The biggest liar gets the deal

There is a reason why financial markets are regulated. Society needs protection from unscrupulous lenders who will mislead and defraud vulnerable borrowers. However, it is strange how such simple truths can be forgotten, and then suddenly remembered when it is too late.

The subprime crisis is such an example. We have known since the beginning of time that poor folks don't make great borrowers. So, it is prudent to ensure that lenders keep away from such people. The poor tend to default on their loans, and defaults tends to create financial problems for banks.

However, the mortgage broker enters the scene. The broker feels no responsibility to either the bank or the client. He is only interested in commissions, which can only be maximised by loan originations. Without any responsibility, the broker sells loans to those who cannot pay them back. Moreover, he develops a series of unscrupulous sales techniques that lures the unwary borrower into a financial hell on earth.

Here is the story of one devious mortgage broker from the AOL real estate website.

A Mortgage Broker Reveals the Tricks of the Trade

AOL Real Estate

"There's an old saying in the mortgage broker business: The biggest liar gets the deal," says one home loan broker who has been in the business for more than 15 years. We'll call him Victor to protect his identity.

"When I price my loans, I price at the point where my buyer can't get a better loan anywhere else. That's how I sleep at night. But the other rule is to get as much from the borrower as they can before they notice. Most agents do the latter," says Victor.

It's hard to ignore the news lately about sub-prime mortgages, predatory lending and the surge in foreclosure rates. Making sense of how this debacle happened is another story. We want to find out how you can avoid common mistakes when seeking a loan. So we decided to have a very candid discussion with Victor, who's an industry veteran based in California. In his nearly two decades of lending, he has never seen anything quite like today's landscape.

A Loan with Just One Hitch

One of the most disturbing loan trends he talks about became very popular between 2001 and 2005. It's called a negative amortization loan. This is when a borrower can't afford a high interest rate because the monthly payments are too high. To close the deal, the loan agent comes up with a monthly payment and interest rate that satisfies both the borrower and the lender.

"They give the borrower a lower monthly payment based on a 1 percent or 2 percent annual interest rate, but the rate on the actual overall loan is much higher," says Victor. "So let's say the real rate is 7.5 percent, but their monthly payment is based on a 2 percent annual rate. The 5.5 percent interest they are not paying each month goes onto their balance, which means the total loan amount keeps getting bigger. So in a short amount of time, you're upside down." You can easily see why this leads to trouble. If the price of your house is not going up, but your mortgage balance is rising … it's a matter of time before you owe more on the house than it's worth. That is, unless you refinance or take on a higher monthly payment.

Victor says a lot of loan brokers, "prey on the ignorance of the consumer. The consumer is like, 'Oh gosh, I'm getting a 1 percent or 2 percent loan.' They don't understand there are no free lunches. Every month, they are losing equity. These loans have been around since the early '80s, but it wasn't until recently that the loan values were 95 percent of a home's value, compared to tougher standards like 80 percent loan to value"