I am pleased to announce that I have been offered an opportunity to speak at the Association of Real Estate License Law Officials (ARELLO) Midyear Meeting, which is being held April 24-26, 2008, in Pasadena, California. If you’re unfamiliar with ARELLO and the important role this organization plays in the real estate industry, here’s some background:

ARELLO was founded in 1930 to facilitate the exchange of information and cooperation among regulators and policy makers in the area of real property. Today, the organization has grown in stature and in recognition by growing its membership, attaining financial stability, and formulating and adopting uniform policies and standards in the fields of education, administration and enforcement. The association’s membership is deeply committed to the effective administration and enforcement of the license laws and of the importance of regulation in a healthy marketplace.

As you can imagine, fraud is a topic of high interest to ARELLO members, and I have been asked to address the group on current trends in real estate and mortgage fraud, what to look for when attempting to determine if fraud is present in a transaction, and emerging trends in real estate and mortgage fraud forensics.

If you would like to learn more about ARELLO or the 2008 Midyear Meeting, visit the ARELLO website or the Midyear Meeting page today.

During the current mortgage meltdown, the press has turned its focus on the most obvious culprits–the irresponsible and often unethical loan officers, mortgage brokers, appraisers, Realtors, and even the borrowers. Those are the people I like to call the riggers–the people you usually think of when you picture someone taking out a loan or buying a home.

Working behind the scenes, however, are other culprits who facilitate and often encourage the riggers to commit fraud. These are the people I call the triggers. When the triggers and the riggers got together, they ignited the blaze that has engulfed the mortgage industry. The riggers spilled the gas, and the triggers dropped the match. Now homes, communities, cities, states, and the entire nation are ablaze.

Recently while talking to a senior underwriter for a major Wall Street bank, she shared with me that she had witnessed the sinister inner workings of the lending industry first hand. The underwriter’s job is to provide an unbiased assessment of the risk level of a particular loan. This particular underwriter has always taken great pride in protecting the lender/investor from approving overly risky loans and protecting the borrower from becoming saddled with debt that he or she cannot repay.

She and her colleagues did their best to identify bad loans and sound the alarms, but the bank’s managers and account executives prevented them from doing their jobs. The underwriters were expected to let the loans slide through the approval process despite the fact that many of these loans should never have be approved. The underwriters were told that they should be happy to have jobs.

Feeling the stress of being forced to act unethically, many of her colleagues resigned. This particular person felt that it was her responsibility to remain on the job and call attention to this problem from the inside, where she could witness this institutional fraud with her own eyes. Currently, I cannot disclose the identity of my source or the bank she works for.

SLC: Submit, Lock, and Close

What this senior underwriter and her colleagues have witnessed can be summed up in a single acronym: SLC (Submit, Lock, and Close). As soon as a loan application is submitted , they lock their focus on it and move it through closing. It’s like a sweat shop for the loan industry, an assembly line, no questions asked, where they approve and process as many loans as possible, so they can make money and stay in business.

As underwriters, they have called their managers’ attention to blatant signs of fraud–fraudulent income and assets, questionable transactions, and so on. The managers have told them to let it go. They call it a “business decision,” a “relationship building tool.” In fact, it’s fraud, plain and simple.

How It Works

In the good old days, lenders viewed underwriters as the good guys and gals, protecting lenders from approving bad loans. Most recently, however, brokers and account executives, driven by greed, have found ways to work directly with one another to bypass the underwriter.

Here’s how the relationship typically develops:

1. A prospective borrower visits a mortgage broker to take out a loan.
2. The loan officer (working on behalf of the broker) has the borrower complete the loan application and then collects all the documentation, packages it up, and sends it to the lender/investor for approval.
3. All files go to underwriting.
4. A senior underwriter examines the documentation and discovers a problem; for example, a fraudulent pay stub. He reports the problem to his manager. The good news is that the senior underwriter has done his job to protect the lender/investor.
5. The loan officer is informed that the loan application he has submitted has been rejected.
6. The loan officer reports the problem to the manager of the mortgage company.
7. The manager of the mortgage company contacts the account executive for the lender/investor and threatens to pull his 20 closings a month, which would negatively affect the income of the account manager.
8. The account executive approaches the manager of the underwriting department and reminds him that they both get paid on volume and that this loan needs to be approved in order to preserve future business.
9. The underwriting manager instructs the senior underwriter to approve the loan and simply document any concerns that she may have in order to protect herself. The manager justifies approving the loan as a business decision that is beyond the senior underwriter’s pay scale.

