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Attorney General Jerry Brown recently announced that the State of California has filed a legal suit against Countrywide home mortgage lender for deceptive lending practices that has caused thousands of foreclosures. Brown cites that Countrywide routinely failed to explain complicated and expensive mortgage terms to consumers -- a practice that encouraged borrowers to agree to completely unaffordable mortgage terms.
But according to several lending professionals working in California State (who requested that their anonymity be protected for this blog post), Countrywide’s failure to protect their clients from the possibility of foreclosure is just a small part of a much larger state-wide problem.
As one real estate professional explained, essentially, the real estate policies of California State do not protect mortgage consumers from an industry that thrives on the commissions and fees of realtors, mortgage professionals, bank lenders, and escrow companies.
Currently, the typical home buying process in California entails a rushed 30-day purchase transaction that is fueled by impatient commission-based realtors and apathetic escrow companies. While California State does technically require lenders, escrow companies, and realtors to explain mortgage terms to home buyers, it does not have any legal safety-nets in place to compensate for the possibility of deception by an industry of professionals that depend on home and mortgage sales for their income.
One lending professional described encountering home-owners, many with limited English-speaking skills, that came to her office frantically trying to refinance their Countrywide loans because they could not afford the ever-increasing monthly payments of their negative-amortization loans and high-rate second mortgages as they were on the verge of foreclosure. Upon asking these refinance seekers what sort of loans that they had, many would state that they did not know and that they were never told.
The real estate professionals that I spoke to identified several ways that the State of California could prevent similar home foreclosures in the future. One protection should be to require the use of third-party real estate attorneys chosen by buyers that are capable of explaining lending terms, ultimately warning and protecting potential buyers form predatory lending practices when necessary. Currently, escrow companies charge an additional closing-fee for this service, but as evidenced by the Countrywide foreclosures, many escrow companies do not actually protect buyers by explaining less than ideal mortgage terms to consumers. The use of third-party attorneys would also allow non-English speaking buyers the benefit choosing a lawyer capable of explaining mortgage terms to them in the language that buyers are most comfortable in.
Another protection that the State of California should institute would be to prohibit the use of 30-day or less closings where buyers pay upfront non-refundable escrow contract deposits. Often buyers do not have enough time to learn that they are agreeing to a questionable high-risk mortgage due to short mortgage-contingency periods; but should buyers later learn that they do not qualify for the more-favorable terms of a conventially financed mortgage and want to cancel the deal, they must forfeit and lose the money that they paid for their escrow contract deposit. These policies trap home buyers who do not want to lose their money into predatory buying agreements.
Photo by respres via Flickr.
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I know this is a broken record, but seriously, you borrowed money and bought a house and don't know what your fiscal responsibilities are? It's one thing to have been defrauded, but it's another matter entirely when you just don't know. If you have enough money to buy a house, you (theoretically) should have enough money to have a lawyer look over the terms of your agreement. And if you don't, you should not be buying that house.
This is right on. The system is broken. You've got 2 salespeople, both of whom want to make a sale.
It's laughable to believe the "your" agent is looking out for you. He/She stands to pocket a 5 figure commission if he can ram through the sale. There needs to be SOMEONE in the process who is an advocate for the buyer.
I just can’t see how traditional brick and mortar brokers are going to be able to compete with sites like zillow, trulia and reozom when this is all said and done. Especially considering a lot of homeowners simply don’t have the equity to cover the relatively high commission that traditional brokers charge. Traditional full service brokers; your days are numbered, please prove me wrong, but I can’t see property values going up anytime soon. Any other thoughts on this matter?
"The system is broken. You've got 2 salespeople, both of whom want to make a sale".
"It's laughable to believe the "your" agent is looking out for you. He/She stands to pocket a 5 figure commission if he can ram through the sale. There needs to be SOMEONE in the process who is an advocate for the buyer"
I couldn't agree more, back door deals are being done all the time among realtors and there no way of really proving it. The system of buying property through realtors will be changing very soon, it's a corrupt monopoly.
" ...the real estate policies of California State do not protect mortgage consumers from an industry that thrives on the commissions and fees of realtors, mortgage professionals, bank lenders, and escrow companies. "
Let me guess. Was this another one of those "we can trust the industry to police themselves" brain farts?
What you are describing around the two agents, neither of them really representing the buyer is true. Since they both get paid on a percentage basis, each is incented for you to buy quickly, and to spend as much money as possible.
On the larger picture of the "bad loan" scenario, pretty similar trend. The people deciding who gets what loan at what amount are not the same people who will bear the risk of that loan.
Hopefully enough fat cats lost their shirts on this mess that we'll get better rules.
Bill@Saving Money