Confessions of a Subprime Lender

by Richard Bitner

  Brokers can withhold information from lenders in a number of ways such as these:• The broker encourages a borrower to obtain a separate loan to cover the down payment for a home purchase. By not disclosing the separate loan on the mortgage application and timing the loan to close shortly before the mortgage, the broker prevents the lender from learning about the additional debt.

  • The broker reviews borrowers’ income documents and determines they don’t make enough money to qualify, so he puts them into a stated income loan and never sends the income documents to the lender. While stated income loans are a standard industry offering, this scenario assumes the broker has confirmed the borrower cannot afford the payment.

  Manipulators

  Loan manipulation means either information is altered to make the lender believe the loan is less risky or the broker’s actions are deceptive and potentially damaging to the consumer. A broker willing to do this takes fraud to the next level. Such a broker is motivated purely by income with no regard for the lender or the consumer. Unlike the first two categories of dysfunctional brokers, manipulation requires the broker to willfully exploit a situation.

  Manipulation comes in many forms. Here are a few of the most common types:• Falsifying or altering income documentation. Desktop publishing programs allow for near-perfect replication of pay stubs and W-2s.

  • Placing an unsuspecting borrower into an adjustable rate mortgage without explaining how it works.

  • Pulling a bait and switch by disclosing a lower rate and fee structure to a borrower and then increasing the figures shortly before closing.

  The last example is painful to witness. Since the broker has the relationship with the borrower, lenders aren’t expected to have any direct contact with this person prior to closing. If the lender needs something from the borrower, the broker serves as intermediary. This helps preserve the broker-borrower relationship and prevents the lender from poaching the broker’s customer.

  When brokers pull a bait and switch, lenders have few options. They could go around the broker, but that is a dangerous tactic. Once a lender is known for doing end runs, they risk alienating other brokers. The only other option would be to inactivate the broker. This also poses a dilemma, since unless the lender waited until the loan closed, he would penalize the consumer by not completing the deal.

  After 14 years in the mortgage business, I’m convinced the process of buying a first home can be one of the most stressful situations consumers experience. After going through all the steps to find a home and get approved, imagine the distress borrowers feel when they discover the loan terms have changed at the last minute. What options do they have? A borrower with damaged credit who had struggled to get approved feels trapped. Between the earnest money that has been put down, the landlord who’s been given notice, and the moving company storing their worldly possessions, they have committed themselves to the process. Threatening to report the broker to the attorney general unless the original deal is honored is usually all that’s needed, but many borrowers don’t know that this is an option. Since the broker isn’t required to meet the figures disclosed on the Good Faith Estimate, borrowers with damaged credit become easy targets.

  The manipulators were a concern to lenders for several reasons. First, they could inflict enormous damage. Anyone willing to throw a lender or consumer under the bus is a serious threat. Second, just because a broker manipulated loans didn’t mean he did it on every deal. Some brokers were chameleons, changing colors when it suited them best, and any lenders that let their guard down could easily be victimized.

  Jeff McDaniel was just this kind of broker. After a year of doing business together, we started developing some trust. He represented himself as a highly ethical person and never gave us any reason to doubt him. But when he called one afternoon and said, “I’ve got a loan ready to close,” it meant another lender had just declined the deal. A loan can only close if a broker has a complete file, which means it was originally sent to another mortgage company. Just because a lender denied the loan didn’t mean it was fraudulent, but it did mean we had to dig deep to find out why the lender wouldn’t take it.

  Jeff mentioned the loan was turned down for credit reasons but we suspected something else. The borrower had only fair credit, but it should have been good enough for any subprime lender. Something didn’t smell right about this deal. It was possible that the borrower, a single woman, was buying a 6,000-square-foot home, but not likely. The appraiser called it a single-family residence, but the picture of the front of the property was taken from so far away it was hard to make out any details. Since the interior photos were also taken from odd angles, we suspected the appraiser was hiding something.