As you can see, the system in place is designed to protect the lender/investor, and it would work well if the underwriters were allowed to do their jobs. The trouble is that, in this case, greed has turned the system upside down, exposing the lender/investor to loans that are likely to have high default rates.

In the process, the mortgage broker/loan officer loses all respect for the underwriter’s decisions and calls the account executive on every file. The account executive calls the manager who rubber stamps every file, overriding the underwriters, who have no power to stop it. According to my source, “The managers would overturn every decision to deny a loan, every request for complete documents, bank statements, or pay stubs. Everything we questioned in our capacity as underwriters was overridden.”

The Hype

The underwriters were reminded daily of all the companies like theirs that were shutting down as a result of the mortgage meltdown and that their company was one of the few survivors. They were told to keep closing loans. With all of those other companies going out of business, they now had a golden opportunity to increase market share and become the lender of choice. They were told that management was aware and that they were over staffed, but because they were doing so much business, nobody would have to be laid off. They didn’t have to worry about having a job as long as they continued to close loans. “It’s a bad time to be looking for a job in this industry, so we all need to work together.”

From my perspective, this is just one of the pieces that contributed to the mortgage meltdown and why it will continue until the underwriters are allowed to do their jobs. As I have always stated, it takes more then one to hold a “fraud party.” Most people would never imagine that the lending industry functions as a good ol’ boys network, with favors being traded to the detriment of consumers, the industry, and the entire economy, but that’s exactly what’s going on, and it continues even with all the bad press swirling around.

This situation has been turned into the authorities, and FBI interviews have begun. To the credit of this lender/investor, once they were presented with the information, they acted quickly and have already released one of the offenders from employment. There is more that needs fixing, however, than simply removing a few bad apples. This case demonstrates several problems:

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• Lenders being pressured to approve more loans to feed Wall Street’s insatiable appetite for mortgage-backed securities
• Lowering the FICO score to allow more borrowers to qualify for mortgage loans
• Risky products, including adjustable-rate mortgages, being pushed on unsophisticated borrowers
• A system of checks and balances that was designed to curb irresponsible lending but that was all too easy to circumvent
• Greed, pure and simple

The REALTOR’S® many obligations to other REALTORS is awfully clear, especially when it comes to talking about one another. Take for instance Article 15 of the National Association of REALTORS’ “The Duties to REALTORS®,” which reads:

REALTORS® shall not knowingly or recklessly make false or misleading statements about competitors, their businesses, or their business practices. (Amended 1/92)

Standard of Practice 15-1

REALTORS® shall not knowingly or recklessly file false or unfounded ethics complaints. (Adopted 1/00)

Standard of Practice 15-2

The obligation to refrain from making false or misleading statements about competitors’ businesses and competitors’ business practices includes the duty to not knowingly or recklessly repeat, retransmit, or republish false or misleading statements made by others. This duty applies whether false or misleading statements are repeated in person, in writing, by technological means ( e.g., the Internet), or by any other means. (Adopted 1/07)

Why am I mentioning this now? According to CrimeLibrary.com, police have arrested a 42-year-old Miami-Dade, Florida REALTOR named Dean Isenberg for posting fake escort ads on the Internet that included the personal contact information of a rival REALTOR. According to police, the incidents began last summer, when 44-year-old Debbie Blasberg, a local Miami REALTOR and a married mother of two, reported that she was receiving hundreds of unsolicited phone calls and text messages from strangers inquiring about sex. One of the callers had confessed that he found her number in an escort ad on Craigslist.org.

Ethically speaking, what Dean Isenberg did is reprehensible in every sense of the word. In addition to the criminal charges he now faces, I sincerely hope the National Association of REALTORS censures and condemns his actions with a lifetime ban!

With the author’s permission, I am posting a reader’s follow up thoughts to yesterday piece on the fiduciary responsibility in the current mortgage meltdown:

Thank you, Ralph, for your very balanced article today. I think you framed the situation pretty well. It’s so nice to read an article that provokes thought (rather than the usual outrage or hysteria).

I, too, have pondered the incentives created by a commission-based compensation system. It does lend itself to the salesman mentality. However, the mortgage market, because of its unequal treatment of market participants, tends to work against any alternative. In a simplistic sense, the market is composed of brokers and bankers. Brokers are required by law to reveal all of their compensation (including yield spread premium). Bankers are not. As a result, a banker always is able to make his loan LOOK cheaper by burying fees and his compensation into the interest rate.

