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Bad lenders pose a danger on slowing US property market

With the US real estate market slowing, fewer people are seeking loans. And with subprime lending standards tightening significantly, fewer people qualify for them.

The combination has resulted in less business for lenders and brokers, which in turn means that prospective borrowers should tread carefully.

People shopping for loans must always exercise vigilance against unscrupulous lenders. But analysts and industry executives say that in the midst of the current shakeout, borrowers should be especially cautious about loans.

Paul Miller, a mortgage industry analyst with Friedman, Billings & Ramsey, an investment firm in Arlington, Virginia, said that these days, some lenders or brokers cannot afford to be choosy. And that's where the problems can begin.

"All of a sudden, you might have only two people walking through the door, and only one of them looks like they'd be a good loan," Miller said.

But an unprincipled broker will decide that both loans are good, Miller said, because the broker needs the income.

In other words, to make a larger fee, the unscrupulous broker will qualify someone for a loan he or she really shouldn't get. Doing so is unethical at best and fraudulent at worst.

Michael Moskowitz, the president of Equity Now, a mortgage lender based in Manhattan, said that in harder times there is also more temptation to match borrowers with loans that might not be right for them, but which will carry higher profits for the company.

He said a former client in Connecticut had recently closed an US$880,000 refinance loan, although a second mortgage would have worked just as well. But that would have yielded the broker only US$4,000 in profit, compared with US$35,000 for the refinance.

Moskowitz said he urged the borrower, who had come to him for advice about another possible refinance loan, to complain to state regulators in Connecticut and New York, where the loan officer had his office, and to appeal to the investor who ultimately bought the loan.

"I believe he could present this as a predatory loan," Moskowitz said, but the borrower has been unwilling to do so.

Industry executives said borrowers should demand to see the final loan documents, known as the HUD-1 statement, 24 hours before the closing, to avoid any surprise costs or terms.

Moskowitz said borrowers should also ask the lender to connect them with three customers in similar situations.

"A reputable company will have no problems with that," he said.

Harry Dinham, the president of the National Association of Mortgage Brokers, said most brokers try to establish long-term relationships with their clients and seek to match them with the right loans. But he said borrowers should be vigilant.

But consumers can take some solace in that the downturn will weed some unscrupulous lenders from the mix, Dinham said.
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