  By coincidence, Ken’s wife was visiting a friend in the city where the property was located, so we had her take a look. She drove by the house and discovered it wasn’t a residence but a small office building. At some point it had been a single-family residence, but it had been converted to individual suites with living quarters in the rear. Each company that rented space had a separate entrance at the front of the property. This explained why the appraiser took the picture from so far away—he didn’t want the lender to see the company nameplates on the doors.

  There is no doubt the appraisal was manipulated. Residential appraisers would never do this type of work unless they were completely incompetent or influenced by someone. Since Jeff ordered the appraisal, he’s the only person who could have planned this fraud.

  When a broker is caught red-handed, the follow-up calls are usually memorable. Watching brokers attempt to lie their way out of a situation makes for an interesting study in human behavior. In this case, Jeff didn’t know that Ken’s wife had seen the property, so we tried to trap him, hoping for a confession. Even though he was backed into a corner and fumbled his way through the call, he tried to turn it around by blaming the borrower. He wanted us to believe that she conspired with the appraiser, but his argument made no sense. Brokers drive this process and it was clear who was running the scam.

  Jeff is the worst kind of manipulator. He spent a year gaining our confidence, making us believe he was trustworthy. Faced with a chance to make a $15,000 commission check, he finally showed us his true colors.

  Whether it was the borrowers, brokers, or a combination of the two that contributed to the trend toward manipulation, it’s easy to understand why this business could turn anyone into a cynic.

  Corrupt Brokers

  While any broker who manipulates a file can be classified as corrupt, I reserve this category for the worst offenders. There is also one significant difference between a manipulative broker and a corrupt one. A manipulative broker will determine what actions need to be taken for a lender to approve a loan. Even though the deal is fraudulent, the borrower has the intention of making payments. The corrupt broker is crafting a plan to generate income by inflicting financial harm on a lender. It’s unlikely a payment will ever be made. Fortunately, the tactics these brokers used accounted for only about 5 percent of all subprime loans.

  These brokers have no redeeming qualities—they’re immoral and malicious. The best way to illustrate their actions is to list some of the losses they caused our company.• Tim Booker purchased a home in south Dallas. The only problem was that Mr. Booker was deployed on a naval ship in the Middle East when his closing documents were signed. His uncle, the mortgage broker who originated the loan, used him as a straw buyer, which meant he never intended to occupy or make payments on the property. He arranged to have someone else sign all the closing documents. Cost to Kellner Mortgage Investments: $13,000.

  • In 2001, we wrote a mortgage for Thomas Arnold, also a straw buyer. This loan was completely fabricated. The appraisal we received was for a completely different property. His income documentation and bank statements had been altered. The broker, buyer, appraiser, and realtor all conspired to perpetrate this fraud. The loan closed six months after we opened, when our QC procedures were lax. It was a
very expensive lesson. Cost to Kellner Mortgage Investments: $100,000.

  • In 2003, our company sold a property we owned in a deal put together by Kurt Davis, a local broker. The couple that bought the house claimed they never signed the loan documents and that someone forged their signatures. We suspected Mr. Davis was the guilty party, but he died shortly before the trial started. When he structured the deal, it required us to carry a second mortgage. When Washington Mutual foreclosed on the property, we lost our lien. Cost to Kellner Mortgage Investments: $90,000.

  These brokers didn’t care about the wreckage left in their wake. They would use whatever tactics were necessary to plan their schemes. While some were linked to organized crime, many were small operations that moved from lender to lender, looking for their next target.

  Since these brokers were in the business of fabricating deals, most of them kept their distance from lenders. On one occasion, however, I did have a chance to interact with one of these operations. Having just opened our company, I connected with one of the largest mortgage brokers in Cleveland, Ohio, a branch office for Country Home Mortgage. After building a relationship with Luther, a person who portrayed himself as the branch manager, I flew to Cleveland hoping to further the relationship. The trip still ranks as the strangest and most bizarre event during my mortgage career.

