lawsuit on behalf of Mendoza and Rodrigues, Greater Boston Legal Services attorney Nadine Cohen claims Your Home Mortgage brokered loans in violation of the state’s consumer protection law.
“What troubles me most is that poor, unsophisticated, often non-English speaking people put their hard-earned money into buying a house and really tried their best to make their payment but they were doomed from the beginning,” said Cohen.
Jaime Alvarez agrees. “These brokers don’t know how much damage they can do to a family,” he said.
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Investigation Findings:
Between January 1, 2007 and June 1, 2009, The Massachusetts Division of Banks took its most stringent actions against less than 3 per cent of the mortgage brokers/lenders it was supposed to regulate.
Compared to the other New England states, Massachusetts ranks last during that time period in the number of revocations, suspensions and forced license surrenders against mortgage brokers/lenders. It ranks second in its foreclosure rate.
The Division’s examinations of mortgage brokers and lenders dropped between 2006 and 2008. Not until last year, did state regulators, set up a special unit to investigate mortgage fraud.
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The New England Center for Investigative Reporting at Boston University is an investigative reporting collaborative co-directed by Joe Bergantino and Maggie Mulvihill. Additional student contributors include Molly Connors, Nina Cromeyer, Ben Ezickson, Sydney Lupkin, Dan Rowinski and Lauren Winowich. Other NECIR-BU media partners are The Boston Globe, WBUR (NPR), New England Cable News, The Warren Group, El Planeta, and the Lawrence Eagle Tribune.
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