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The Sub Prime And Other Frauds – Penalties Coming
I was wondering, as I am sure, how long it would take the government to take action against the mortgage brokers responsible for the collapse of the sub-prime mortgage industry. After following several newspaper accounts this information is finally happening, and there will be more to come. The problem in this market is the lack of regulation of mortgage brokers. We regulate banks, Savings and Loan companies and the like but not brokers. The reason given for this is that they are not lenders but only sales people.
Look for more finger pointing and playing the blame game. The United States Attorney for the Southern District of New York announced that David Goldwasser, a mortgage broker and broker in Rockland County, has pleaded guilty to defrauding the First Bank of the City of New York and the First Union Bank of Port Chester, New York for approximately and $500,000. Mr. Goldwasser admitted in court that he had applied for loans for other parties but also for companies in which he had a financial interest. He admitted to filing false financial documents including false tax returns and bank and sales statements. He could face up to 30 years in prison and be required to pay restitution.
Another pending case of a slightly different nature involves a man referred to as a “rogue mortgage broker” from Port Washington NY. Jacob Milton is accused of stealing someone else’s personal information. Identity theft is the fastest growing crime according to the FBI and US Postal Service If you think you’re not a candidate read on.
Mr. Milton is accused not only of stealing the identity of an unnamed person but of buying two homes in his name and leaving him over a million dollars in debt. Now, due to the announcement by the police, other victims are coming forward. Some of these claim credit card fraud and other types of fraud. Police believe there could be hundreds of victims.
This type of scam happens every day in every city and it could happen to you. Here’s an interesting thing, Mr. Milton is the director of a large mortgage company with offices throughout New York. Not exactly the type of guy one would suspect.
With regard to potential loan fraud by unscrupulous traders, the extent of the prosecution remains to be seen. Don’t hold your breath on that. Membership of all mortgage broker associations in the United States represents less than 10% of the entire industry. But that was enough to wreak havoc in the banking world. Most brokers feel little or no responsibility because they combine loans with a few bad ones and good ones it seems like things will work out. They take their money and move on.
There have been cases of clear fraud however. The Orange County Register (California) ran an article recently about a mortgage broker who submitted fraudulent loan forms legal A Mexican family who could not speak English. Now the family is losing their home and of course the realtor is nowhere to be found. A similar case is being investigated here in Phoenix. In both cases the traders were only interested in their commission on the deal.
Now I know someone is going to say real estate agents are bad guys and someone else is the worst. We have mortgage lenders on our website. Most home buyers do a great job. All the vendors on our website are great companies that care about the business. It’s the little “Johnnie Come Lately” that has caused so many problems. They have no investment in the overall health of the business, and they only exit “fast money” it seems.
Everyone is responsible for this problem. The broker sells only what people have been asking for for years: the lowest payment for little or no payment. However just a few years back it was not possible to get this type of loan. It may be necessary for the banking industry to go back to the way it did 20+ years ago and require low down payment associated with loans that most people probably can’t afford to own their own homes, but financial institutions won’t. in trouble either. The Arizona Republic carried a lead article this morning (10/23/07) stating that Rep. Barney Frank, head of the House Financial Services Committee, has introduced a bill to require the banking industry to do just that.
The root cause of investment fraud in banks. It is bad business to create any product that encourages people to cheat. The fraud (or it ends in judgment if you like) at this time is a hundred million dollars so it must be prosecuted and corrected in the opinion of this writer before our country suffers the mother of all financial collapses.
Simply put, the solution is simple, maybe that’s why no one can see it. The system as we have it now is all about pushing the limits of production and selling volume. It’s also about making credit available to people who couldn’t access it 20 years ago. That part was successful. Home ownership has grown by leaps and bounds which no one would argue is a bad thing at all.
But as success grew the business threw caution to the wind and made some foolish decisions. Investment bankers and small retailers have become careless and have forgotten past lessons of maintaining loan volume and expanding credit without adhering to good business practices.
Risk in the lending industry is easy to measure.
· Mortgages are at least 5 or 6 thousand years old
· The formula for a safe mortgage investment was calculated a long time ago
· The formula calculated at 80% Loan-to-value is a good risk if the borrower has reasonable credit.
· It doesn’t get any harder than that.
But the risk increases significantly every time you change the formula.
· Increase loan to value (Inflated rates are another problem)
· Sell an adjustable rate loan for the first five years to make a sale
· Due to inflation, long term loans are offered
· The last thing is that people with poor credit are given debt on their homes that they cannot pay.
All these things together make a package that can explode in our face. We must be common sense.
Where will all this end? Time will tell.
References: Arizona Republic, Washington Post, OC Register
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