Patterico's Pontifications

3/20/2006

No Wonder Dennis Prager Likes These Guys

Filed under: General — Patterico @ 7:46 pm



Interesting story in the L.A. Times on Park Place Funding. Apparently the value isn’t just in the relationship. (I didn’t say nothing out of pocket!)

Real estate has been a swell deal for just about everyone who owned a home in California during the last few years.

For hundreds of Orange County homeowners, it’s been even better. Thanks to their mortgage broker, they essentially get paid to borrow money.

Mark Gallagher, the founder and president of Park Place Funding in Laguna Hills, uses a technique that unscrupulous brokers employ to bilk clients.

Gallagher’s innovation was to cut his customers in on the action, giving them a share of the premium he earns for placing loans with high interest rates.

The homeowners receive cash on a regular basis they can use for vacations, remodeling or to pay off that expensive house faster. Not surprisingly, they love their broker.

Smart idea.

But why is the technique described “a technique that unscrupulous brokers employ to bilk clients”? Why isn’t it just clever exploitation of a loophole?

Mortgage lenders were once fond of Gallagher too, helping him become one of the biggest independent brokers in the state.

Recently, however, the relationship soured. No one disputes that Park Place’s system is completely legal, but it has suddenly become controversial as well.

Is Gallagher the consumer’s champion, as he bills himself? Or do his mortgages, which are refinanced almost as soon as the ink is dry, make implicit promises to lenders and investors they don’t keep?

When rich investors and lenders start whining that they have not been given the benefit of “implicit promises,” that’s when I start clutching my sides and laughing heartily. That’s why you hire lawyers, rich guys. Get it in writing. Isn’t that what you always tell us little guys?

17 Responses to “No Wonder Dennis Prager Likes These Guys”

  1. It is a shady technique as it was intended to work. If a broker sells someone who qualifies for a 5% mortgage a 6% mortgage then the mortgage holder will make (on average) thousands of dollars of excess profit (the difference between the payments on a 6% mortgage and the payments on a 5% mortgage) over the life of the mortgage. The banks making the mortgages were kicking back part of this excess profit to the broker to encourage the broker to sell overpriced mortgages. But this broker doublecrossed the banks by encouraging its customers to refinance the overpriced mortgages immediately. This caused the banks to lose money because the expected excess profits go away as soon as the customer refinances. Just goes to show there is no honor among thieves.

    James B. Shearer (fc887e)

  2. Why is it overpriced? They bought the thing at 6% rather than 5%.

    It is no different than someone being stupid and doing all their grocery shopping at Gelson’s rather than Ralph’s and thus paying $6.50 for a 12-pack of coke.

    Angry Clam (a7c6b1)

  3. This line sums it up:

    One way lenders make money is by making loans at high interest. They are so eager for these loans that they pay brokers a bounty for them.

    Simple solution for lenders: don’t be so eager for these loans that you pay brokers a bounty for them. Or if you are, then at least have the good sense to make that bounty contingent on the loan not being paid off or paid down substantially until X months. Or include a penalty for early refinance in the loan itself, as is the case with some residential loans.

    Whatever you do, don’t whine about the fact that somebody else profited from your greed. What’s next? Is Fry’s going to cry about all the “scammers” who buy up all the loss leaders in their ads, but don’t buy any of the other, overpriced stuff according to plan.

    Xrlq (f52b4f)

  4. Huzzah Xrlq, having left California, you can no longer enjoy the bounty that is Fry’s loss leaders!

    To the lenders. In the most annoying Nelson voice “Haaa Haaa!”

    Joel B. (8f121b)

  5. They’re not even really lenders. (We’re talking about home loans, now.) The paper gets traded on the commodities exchange. The very top of the pyramid are investors. In-between are the brokers, providers, processors, clearinghouses, e-funders and servicers who get a little bit of the money to stick to their hands. The end effect on the investors is a slightly lower rate of return or a slightly lower price when they choose to dump the paper.

    nk (bfce66)

  6. Angry Clam, I don’t agree. By my estimate the difference between 6% and 5% on a 30 year $300000 mortgage is in excess of $30000 part of which is being kicked back to the broker. This will lead to shady and outright fraudulent sales tactics (such as telling the prospect that 6% is the best rate they can get). People who shop at higher priced stores generally know they are paying more and choose to do so for various reasons. I doubt many people are voluntarily paying 6% when they could get 5% with an honest mortgage broker.

    James B. Shearer (fc887e)

  7. Okay, call me naive/stupid if you like: are people really getting 30-year fixed mortgages for 5% nowadays?

    Patterico (59bfb8)

  8. If no one is willing to lend to them at 5%, then they aren’t worth 5%.

    Part of the interest rate provided borrowers is designed to provide adequate return to the underwriters, both to compensate for default risk and also because they lack the use of their money.

    “Qualifying for X rate” isn’t an inherent feature of someone.

    Angry Clam (a7c6b1)

  9. Angry Clam, you don’t undestand. Banks A, B and C are willing to provide a 5% mortgage. Bank D is willing to provide a 6% mortgage and kick back $5000 to the broker. Bank D is willing to do this because they will collect an extra $30000 (assuming the mortgage is not refinanced). The mortgage broker places the prospect with bank D.

    James B. Shearer (fc887e)

  10. Patterico, that was just an example, 7% vrs 6% (on a 30 year $300000 mortgage) would also be a $30000+ difference. 6% vrs 5% for $300000 for 20 years is a $25000+ difference.

