Anyone who has been watching Wall Street's gyrations this summer is familiar with the effect of subprime mortgages. These are the risky loans extended to people with poor credit -- supposedly so they can share in the American dream of home ownership. They've led to a national upsurge in foreclosures and an erosion of confidence in the economy.
But this isn't just a numbers story about dollars, interest rates and the Dow Jones Average. It's about people like Angie and Eduardo Sosa. And those -- like Christopher Gallagher, Patrick Balf and Donald Stone -- who take advantage of hundreds and thousands like them.
In 1999, the Sosas took out a mortgage with Mr. Gallagher's Allentown mortgage brokerage. Mr. Balf referred buyers to the firm and Mr. Stone worked for Mr. Gallagher. They targeted poor people, often Hispanics, inflating the prices on rundown homes and getting them to sign predatory loans with fraudulent information.
The Sosas purchased a home on N. Sixth Street for $48,750, which just two months earlier had been sold for $26,000. At the time, the Sosas had an annual income of about $20,000. They didn't understand the details of the mortgage and its 11.99 percent interest rate and large ''balloon'' payment. Soon, their mortgage payments hit $700 a month. They fell behind on their taxes and twice had liens placed on their home.
But the Sosas are among the lucky ones. ''It took a lot of hard, stressful times,'' says Mrs. Sosa, but the family paid their bills and eventually refinanced their mortgage.
In Allentown, there were hundreds of others who weren't as fortunate. While purchasers have a responsibility to inform themselves of the details of mortgages, the insidious reality with this subprime scandal is that it preys on people made vulnerable by their lack of understanding and resources. Messers. Gallagher, Balf and Stone preyed on these people. The greater responsibility rests with them.
Messers. Balf and Stone were sentenced last year for their part in the scam. Mr. Balf got five years in prison and must pay $2 million in restitution. Mr. Stone got six months and must pay $820,000 in restitution.
Last week, U.S. District Judge James Knoll Gardner sentenced Mr. Gallagher to 18 months in prison, three years supervised release and ordered $145,000 in restitution on three counts of wire fraud and two counts of failure to file income taxes. But the judge allowed this so-called ''struggling musician'' three months to perform with a rock band and release a CD before he must surrender. This was okay with federal prosecutor Seth Weber.
Outrageous. Maybe this was Mr. Gallagher's first offense, but he victimized hundreds of people. He could have been sentenced to 62 years. This white-collar crime sentence, and letting Mr. Gallagher play in his band is an insult to any sense of justice (Depicted from www.mcall.com).
Monday, September 10, 2007
Tuesday, August 21, 2007
Sector Snap: Mortgage Lenders
Shares of mortgage lenders climbed Tuesday on prospects for a Federal Reserve interest-rate cut and the possibility that Countrywide Financial Corp. could attract a buyout.
Mortgage lenders' stocks have fluctuated dramatically in the past few months and the ones that are not bankrupt still trade near multiyear lows.
On Tuesday, Sen. Christopher J. Dodd, the Connecticut Democrat who heads the Senate Banking Committee and is running for his party's nomination for president, said he met with Federal Reserve Chairman Ben Bernanke and urged him to use "all the tools available" to help calm distressed financial markets.
The Federal Reserve has two main tools available: the discount rate, which the Fed cut last week to 5.75 percent from 6.25 percent, and the federal funds rate. The discount rate is how much the Fed charges commercial banks for loans.
Dodd's comments add to the pressure on the Fed to cut the more-important federal funds rate, the rate that ultimately determines borrowing costs for nearly everything from mortgage loans to corporate bonds. That's because commercial banks borrow from one another far more frequently than they borrow from the Fed. Many investors expect the Fed to cut the federal funds rate to revive the financing markets vital to mortgage lenders.
These markets are depressed amid a worldwide flight from risk. Mortgage lenders that rely on selling mortgage-backed bonds, commercial paper and collateralized debt obligations have been unable to raise cash because buyers in these markets have all but disappeared.
If the Fed were to cut the federal funds rate, which is what banks charge one another for overnight loans, it would pump new cash into the system and encourage investors to risk returning to these troubled markets.
Also, a number of reports suggested Countrywide Financial Corp. could attract a buyout, possibly from Warren Buffett. Countrywide Financial, the nation's biggest mortgage lender, had to resort to borrowing $11.5 billion from banks last week, presumably because other sources of cash have dried up.
The Calabasas, Calif.-based lender's stock jumped $1.79, or 9 percent, to $21.59. The stock has still lost nearly half its value this year.
Shares of the second-biggest mortgage lender, IndyMac Bancorp, climbed $2.09, or 10.1 percent, to $22.83. That stock has also lost roughly have its value this year.
Another piece of news that may have moved mortgage stocks was Accredited Home Lenders Holding Co.'s deal to transfer $1 billion in mortgage loans to an unnamed investor. The complex deal essential shields the San Diego-based lender's portfolio from deterioration while giving it an opportunity to profit should the market recover.
Accredited Home Lenders' shares rose 26 cents, or 4 percent, to $6.70. The company's shares are down nearly 80 percent in the past year.
Shares of NovaStar Financial Inc. rose 17 cents to $7.46.
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