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Wednesday, July 29, 2009

Deconstructing the Corruption Between Senator Conrad and Countrywide

In mortgages, anything can make a difference. The same person could qualify for a loan if the property is a single family unit and get denied if that becomes a townhome or Planned Unit Development. A loan could hinge on whether or not a condominium has four stories or less or five stories or more. While standards became quite loose over the previous five years, it's important to understand that tens of thousands of rules exist in the mortgage world. Everything I just described concerns rules for RESIDENTIAL properties. Commercial properties are a totally different world.

The two types of properties are explained by their names. Residential properties are done on properties in which people live. Commercial properties are properties are bought and sold mostly for commerce. When it comes to multi units, the break point is clear and it's defined. Four units and less are residential properties. Five units and more are commercial properties.

When it comes to commercial properties, the loan done is a totally different animal from a residential loan. Not only are rates two and three points higher, but the terms are almost always a variable rate, with a pre payment penalty, and often a balloon payment at the end. None of those things are common on a residential loan. Terms are only one difference in the two types of loans. In a commercial loan, a borrower is usually asked for at least three years of their full tax returns. In residential loans, a w2 borrower can usually get away with their last two w2's. Furthermore, a rent roll is required on a commercial property along with leases. A residential loan only requires the leases. Commercial loans also require significantly more detailed appraisals which can start at $1000 (and run to $5000 and even more at times) whereas the residential appraisal will usually cost $300-$400. Finally, commercial loans require much greater down payments and much lower loan to values on refinances than residential properties.

Yesterday, it was reported that both Senator Conrad and Senator Dodd were aware of their sweetheart loans with Countrywide. What was mentioned in passing were the details of one of the transactions by Senator Conrad. On one occasion, Countrywide treated an 8 unit property as a residential loan. Senator Conrad downplayed the favoritism.

Conrad's spokesman, Chris Gaddie, said Monday that the senator "never asked for, expected or was aware of loans on any preferential terms" and has "worked overtime to set the record straight."

"He went with Countrywide simply because they already had his financial information," Gaddie said. He added that a Countrywide official had told Conrad that "it is not unusual for them to make exceptions for good customers if they could sell the loan in the secondary market. We now know that they did sell the apartment building loan in the secondary market."

This statement is not only peculiar but a total falsehood. The only question is whether Conrad is perpetrating a lie on the voters, Countrywide is perpetrating a fraud on another bank, or Countrywide lied to Conrad. First, it's very peculiar to have a borrower speak about the secondary market. I don't know too many borrowers that know their loans are sold in the secondary market. Those that do don't care. So, why did Senator Conrad care enough to have his spokesperson point it out in downplaying the favoritism?

That's not answerable yet because Conrad hasn't elaborated on this and no one has asked him directly. That said, an eight unit property would NEVER be included in a portfolio of residential loans to be sold in the secondary market if everything was done legitimately. I don't believe that this loan was sold, but if it was, then either the buyer of the package that included this loan was incompetent or they were defrauded. In fact, I wrote a piece about just such a fraud involving a package of small business loans. Presumably, Countrywide gave the Senator favoritism because they wanted something. Whoever bought this loan, among a package of loans, wouldn't be expecting the same sort of quid pro quo. If they did, then we're dealing with all sorts of corruption. Either way, if this loan really was sold, as Conrad's spokersperson suggests, then that sale must be investigated by both the SEC and Justice immediately for fraud. That's because a commercial property was done as a residential loan. If a bank did this loan this loan this way, that's their business. If they sold it, they better have disclosed that or it is fraud.

Most media is reporting that it was Countrywide's rules that limited residential loans to four units or less. That's misleading. That's a mortgage rule. As such, this commercial property would be included with residential properties in a package that is only supposed to be residential loans and properties. That would be fraud and it would serious and significant fraud. If Conrad's spokesperson's statement is accurate, they have accidentally informed the public of massive fraud.

Another possibility is that Countrywide lied to Conrad in trying to explain why they were giving him such a bargain. Finally, Conrad may just be lying to the public. Either way, there's no way this loan was sold in the secondary market if that transaction was done legitimately.

The loan was only $96000 and so the monthly savings were likely only $300-$400 per month. The savings are not the issue. This was a refinance and so Conrad was probably familiar with the process of financing a commercial loan. He had already financed this property at least once, and so it's hard to believe that he didn't know just how good a deal he was getting. Doing a commercial property as a residential loan is not some small giveaway. This breaks a clear, straigthforward, and standard rule that all mortgages are supposed to follow. Never, during the most obscene times of the mortgage industry did banks ever allow for eight units to be financed as residential properties. That Conrad's loan was given such special treatment is something that must be investigated fully. A bank doesn't violate such an important rule without expecting something tangible in return. So, the question remains what did they expect and what did Conrad give them.

1 comment:

Anonymous said...

Well the most obvious target for quid pro quo would have been the failed mortgage cramdown legislation.