September 17, 2009 Mass. regulators lag New England in disciplining brokers and lenders Play video

(NECN: New England Center for Investigative Reporting) - Where were Massachusetts banking regulators as the subprime mortgage crisis exploded all around them?

That question is the focus of a special investigation by the New England Center for Investigative Reporting at Boston University-a collaborative effort that includes NECN, WBUR radio, the Boston Globe and Banker and Tradesman.

Did state regulators protect the public or fall asleep at the wheel?

The Center’s senior investigative reporter, Joe Bergantino, has our story...

On this street in Somerville, the sub-prime mortgage mess has a human face.

Carmen Mendoza: "Malisimo."

Carmen Mendoza - a factory worker from El Salvador- is talking about her mortgage broker. In a lawsuit, she says the broker convinced her she could afford this $489,000 two-family house if she put her son and brother on the application.

Her salary: $25,000 a year. Mortgage payment: $48,000 a year.

Mendoza: “I feel like I was betrayed.”

In 2007-at the height of the subprime crisis -- Mendoza's broker, Your Home Mortgage, based in Chelsea, Massachusetts -- was the subject of two complaints to the state Division of Banks -- both raising questions about two different loans.

In one complaint letter, foreclosure prevention counselor Virginia Pratt wrote: "the loan(s) appear to be based on "no income verification." The second complaint, written on behalf of a disabled woman,

says Your Home Mortgage told her that her monthly payment for a $500,000 home would be about $2,300-$2,400 a month. Instead it turned out to be almost $4,000 a month.

Pratt wrote: "I feel she was very much taken advantage of by the broker."

Read the Boston Globe/NECIR story: Few Mass. brokers hit for abuses Listen to the coverage from WBUR: As Subprime Mortgages Crumbled, Mass. Regulators Stood By

The state Division of Banks, which regulates brokers, never responded to that complaint and did not find any wrongdoing in the first case.

Joe Bergantino: “So where was the Division of Banks as the sub-prime mortgage crisis escalated here in Massachusetts, escalated to a point where it impacted the entire economy? Was it, like many of the federal regulators in Washington, asleep at the wheel?"

Over the past two and a half years, the Division of Banks took 43 serious disciplinary actions-revocations, suspensions or forced license surrenders-- against mortgage brokers or lenders. That's just slightly less than three percent of the average number of mortgage licensees in Massachusetts.

See the 2007 state audit of the Division of Banks

And it puts Massachusetts dead last compared to every other state in New England. The number of serious sanctions against brokers and lenders is also less than those taken by North Carolina, which has a similar number of brokers.

From January 2007 through June of this year, Connecticut took 501 actions, Rhode Island--173; New Hampshire--100; Maine-53; Vermont-52 and North Carolina-63.

John Taylor, of the National Community Reinvestment Coalition, said regulators should have been much more aggressive in policing the industry.

John Taylor: "It concerns me that a lot of licensees have thus far gotten away with murder when it comes to some of these foreclosures…we're looking at one in 100, 120 homes facing foreclosure in the Commonwealth and that's a lot for any state."

Division of Banks chief operating officer David Cotney:

Joe: “Let me go back to the raw number of formal actions from January 1, 2007 through June 1st of this year. Is that acceptable?
David Cotney: 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."

The Division of Banks takes credit for Massachusetts legislation banning felons and anyone convicted of fraud from the mortgage brokerage business. Cotney argues that the division's 210 informal actions-- which are not made public --also have made a significant difference in preventing more serious abuses. Overall, Massachusetts has managed to earn a national reputation for being outspoken in the battle against mortgage abuses… but

Tom Callahan: "Anytime you hear that Massachusetts is well below national averages or well below where other states are in terms of enforcement actions or cracking down on behavior that we (need) to crack down on, it's a concern."

Want to find out your mortgage broker's disciplinary record? Lyle Moran reports it's no easy task. Read his story.

So why so few serious enforcement actions?

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 Massachusetts state audit, citing a need for more aggressive enforcement by the Division of Banks, said - quote - 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."

