Mortgage turmoil: fraud, foreclosures give lending industry a black eye.

• Author: Stokes, Jeanie

In December, Ownit Mortgage Solutions, a California lender, shut down due to a high percentage of loan defaults in its portfolio. ABN Amro Mortgage Group, H&R Block's Option One Mortgage and ACC Capital Holdings Corp.'s Ameriquest Mortgage Co., all of which serve sub-prime borrowers nationally, were put up for sale. In Colorado, Sebring Capital Partners, a Texas-based sub-prime wholesale mortgage bank, abruptly closed its Arapahoe County office, throwing 50 people out of work. Much more quietly--Douglas County's Altus Home Loans, which advertised incredible low-interest mortgages, ceased operations.

[ILLUSTRATION OMITTED]

Slower home sales due to higher interest rates, foreclosure rates that threaten to break records set during the late 1980s recession in Colorado, and proposed legislation from both the Republican State Attorney General and Democratic legislators spell big trouble for Colorado's mortgage brokerage industry in 2007.

The mortgage-refi party, after years of consecutive waves of lucrative deals that saw consumers removing much of the equity from their existing home loans in return for cash and lower and lower interest rates, is definitely over. And mortgage fraud is in the sights of both federal and state prosecutors.

What happened?

"It's unfortunate that a few bad apples have ruined the barrel, mostly driven by greed," said Jim Lewis, president of Clarion Mortgage Corp. and chairman of the Colorado Mortgage Lenders Association, an organization of 360 companies in the industry. A broker-registration program that took effect Jan. 1 is useful in catching the broker who has a criminal record or who may have lost a securities or real-estate license in another state. But the law, the first in Colorado to address what has been an unregulated industry during a decade-long housing boom, has already been criticized as ineffective.

[ILLUSTRATION OMITTED]

What the industry needs, says Lewis, is continued self-policing and law enforcement officials who will prosecute violators of existing state consumer law. The vast majority of people arranging financing in his business, Lewis said, are honest, trustworthy people who supply a much-needed service to their customers. But "probably nine out of 10 borrowers don't understand the system," says Jim Ingersoll, who owns Cove Creek Mortgage Co. in Englewood, and that ignorance can lead to abuses as well. "Consumers have a responsibility not to be gullible," said William Kidwell, president of the Colorado Association of Mortgage Brokers.

Primer on the mortgage biz

The mortgage industry is a complex business, with numerous opportunities to make money. Traditionally, mortgage brokers were intermediaries between the consumer and sources of money to finance their mortgage loans. For a fee, brokers would draft and handle the paperwork for loans placed with lenders, a government-insured agency like the Federal National Mortgage Association (Fannie Mae) or the Government National Mortgage Association (Ginnie Mae) or even private investors. The fee, based on a percentage of the dollar value of the mortgage loan, could be paid...