As Subprime Mortgages Crumbled, Mass. Regulators Stood ByPlay
Where were Massachusetts banking regulators as the subprime mortgage crisis exploded all around them? An investigation by the New England Center for Investigative Reporting found Massachusetts lags far behind other New England states in the number of serious disciplinary actions against mortgage brokers.
Jaime Alvarez has the face of a trusting man. The 57-year-old and father of two young children emigrated from Colombia 37 years ago. His warm smile is followed by a gentle handshake.
On a summer afternoon in Brighton, he is taking his kids — a boy and a girl — to a nearby park. He is out of work because of a back injury he suffered while doing some repair work on his home. Several steps up from the sidewalk where we’re standing is that Brighton home — one Alvarez can barely afford.
"At the beginning we had to figure out how to come up with the money for the mortgage. We didn’t know what to do. So we were living in one room with my kids and my wife and I--" Alvarez breaks down into tears.
Despite Alvarez’s family income of $38,000 a year, he obtained $580,000 worth of subprime loans that add up to yearly mortgage payment of almost $52,000 a year.
"We are both from the same country and he was treating me like a member of his family," Alvarez says of Mauricio Osorno, the owner of Your Home Mortgage in Chelsea. "I trust him, right from the beginning. I trust him completely.”
Alvarez says Osorno never explained the terms of the mortgages. Alvarez says he was forced to take in boarders to meet his monthly payment.
Allegations Of Unfair Practices In Mortgage Lending Arise
The mortgage broker Alvarez used — Your Home Mortgage — is now the subject of a Greater Boston Legal Services lawsuit alleging unfair and deceptive practices and discrimination. The company was also the subject of two complaints sent to the state Division of Banks that regulates mortgage brokers and lenders.
"I think there was a lot more that probably could have been done at the time," says Legal Services attorney Nadine Cohen.
Cohen is specifically referring to what happened when a nonprofit foreclosure prevention specialist filed two complaints with the state division of banks about Your Home Mortgage. In one letter on behalf of Alvarez, she wrote to the division saying that Alvarez’s mortgages appear to be based on “no income verification.”
The Division of Banks wrote back saying it did not see anything wrong with what Your Home Mortgage had done.
“I felt like a mountain came over me," Alvarez says. "I was hoping that I was going to get some help, but it never happened.”
Mauricio Osorno, who, with his brother Diego, runs Your Home Mortgage, would not talk about the lawsuit or complaints against their company, except to say they deny the allegations.
The Osornos also have a companion real estate company called Su Casa y Más. As part of our investigation, we found that nearly 50 percent of the residential sales Su Casa has been involved in — representing the buyer and seller — since 2005 ended up in some stage of foreclosure. The average foreclosure rate for residential properties in Massachusetts is about 9 percent.
Where Were The Regulators?
Over the past two and a half years, as the predatory lending crisis was exploding, the Massachusetts Division of Banks issued 43 serious disciplinary actions — suspensions or revocations or forced license surrenders — against mortgage brokers and lenders. That is slightly less than three percent of the companies it licenses, and it puts Massachusetts dead last compared to every other state in New England and below North Carolina, which has a similar number of brokers.
“Anytime you hear that Massachusets is well below national averages or well below where other states are in terms of enforcement actions or cracking down on behavior that we want to crack down on, it’s a concern,” says Tom Callahan, director of the Massachusetts Alliance for Affordable Housing.
"I think we have an excellent record of taking action when we’ve found a problem and in keeping people out of the business so they won’t perpetrate this fraud.” says Division of Banks Chief Operating Officer David Cotney.
Cotney argues the division’s 210 informal actions, the details of which are not made public, have prevented more serious mortgage abuses. The division also sees itself as leading the way in policy initiatives to reform the mortgage industry.
More Investigators, But Less Disciplinary Action
Our investigation found that Massachusetts has more than double the number of investigators compared to all of the other states we surveyed, but it might not be enough.
A 2007 state audit cited a need for more aggressive enforcement by the state division of banks. The audit said the agency’s “capacity to perform examinations (of mortgage brokers) has not kept pace with the increase in the number of mortgage lenders and brokers under its authority.”
“Maybe the Division of Banks wasn’t nimble enough to switch and pull resources from the banking, the credit union world and say ‘our major concern has got to be the mortgage companies," Callahan says.
In response to the state audit, the Divison of Banks successfully lobbied the legislature for funding to hire more examiners. But despite that extra manpower, the number of examinations of mortgage brokers and lenders dropped by 74 between 2006 and 2008. not until 2008 did the agency set up a special unit to investigate mortgage fraud.
In the meantime, the number of foreclosures in Massachusetts more than doubled.
While Massachusetts — compared to the other states we looked at — ranks last in the number of serious enforcement actions, it ranks second in its foreclosure rate.
So why didn’t the division of banks take action when it received complaints about your home mortgage, the company that gave Jaime Alvarez his subprime loans?
"I’m not familiar with this particular issue but what I can tell you is we don’t just have a policy of saying these are bad acts or practices, we actually do have a track record.” says David Cotney.
That was Cotney’s answer to practically every one of our questions: the Division of Banks has a track record that it is proud of.
When we asked about the depth, severity and impact of the subprime crisis in Massachusetts, Cotney — the chief operating officer at the Division of Banks — did not have an answer.
“What troubles me most is that poor, unsophisticated, often non-English speaking people put their hard earned money into buying a house and really tried their best to make their payment, but they were doomed from the beginning,” says Cohen, the Legal Services attorney.
The experts we interviewed for this story say those families are not the only victims — all of us are paying the price for a lack of aggressive enforcement of the mortgage industry.
In the midst of the worst mortgage crisis in recent history, at a time when foreclosures are still on the rise, the state Division of Banks’ record is this: only 43 serious disciplinary actions over two and a half years, the worst record in New England.
Jamie Lutz, Lyle Moran, Christie, Molly Connors, Nina Cromeyer, Ben Ezickson, Sydney Lupkin, Dan Rowinski, Lauren Winowich and Maggie Mulvihill, co-director of the New England Center for Investigative Reporting, contributed to this report.