Tom Callahan: "Given the size of the state and the number of institutions that they are in charge of regulating, they've been under-resourced for years. 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.'"

In response to the state audit, the Division 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 six other states we looked at--ranks last in the number of serious enforcement actions, it ranks second in its foreclosure rate.

John Taylor: “What Massachusetts and its leadership ought to be focusing on should be going after the bad actors and you gotta do that so that people know that even if you think you can get away with something, somebody may get you later."

Nadine Cohen: “I think there was a lot more than could have been done at the time."

Greater Boston legal services attorney Nadine Cohen is specifically referring to the Banking Division's handling of complaints against Your Home Mortgage - the broker Carmen Mendoza used and one Cohen now has filed suit against, alleging unfair and deceptive practices as well as discrimination.

Read the Superior Court complaint filed in March 2009 against 'Your Home Mortgage'

Mauricio Osorno, who with his brother Diego, ran the business wouldn't say much about the lawsuit. He claimed he's had hundreds of satisfied customers.

Mauricio Osorno: "We have over 600 clients within the past six years. I can get you more than 100 or 200 letters from people that can vouch for our name and our reputation. That is all I have to say."

In late June the Osornos surrendered their mortgage brokers license, claiming they are broke.

The Osornos also run a real estate company called Su Casa y Mas. Our check of Su Casa's sales on what's called the multiple listing service found that nearly fifty percent of the residential sales Su casa has been involved in - representing both buyers and sellers -- since 2005 ended up in some stage of foreclosure. The average foreclosure rate for residential properties in Massachusetts? About 9 percent.

Ira Reingold is with the National Association of Consumer Advocates.

Ira Reingold: "It's absolutely appalling. That's the kind of person or business that state regulators needed to do something about."

We asked the Division of Banks: why they didn't take action when it received complaints about Your Home Mortgage?

Cotney: “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."

Joe: “Can you put a dollar value on the toxic assets that have been produced through bad mortgage practices in Massachusetts?”
David Cotney: “No.”
Joe: “You have no idea?”
Cotney: “A dollar value, no.”
Joe: “Approximate dollar value?”
Cotney: “No.”

Jaime Alvarez: “Every number is a family…"

That's how Jaime Alvarez puts it. He doesn't want us to show his face but we can tell you what he is alleging in complaints against Your Home Mortgage. He says despite his income of $38,000 a year, Your Home Mortgage arranged subprime loans totaling $580,000 so Alvarez could buy this house in Boston’s Brighton neighborhood. Even after taking in boarders, he can barely come up with the monthly mortgage payment, which totals almost $48,000 a year.

His case was one of those brought to the attention of the Division of Banks in 2007. In this complaint, his foreclosure prevention counselor raised concerns about the terms of the mortgages and questioned whether Alvarez received a $10,000 credit towards his closing costs.

The Division of Banks response -- Alvarez did get the credit and Your Home Mortgage did nothing wrong.

Alvarez: “I was hoping that I was going to get some help. But it never happened."

Cohen: “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.”

Joe Bergantino: “The victims in this story are not just those families. They include every single one of us who are now paying the price for what appears to be a lack of aggressive enforcement by regulators, not only in Washington, but right here in Boston. “It is no exaggeration to say that the cost is more than anyone can calculate. I'm Joe Bergantino."

Editor's Note: The story also appears online at NECN.com and NECIR-BU.org.

The New England Center for Investigative Reporting at Boston University is an investigative reporting collaborative co-directed by Joe Bergantino and Maggie Mulvihill. Student contributors include Jamie Lutz, Lyle Moran, Christie Musket, Molly Connors, Nina Cromeyer, Ben Ezickson, Sydney Lupkin, Dan Rowinski, and Lauren Winowich. Other NECIR media partners are The Boston Globe, WBUR (NPR), NECN, Banker and Tradesman, New England Ethnic News and El Planeta.

To see more of the documents used in developing this story, or to learn more about the NECIR, visit the Center's website at www.necir-bu.org

If you have any investigative story idea or tip - we'd love to hear from you. Just email the NECN Investigates unit at investigations@necn.com.

You can also call the tip line - at 617-630-4242.