I truly think the best thing we can do as a society is better train consumers about shopping for a mortgage. This training should start in secondary school. It’s ridiculous that we don’t equip our teenagers with financial skills. And we wonder why so many of them get in trouble with credit cards as young adults.

The government mandated that those who offer mortgages (and other consumer debt) reveal an annual percentage rate (APR) that accounts for costs associated with creating the mortgage. It’s a good tool for comparison shopping, but I don’t think most consumers know how to use it.

People have to be responsible for their own decisions. Let’s give them what they need to make informed, smart decisions.

Thanks again and Happy New Year.

Steve

——————————–
G. Steven Bray
Commercial and Operations Manager
Texas Lone Star Lending
“Your Loan Educator”

512-261-1542
877-546-7079
steve at lonestarlending dot com

Thanks, Steve. Appreciate the feedback.

I was discussing the mortgage meltdown with a colleague the other day, when we encountered an interesting question: Who do mortgage originators (brokers and loan officers) represent? Do they represent themselves, the lenders whose products they sell, or the borrowers?

As a REALTOR®, my relationship with my clients is clearly delineated. I have a fiduciary responsibility to the buyer or the seller I represent. The term “fiduciary” simply means that I must represent my client’s best interests. In a case of dual representation, REALTORS® are expected to treat both parties fairly and equitably.

A professional’s responsibility varies according to the profession and the specific role the person plays. A stock broker, for example, is supposed to sell investments to clients that are in the clients’ best interests. Someone who sells cars, however, is responsible for acting on behalf of the dealership, not the person who’s buying the car. Condemning a car salesperson for trying to sell the buyer additional optional features the buyer didn’t really need would be insane.

In real estate transactions, fiduciary responsibility is not always so clearly defined, and I believe this is at the root of many problems in the industry. For example, is an appraiser (paid by the buyer) responsible to the buyer or to the bank who uses the appraisal to deny or approve a loan? In the best of all possible worlds, the appraiser’s job is to provide an accurate appraisal of a home’s value, but in the real world, this doesn’t always happen. At the direction of a homeowner, loan officer, or real estate agent, the appraiser may inflate the appraisal, fooling the lender into approving a loan it would otherwise deny.

The fiduciary responsibility of mortgage brokers and loan officers is even fuzzier. Like a car dealer, a loan officer is merely selling a product supplied by the lender. Like an investment broker, however, the loan officer has some responsibility not to saddle the borrower with an overly risky loan. As you can see, the role that the broker or loan officer plays between the lender and borrower is clouded in ambiguity.

I believe that this ambiguity led to many of the problems leading up to the mortgage meltdown. In some cases, loan officers were overly ambitious in representing the borrower’s interests, which resulted in mortgage fraud. In other cases, loan officers who were overly eager to sell the lenders’ products pushed risky loan products (subprime mortgages) on unwary borrowers. Ironically, by acting solely on the behalf of either the borrower or the lender, these loan officers served neither party. Both lenders and borrowers got stuck with bad loans.

Some states have passed legislation that gives mortgage brokers and loan officers fiduciary responsibility to borrowers, but that addresses only one half of the equation. Brokers and loan officers also have to protect the interests of lenders.

I don’t intend to make mortgage brokers and loan officers the scapegoats in the mortgage meltdown. There’s plenty of blame to go around. Real estate agents, appraisers, title companies, Wall Street, the Federal Reserve, legislators, politicians, and homeowners all share the blame. Unfortunately, mortgage brokers and loan officers play the role of gatekeepers and are saddled with an inordinate amount of responsibility. They must serve two masters in a way that is in the best interest of both parties.

Perhaps mortgage brokers and loan officers need to stop thinking about their vendors and their clients and think in more abstract terms. Instead of selling products from lenders or representing borrowers as clients, maybe they need to be committed to making good loans. In many ways, the relationship needs to be governed by the same rules that apply to dual representation in the real estate industry — if it’s not a good deal for everyone involved, then it’s not a good deal. As an added incentive, perhaps brokers and loan officers should have their compensation tied to the success of the loan rather than receiving a commission on each sale.

2007 has been a tough year for all of us in the real estate business, but the hardest hit are the families who have been victimized by the mortgage meltdown. Millions of families stand to lose their homes to foreclosure, and most of these people don’t know where to turn for help.

