Mortgage Broker Manipulations Outed By Subprime Bust
It was 2004, and the real estate market was on fire.
Down in the Southern California housing market, a hub for home loan lenders specializing in loans to people with weak, or subprime, credit, brokers were making a fortune pushing risky mortgages on home buyers.
Taher Afghani was working for discount retailer Target near San Francisco when friends told him about the riches to be made in California’s Mortgage Alley.
After tagging along with a buddy on a company trip to Los Cabos, Mexico, Afghani quit Target, headed south and began hustling home loans at Costa Mesa-based Secured Funding Corp.
“I had never seen so much money thrown around in one weekend,” Afghani, 27, says of the Cabo getaway. “It was crazy. All these kids, literally 18 to 26, were loaded - the best clothes, the cars, the girls, everything.”
Soon Afghani, who’d made $58,000 a year managing a Target distribution center, was pulling $120,000.
California mortgage brokers like Afghani, many based out of Orange County, just south of Los Angeles, lie at the heart of the once-profitable partnership between bad credit mortgage lenders and Wall Street investment banks that’s now unraveling into billions of dollars in losses.
After years of easy profits, a chain reaction of delinquency, default and foreclosure has ripped through the subprime mortgage industry, which originated $722 billion of loans last year.
Since the beginning of 2006, more than 50 U.S. home mortgage company sales have been forced, as many continue to close or declare bankruptcy, according to data compiled by Bloomberg.
Lenders such as New Century Financial, ACC Capital Holdings Inc., GMAC LLC’s Residential Capital and General Electric Co.’s WMC Mortgage Corp. division have slashed more than 5,000 jobs.
On May 22, Santa Monica-based Fremont General Corp., whose loans helped trigger the bad credit mortgage crisis, agreed to sell off its commercial real estate unit for $1.9 billion.
The upheaval in Orange County, home of Disneyland and birthplace of Richard Nixon, has sent shockwaves throughout the financial world.
The mortgage broker is merely the first link in a chain stretching from mortgage companies, which originate loans; to the wholesale lenders, which bundle them together; to Wall Street banks, which package bundles into securities; and finally to commercial banks, hedge funds, pension funds, and other groups which buy these investments.
And the pain has only just begun.
As home prices sink and home mortgage defaults continue to climb, the same bond investors who financed the U.S. housing boom stand to lose as much as $75 billion on securities backed by bad credit mortgages.
At GM, profit plunged 90 percent during the first three months of 2007 because of mortgage losses at its 49 percent-owned GMAC finance company.
Subprime originations fell 10.3 percent to $722 billion in 2006 from a record $805 billion in 2005, according to JPMorgan Chase & Co. Credit Suisse predicts a 40-60 percent slide this year.
The party is over in Orange County.
The subprime industry - and investors’ losses - would never have gotten so big were it not for a small army of independent mortgage brokers and hustling salesmen like Afghani, who was fired in October.
Afghani and other bad credit home loan company veterans say their job was to reel in borrowers, period. Never mind whether customers needed loans or could manage payments.
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