You have been reading about the mortgage meltdown and seeing daily news reports about the record number of foreclosures. Mortgage lenders and dropping like flies. Even large companies such as Countrywide Mortgage are feeling the crunch, having to borrow billions of dollars to keep their doors open. Based on what you have read, heard, and seen in the media, maybe you feel as though you have a pretty good grasp of what is going on and what caused it, but how much do you really know?

To find out how savvy you really are about this mortgage meltdown, take the following single-question quiz:

Why have so many mortgage lenders gone out of business?

A. Homeowners are unable to make their payments.

B. Massive amounts of real estate and mortgage fraud.

If you are among the multitudes of the ill-informed, you probably chose A. And if this were the 1950s, perhaps you would have been correct. Back in the 1950s when banks loaned money directly to people who were unable to repay the debt, the banks took a direct hit to their bottom line. They felt the pain.

In the current system, most banks rely on brokers to originate the mortgage loans. These brokers typically have loan officers who work for them and are in charge of selling loans to consumers, helping the consumers fill out their loan applications, and performing other tasks to expedite the loan process. Loan originators receive a commission for every loan that's approved, and because they are lending someone else's money, they take on risk only indirectly.

When someone borrows $300,000 to purchase a home, for example, the broker receives 2 points at closing for a total of $6,000. They then package the loan with other loans and sell it to the market at 104 percent, or $312,000. In this case, the originator just "earned" $18,000 off the mortgage loan -- the $6,000 commission plus the $12,000 markup.

When bad loans are traced back to mortgage fraud, misrepresentations, and misdeeds, originators takes a double hit. They are forced to buy back the bad loans, and the lender cuts off access to future transactions. With huge chunks of money flowing out and little or no money flowing in, the mortgage originator is forced to close up shop. That is what is currently happening and why we are now seeing a mortgage meltdown.

When interest rates were low and housing prices were soaring, mortgage fraud was rampant, but the problem remained hidden because homeowners were awash in equity. Credit was easy to get, and mortgage brokers and loan officers made it even easier. If an applicant couldn't qualify for a particular loan, the loan officer would simply encourage the applicant to fudge the numbers or would fudge the numbers on the applicant's behalf. If a home buyer wanted a larger loan to cash out some money at closing, you could always find an applicant to accommodate -- inflating the appraisal to make the property appear to be worth more than it really was. Loan officers were tripping over each other to approve risky loans and nab their commissions.

MILA, a subprime wholesale lender that was based in Mountlake Terrace, Washington shut down during the spring of 2007, primarily due to the fact that its loan officers were responsible for huge numbers of fraudulent loans. Several employees who refused to go on the record reported that they passed along proof of fraud committed by at least one of the company's loan officers. This person made so much money for the company that instead of firing its employee, MILA relocated and promoted the person.

Now that the housing market is in a slump, it's as though the water has been drained out of the pond, and now we can see what is at the bottom … a whole lot of muck.

Published: November 15, 2007

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Ralph R. Roberts, CRS, GRI is an award-winning and internationally recognized real estate agent, author, coach, and speaker. Throughout his career, Ralph has proven his commitment to helping other real estate and sales professionals build upon their past and present success, grow and expand their businesses, and provide a rich and rewarding future for themselves, their customers, their employees, and their families. As president and CEO of Ralph Roberts Realty, Ralph has personally helped thousands of consumers realize their dream of homeownership. While selling over 10,000 homes (and buying and selling over 3,000 investment properties) throughout his 30-year career, Ralph has made the time to mentor and coach hundreds of professionals in real estate, sales, and a host of other fields. Ralph is a recognized authority on Real Estate and Mortgage Fraud; Residential Real Estate; Personal Salesmanship; Sales Force and Office Management, Motivation, Design, and Team Building; and Foreclosure Self-Defense and Loan Modification, fields in which he has demonstrated his commitment to preserving the American Dream of Homeownership. Ralph's numerous websites, blogs, seminars, and speaking engagements engage, entertain, and educate both consumers and professionals. Ralph is also an accomplished author with several successful titles to his credit, including: Power Teams: The Complete Guide to Building and Managing a Winning Real Estate Agent Team Financing Real Estate Investments For Dummies (John Wiley & Sons) Mortgage Myths: 77 Secrets That Will Save You Thousands on Home Financing (John Wiley & Sons) Foreclosure Self-Defense For Dummies (John Wiley & Sons) Protect Yourself from Real Estate and Mortgage Fraud: Preserving the American Dream of Homeownership (Kaplan) Foreclosure Investing For Dummies (John Wiley & Sons) Foreclosure Myths: 77 Secrets to Saving Thousands on Distressed Properties (John Wiley & Sons) Advanced Selling For Dummies (John Wiley & Sons) Flipping Houses For Dummies 52 Weeks of Sales Success (John Wiley & Sons) Walk Like a Giant, Sell Like a Madman (John Wiley & Sons) Cross-Cultural Selling For Dummies (John Wiley & Sons) To learn more about Ralph, visit AboutRalph.com, check out his daily insights on real estate and mortgage fraud prevention at FlippingFrenzy.com, or visit his latest blog dedicated to helping distressed homeowners fight foreclosure, KeepMyHouse.com. You can reach Ralph at or by calling (586) 751-0000.