The Obama administration is continuing the appointment method of “crown the clowns” used at the Treasury Department to fill the Federal Housing Administration (FHA). This week it was announced the President’s nomination for FHA commissioner, David H. Stevens, would be held up due to a lawsuit alleging violations of anti-kickback RESPA law by his former company.
Violations of RESPA Accusations
Mr. Stevens was President of the accused real estate company, Long & Foster that the lawsuits contends also had an affiliate mortgage lender, Prosperity Mortgage, which itself was a joint venture between Long & Foster and mega-bank Wells Fargo.
Let’s take a trip back in time to learn about the law…
Federal law prohibits “kick backs” of “unearned fees” in a real estate transactions knowing if they were not outlawed the cost and therefore, the barriers to home ownership, would skyrocket. This actually happened in the early 1970’s before the RESPA law was enacted primarily due to “finder fees” being paid to a daisy-chain of participants.
For example, can you imagine how much the agent must build into his commission if he wants to earn 7%, but must also pay any number of “bird dogs” that led him to the client. Double that for the mortgage broker who also finds most of his clients through referrals by the real estate agent. Big banks also have more money to “buy business” from real estate agents and the Fed’s did want an unlevel playing field feeling more competition is the best way to drive the cost of home ownership lower rather than higher.
Since the “bird dogs” or referring parties don’t actually provide services to the client, the Feds figured they could simply outlaw those payments. They did so in the Real Estate Settlement and Procedures Act in 1974.
It was a good idea, but it didn’t really work. Many agents had grown accustomed to those payment and to this day still expect the mortgage broker to “kick back” something for bring him clients. Every trick in the book to “game the system” and pay real estate agents for clients against the spirit of the law has been used. Everything from the leaving an unmarked envelop filled with $100 bills after a lunch meeting between mortgage provider and agent…to joint venture agreements only created to funnel “profits” to the non-performing entity.
Okay, now back to Mr. Stevens and Long & Foster….
Agents at the Long & Foster real estate brokerage firm were allegedly “pushed” via email to use the joint venture mortgage firm, Prosperity Mortgage.
The Washington Post put it like this in November of 2007,
“In an e-mail to all Long & Foster agents and managers, P. Wesley Foster Jr. chastised his workers for funding mortgages through Bank of America more than 2,200 times last year and through Wells Fargo instead of using Long & Foster’s affiliate, Prosperity Mortgage…
The e-mail sparked criticism, with some Long & Foster agents, consumer activists and others raising concerns about whether Long & Foster executives are trying to profit at the expense of their clients’ interests.”
And simply since the agents themselves didn’t get a kickback or profit from the referral, but allegedly the company did…there is no technical violation of the law….or so says the Department of Housing and Urban Development.
Let me quote the Washington Post again,
“HUD officials declined to comment about the memo, but spokesman Brian Sullivan said business relationships between brokerages and lenders are common, but cross the line into being illegal “if the agents or office managers receive kickbacks or fees for doing nothing more than referring services.”
What’s Good For the Goose Is NOT Good For the Gander
This reminds me of a case in Denver. HUD came down hard on one of these “joint venture partnerships” between a title company and mortgage company to kickback “profits” of the newly created “JV” title company. The mortgage company in the case had a high volume of refinance business. The title company wanted all that juicy refi title income and this “joint venture” was the vehicle to get their hands on it.
As I remember, the title company was destroyed by the investigation…or by their own greed. Take your pick.
I guess it’s acceptable if the joint venture is between a real estate company and a mortgage provider, but not if the parties are a title company and a mortgage provider.
Crowning the Clowns
Well, now it’s about two years later and Mr. Stevens is up for a top job in the Obama Administration. Enter these federal lawsuits into this mess that are blocking his confirmation. It is alleged in the lawsuits that those pushy emails I mentioned earlier, may have actually been written by Mr. Stevens and Mr. Foster “simply put his name on it.”
Never fear, Mr. Stevens, in today’s world, this all but guarantees you the job.
Just ask Tim Geithner!
Until next week…
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