  What Did I Get Myself Into?

  Stepping off the plane in the Cleveland, I’m greeted by Jeff, who introduces himself as the VP of Sales. Since he doesn’t look old enough to drink, I’m surprised a guy so young is running the sales team.

  On the drive to the office, I find out this is his first job in the mortgage business. He tells me, “This is actually my first job in sales. Before that I worked in my uncle’s service station.” Yesterday he’s pumping gas and today he’s running a sales team. Maybe he’s a quick learner. Who am I to judge?

  We get to the office and join everyone for lunch at the restaurant next door. Being 6’4" and 230 pounds, I’m rarely intimidated by someone else’s size, but this is one of those moments. As Luther stands up to greet me, he’s my height but at least 40 to 50 pounds heavier. With his big bushy beard and flannel shirt, I can’t help but think he looks like Grizzly Adams on steroids.

  I take the seat across from their title rep, Suzanne. After a few minutes of conversation, I can’t help but notice her wedding ring since it’s the largest single diamond I’ve ever seen. Being a curious guy, I ask her, “So, Suzanne what does your husband do for a living?” As though it were staged, all five people within earshot of our conversation burst into laughter. Suzanne says, “Really sweetheart, it’s healthier for you to not ask that question.” Hold the mortgage train a minute. Did she just say healthier? When it becomes clear she isn’t kidding, my head starts to fill with images of cement-filled shoes and me sinking to the bottom of the Cuyahoga. Maybe changing the subject is a good idea.

  After we leave the restaurant and go back into his building, Luther leads me toward his office in the back of the suite. As we approach the last office, I’m struck by the enormous size of his door. This massive steel contraption looks like it belongs on the front of a vault, not in an office. Luther sees me eyeing it and says, “Oh, you like the door? I got it out of an old bank that closed down. The great thing about this is, short of a rocket launcher, nobody’s getting in.”

  Rocket launcher? Why does a mortgage broker need a door that could protect Fort Knox? Sure, we’re in the money business, but it’s not like we print the stuff or keep any lying around. Looking around inside the office, I don’t see anything of value outside of a bizarre collection of knives hanging on the wall.

  “Cool knife collection, Luther. Where did you pick these up?” I ask.

  “Oh you like them? This one’s my favorite. I like to use it for target practice.”

  I turn around in time to see him pull this knife out of its wall mount and hurl it toward the corner of his office. With a loud thud, it smacks into the middle of a wooden board.

  “Holy shit!” I yell.

  Luther practically pees his pants he’s laughing so loud. Once he calms down he says, “Sorry about that, Rich, I just couldn’t help myself.”After my heart starts beating again, it occurs to me he’s probably done the knife routine before.

  Watching the office in operation, it seems to me the ads they run must be paying off. Calls are steadily coming in, which means the loan officers keep busy. They bring me deals to qualify, but I’m surprised how little they know about the business. Then again, considering the head of sales is 20 years old and is still learning how to spell mortgage, why should I be surprised? This is not an impressive team.

  That evening at dinner, Luther decides to drop another bombshell. “You seem like a good guy and you’ll eventually find this out, so it’s best you hear it from me,” he says. “About eight years ago, a former business partner set me up and I did a few years in the federal pen.”

  He talks about how he almost killed the meanest guy in the joint, came to terms with his own mortality, and now lives every day to the fullest. None of it’s really getting through—I’m still stuck on the part about going to jail. As a relatively conservative Ivy League grad, having come up through the ranks of GE and GM, I’m used to conducting business a certain way. This never included having knives thrown by convicted felons or working behind impenetrable steel doors. Somehow the world of Jack Welch and Six Sigma seemed a long way off.

  After dinner we go back to his office to retrieve a file and no sooner do we arrive than his cell phone rings.