    James B. Shearer (fc887e)

  11. That’s why you deal directly with the banks, nearly all of which have direct to lender operations.

    It isn’t a very hard concept, it just requires a little more legwork. If you get lazy and go to a broker, you’re going to get screwed. That’s what happens when you employ a middleman.

    Why do you think that almost no one uses travel agents anymore?

    Angry Clam (a7c6b1)

  12. That you can get a loan through a bank, without need of a mortgage broker, is only a reflection on your own good credit rating and debt/income ratio. Most people need a mortgage broker to help them with the documentation, credit clearance and income verification. In most instances these days, the direct to lender is an illusion. The bank has simply branched out into mortgage brokering. Maybe it will process the loan and e-transfer its own money but the day after the closing it will have sold the loan and gotten its money back. You might save a quarter to half a point on discount fees and get more personal service but that’s about it. The bank is not going to tie up its capital on your 6% home loan when it can lend it out at 9% on a commercial loan. And it’s not going to deviate from FannieMae/FreddieMac procedures and make its paper unmarketable. Further, banks are not into philanthropy. They will charge you the maximum rate, points and fees the market will bear. Mostly, mortgage brokers earn their money. BUT be on the lookout for lenders who for one reason or another have been obligated to lend in certain areas and at certain income levels at incentive rates. There, you will get a bargain rate and your legwork will pay off.

    nk (77d95e)

  13. Angry Clam, people employ middlemen all the time without getting cheated. Walmart and Amazon are middlemen. Some middlemen provide an honest service and some don’t. The incentive to cheat your customers is greatest with one time transactions like getting a mortgage where repeat business is not so important.

    As for brick and mortar travel agents their primary problem is technological change. People still deal with middlemen like travelocity or expedia.

    James B. Shearer (fc887e)

  14. It isn’t a very hard concept, it just requires a little more legwork. If you get lazy and go to a broker, you’re going to get screwed. That’s what happens when you employ a middleman.

    Nonsense. The best deals I’ve gotten on mortgages have been through “middlemen,” sometimes brokers, usually small lenders who issue loans at lower rates than any of the big lenders will offer, only to turn around and sell servicing rights to those same lenders. The cheapest way to get a WaMu mortgage is not to go to WaMu, but to go to a no-name Internet lender who sells his loans to WaMu.

    I think the very concept of a “middleman” is fallacious. If the guy in the middle was just taking a cut while providing nothing of value himself, he’d have been cut out of the transaction long ago. As it is, “cutting out the middleman” just means bearing the cost yourself of performing services that you used to outsource to somebody else. Which is fine if you can provide those services more cheaply yourself, but usually you can’t, which is why you outsourced it in the first place.

    Xrlq (587a0b)

  15. Why do you think that almost no one uses travel agents anymore?

    Speaking only for myself, I almost never use travel agents because the last three I’ve dealt with are dumber than dirt, and all three have found one way or another to screw up my vacation plans. I don’t shun them because they cost more. Generally speaking, they don’t; they just take a cut of the money that would otherwise go to the hotel or airline, in exchange for the hotel or airline saving itself the trouble of having to deal with you.

    Xrlq (587a0b)

  16. These guys came to my house with their SCAM, they left scared. I told them I wanted a 50/50% cut of the profits, not 9-14% they were offering. I explained my experince to the Santa Ana FBI office, they are looking into the shell game.
    Home buyers are only getting the difference from their bait and switch rate to the actual rate they want you to take, usually 7.75 to 8.5% loan rate, for only the first four months of the loan, then you pay the full payment after. Then they hold you hostage at the firt month, and you depending on them to come through before the 5th payment comes due. They also require you to refi your home loan 3 times a year. YES, A VERY BIG SCAM! MARK G. – FBI IS NOW WATCHING.

    BZ (a3b81f)

  17. Last Thursday my wife calls me from work and tells me that she heard on the christian radio broadcast… of a great federal program being offered through Park Place Funding in Laguna Hills, CA. We’ve been financially effected as well as many others, thus the current economy sucks and is threatened our ability to keep up with all the bills. We’re looking into filing bankruptcy on all of our credit cards, and we are about $200,000 upside down on our property value. Bankrupting on our house would seem like the easy way out of all debt. However, moving & renting isn’t so easy… so out of desperation I called PPF, and they tell to write them a letter explaining our present hardship, and to send them a check for $2,900. they informed me that their attorneys would review our matter and guarantee us a 95% chance that the banks would work only with PPF and not us. If their attorneys don’t see hope for us, that they would refund all of our money… if they work on our matter, and the bank still refuses, they would refund only half… but there’s still a 5% chance that the bank would reject a loan modification. Here’s the deal… this is bull shit! Even in our state of desperation, Park Place Funding would take advantage of people. I was informed that the bank might switch our rate of 7.125% to 5.5%… and our second would simply vanish, free and clear. I’m not a banker, nor mortgage broker, but this just smells of B.S.! …and here I am, I goggled and found this web site. Banks play hardball, even in hard times… keep your guards up & fight, because they’ve acquired too many homes that they can’t sell fast enough, and all along having to pay the county property (impounds)taxes. Ask for there Lost Mediation Dept. Good Luck & God Bless!

    hpmracer (9a4fb8)


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