If you are a real estate professional, you are in a unique position to assist those in need. In my experience, I have found that the best option for over 90% of homeowners who are facing foreclosure is to sell their homes and find more affordable accommodations. Real estate agents can help a family accomplish both of those tasks. The United States has more than two million real estate agents, over 1.2 million of which are Realtors®. If every one of us helped just one family, we could transition every family into more affordable housing.

This holiday season, I offer the following call to action:

• Find the family in your area who is in the most dire need of your assistance and offer to waive your listing fee.
• Donate your expertise to the cause and then come back here and post your story.

Let’s just see how a small army of grassroots real estate agents can dampen the fallout from the current foreclosure epidemic and lift the spirit of millions of families this holiday season.

If every one of us helps just one family between now and the end of 2007, we will have helped over one million families through their foreclosure crises and left a lasting legacy to ring in the New Year.

Even top producing Real Estate agents have slow days… or weeks or months. Maybe the economy is slow or it’s that time of year. Perhaps you feel as though you have been saddled with some poor prospects or you are just another victim of the mortgage meltdown. Whatever the cause or the perceived cause of a slump, it really does not matter–those things are outside of your control. To dump your slump, you need to concentrate on what you can control. Here are ten tips to get you back on track.

1. Hold yourself accountable: As a Real Estate agent, you are an entrepreneur. This means that your compensation is tied directly to your production. You have to sell homes to earn your keep, so you cannot afford to sit around waiting for the economy to turn around or a slow season to pass. You have to start working to make something happen. When the housing market is slow, you need to ramp up your efforts, not scale them back.
2. Figure out what’s changed: Ask yourself, “What has changed?” If you can figure out what changed between the time when sales were brisk and when they began to slump, you usually know what you need to start doing. Perhaps when you were first starting out, you were making 200 cold calls a week, but you stopped doing that as soon as you had plenty of customers. In many cases, you simply need to get back to what you were doing when you were more successful.
3. Set a goal and reward: When you’re in a slump, it’s easy to lose your motivation. Set a goal and dangle a reward in front of yourself to provide some added incentive. Your goal may be process oriented, such as making 50 phone calls a day for the next month, or results oriented, such as achieving a certain gross dollar amount in sales for the month or quarter. Once you select a reward, create a reward collage by clipping photos that remind you of the reward and pasting them on a poster board. Keep your collage close at hand, so you can keep reminding yourself of what you are working toward.
4. Surround yourself with positive people: Both positive and negative attitudes are contagious. Avoid people in your office who poke fun at goal setting and other motivational tools, and gravitate toward those who have a positive, can-do attitude. People with positive attitudes will encourage and challenge you to do your best and have fun doing it. The others will simply sap your energy.
5. Focus on the fundamentals: When a professional baseball player is in a batting slump, the batting coach examines the videotapes and tries to find out what the batter is doing wrong. Then, he encourages the batter to focus on the fundamentals, the mechanics of swinging the bat. When you find yourself in a sales slump, focus on the fundamentals of selling. Are you building solid relationships with your clients? Are you following up after the sale? When you arrange to show homes, are you really listening to what the buyers want?
6. Pick up the phone: Every day, five to six days a week, I make 100 phone calls. I call it my Hour of Power. I call my clients just to touch base. In many cases, I get an answering machine and leave a message. I don’t spend a lot of time on each call, and I never try to sell anything. The sole purpose is to let my clients know that I’m thinking about them. Although this may not generate instant sales, you soon observe your sales numbers climbing. Try it. Start slow with say 25 to 50 calls per day, but work toward that magic number of 100. It really does make a difference.
7. Grow out of it: Sales slumps can often be caused by success. You achieve a certain level of success and for some reason cannot seem to break through the barrier to the next level, so you lose interest and sales taper off. Perhaps you simply need to grow out of it. Set a higher goal, figure out what you need to achieve that goal, and get to work. Need an assistant? Hire one. Need some new technology? Buy it.
8. Write something: The Internet has completely revolutionized the way everything is sold, including Real Estate. In the past, clients would hire us to obtain the information we had available through the MLS. Now we have to provide the information first to prove our expertise before a client will hire us. Now, content is king. Provide prospects with the information they need to make well-informed purchase decisions, and you are likely to earn a client. Create a Web site or blog and start writing, contribute to other people’s blogs and to online communities where prospective clients hang out, write articles for online publications related to your area of expertise. Establish yourself as an expert, and people will buy from you rather than from your competitors.
9. Hire a coach: Sometimes, you may be too close to your situation to view it objectively. A reputable agent coach can quickly assess the situation, tell you what you’re doing right and what you’re doing wrong, and offer several strategies and suggestions that you can immediately implement.
10. Start right now: Many people set a date when they plan on implementing changes. They say they’ll start dieting after Thanksgiving of stop smoking on Monday. Don’t put it off another minute. As soon as you have a plan in place, start working the plan immediately. Why wait? Seize the opportunity now!