  “This is Luther. Wait a minute, Gena, calm down. Tell me what happened? When? All right, I’ll take care of it.” He hangs up and starts dialing a number.

  As though magically transformed into a different person, this bear of a man begins talking in a very subdued and gentle tone. “Oh, good evening, ma’am. I’m so sorry to call this late. Oh yes, it’s Luther. Is His Honor still awake?”

  His Honor? Is he calling a judge at home at 10:30 in the evening?

  When the judge picks up the phone Luther starts talking. “Good evening, Your Honor. Yes, sorry to disturb you.” He spends the next minute telling the judge how some friends of his had a misunderstanding. The husband found himself in jail after a typical domestic dispute. The wife called the police and now realizes it was all a big mistake. There is a long silence as Luther listens intently to the judge. He finishes by saying, “Thank you for your help, sir. You have a good evening as well.”

  Luther turns off his phone and says to me, “Well it’s a good thing he was still up or that schmuck would’ve spent the whole night in the can. He’ll be out in the next hour or two.”

  Forget about the pubescent VP of sales, the knife throwing, the jail stint, the impenetrable steel door, the enormous diamond for the title rep married to God only knows who, this is now the highlight of my day. I’ve just witnessed a convicted felon call a judge to help get a buddy out of jail, apparently with success. My dossier has a total of two speeding tickets. It’s clear that I’m way out of my league. Finding out about all of this in less than 12 hours makes me wonder what else there is to know about this guy. My gut tells me to drop him like a bad habit but, having just opened our company, I’m desperate for business.

  The next morning I fly back to Dallas. Within two weeks we catch Luther trying to pass off a doctored bank statement. Like every other broker who committed fraud and got caught, he tries to convince us it’s not his fault. This time it’s the loan processor who did it. After dealing with hundreds of dysfunctional and corrupt brokers, just once I’d like to meet one who said, “Yes, that’s right, I was the guy who did it.” Recently, after not having spoken to Luther since late 2000, I Googled his name to see what I could find out. An article published in the News-Herald in Ohio related that he had been serving 17 months in prison for theft when he was caught on tape trying to hire a hit man to kill the judge who sentenced him. I still wonder if that was the same judge he talked to on the phone that night. H
e accepted a deal in this case, according to the News-Herald, pleading guilty to four counts of intimidation and one count of retaliation. He also pleaded guilty to charges in an unrelated real estate fraud case where he was accused of racketeering. Through the plea agreements, he was able to get the DA to drop over 200 additional charges against him ranging from conspiracy to attempted felonious assault on a police officer.

  Apparently, Luther had been keeping himself very busy.

  Losing Faith in Humanity

  When I initially wrote this chapter, two customers stood out as examples of honest brokers. In addition to Ryan Miller, whom you read about earlier, Richard Bell was my second choice.

  As an award-winning branch manager for Allied Home Mortgage Capital in the Houston area, Richard was more than a customer. He was someone I aspired to be like—a truly successful entrepreneur with a work ethic unlike anyone’s I had ever known. I’m a Type A personality, but nothing compared to him.

  In the four years I funded his loans, we went far beyond the typical lender-broker relationship. He was a close personal friend. While Richard did his residential subprime loans through my company, he made his big money in commercial development. From hospitals to restaurants, he became a mover and shaker in the Houston area. There were numerous articles in various Houston-area publications depicting him as a pillar in the community. One businesswoman went so far as to say that Houston is lucky to have him.

  In November 2004, my wife and I spent a weekend with him and his wife, Joni, on their 65-foot yacht. At the time, it ranked as one of the most memorable trips in our 14 years of marriage. Cruising between Houston and Galveston on the biggest boat in the entire marina was enough to make anyone desire to have what he had achieved. When I sold my interest in Kellner in late 2005, I narrowed my future employment options to three opportunities. One of them included moving my family to Houston and going into business with Richard. We seriously considered the opportunity but chose something else instead.