Before the bottom fell out of the subprime loan market, many big financial firms had an unquenchable thirst for subprime loans. Firms were making a lot of money securitizing these high-interest-rate mortgages, so the demand from Wall Street for new loans was huge. And that created a big opportunity for mortgage brokers. The industry is very thinly regulated, and many brokers made piles of fast, easy money off the lending frenzy.
[Amber] Barbosa says she was pretty fair to her clients and got them the best deal she could in the marketplace. But she says there was plenty of incentive not to put the customer first: Lenders would offer her 1 percent or 2 percent of the price of the loan as a kickback if she persuaded her client to take a higher interest rate. That was legal and commonplace.
Then there were the negative-amortization or “pick-a-payment” loans. Those offered low payment options to begin with but often exploded on the homeowner. As interest rates reset, often at much higher levels, homeowners faced larger payments. That’s because the minimum payment required at the introductory rate didn’t even cover the interest on the loan, let alone the principal.
“The bottom line is that the lender offered an incentive of 3 percent to the broker if they put [a client] into that particular loan,” Barbosa says.
On a $500,000 home in California, brokers could make $15,000 to $20,000 or more in kickbacks on every single one of these risky loans.
“Obviously, tons of people got pushed or thrown in that direction,” Barbosa says.