Back in early-September, I wrote about RISMedia’s 2007 Leadership Conference, a high-level networking and education event for the nation’s top Real Estate leaders, held each year for the last 18 years in the heart of New York City. In addition to attending many sessions, I moderated two panel discussions related to best practices in building and managing Real Estate Agent Teams. One of those sessions, “From A to Z–How Do I Form and Lead a Championship Agent Team?,” was covered for RISMedia by John Voket. John’s article, “Finding the Right Agent Team Formula,” is now available on RISMedia.com.

Check it out for yourself: “Finding the Right Agent Team Formula.”

I am pleased to share that my latest book, “Power Teams: The Complete Guide to Building and Managing a Winning Real Estate Agent Teams” (co-authored by John Featherston, Founder/CEO & Publisher of RISMedia), will be available this coming January. Combining our years of Real Estate industry experience, John and I have created a book that is bound to serve as the definitive guide on one of the industry’s most predominant trends: Real Estate Agent Teams.

Besides drawing from personal insights and experiences in our Real Estate careers, John and I have included information collected from interviews with many of the Real Estate industry’s top teams. At the end of the day, our new book helps agents and brokers overcome the obstacles of creating and succeeding with agent teams. The book not only includes a step-by-step guide to forming an agent team, but also covers the best practices of teams who have already reached a notable level of success.

“Power Teams: The Complete Guide to Building and Managing a Winning Real Estate Agent Teams” helps you by:

• Defining and explaining the agent team concept.
• Reviewing the various agent team models.
• Helping agents decide whether or not an agent team is right for them.
• Showing agents how to build a team from the ground up.

To pre-order your copy, click “Power Teams: The Complete Guide to Building and Managing a Winning Real Estate Agent Teams” today.

My recent commentary, “The Truth About the Mortgage Meltdown,” inspired a great deal of feedback both positive and negative. Most of the negative feedback came from mortgage brokers who were understandably upset by the fact that I was placing much of the blame about the current mortgage meltdown squarely on their shoulders. Most of the positive feedback came from homeowners who were about to lose their homes because they followed the advice of misdirected mortgage originators and purchased risky products promoted by mortgage lenders.

I do stand corrected on two points. First, not all mortgage brokers are to blame. Every industry has its share of top-notch professionals who look out for the best interests of their clients. Although I single out loan originators in this particular commentary, in my book Protect Yourself from Real Estate and Mortgage Fraud, I list nearly a dozen professions that contribute to real estate and mortgage fraud, including real estate agents, appraisers, loan originators, title company representatives, REO brokers, and notaries. You can find good and bad professionals in all of these groups. Second, as at least two people have pointed out, mortgage brokers are not typically the people who package up the mortgage loans and sell them to investors. The broker may earn a commission or fee for processing the loan, but the mortgage lender actually is the one who packages the loan with other loans and then sells it to investors for a markup. In addition, the broker and originator play no role in creating the product; they didn’t invent the risky products or allow homeowners to take out these loans without setting up escrow accounts for paying taxes and insurance.

Although I do stand corrected on these two points, I stand by the premise of my commentary–the major cause of the current mortgage meltdown has less to do with the fact that homeowners are not making their payments and more to do with the fact that mortgage companies are having to buy back their bad loans. And when they run out of cash and cannot buy back the loans, their warehouse line gets cut off, they are basically forced out of business, credit becomes tight, and homeowners can’t refinance their way out of trouble.

Several disgruntled readers (primarily mortgage loan originators) have pointed out that mortgage lenders (not brokers or loan officers) are to blame for creating high-risk mortgage products and for encouraging their brokers and loan officers to push these products. One person went so far as to describe the broker as “the tool of the lender,” simply marketing whatever products the lender chooses to place on the market.

I agree that lenders and Wall Street are to blame for making risky products available, but lenders can’t force brokers to sell these products to clients who are ill-served by them. As a Real Estate Agent, I would never think of selling a particular home to a buyer who couldn’t afford it or selling defective homes to my clients simply because a builder was pressuring me to sell those homes. I believe that Real Estate professionals who deal directly with consumers should be responsible to their clients, not to the manufacturers of certain products.

Let’s not forget who the customer is!