Today’s Wall Street Journal, in “Mortgage Mess Shines Light on Brokers’ Role,” tells the sorry tale of one Altaf A. Shaikh, who frequently used the name Zak Khan and left a path of financial devastation in his wake as a subprime mortgage broker.
This isn’t a great job of reporting. By focusing on one, and only one, likely criminal mortgage broker (civil and criminal suits are pending), the Journal creates the impression that, to the extent there were abuses in subprime lending, they were the doing of a few sharks like Shaikh who were able to operate freely in a rapidly growing and lightly regulated industry, in which many of the players were not well managed.
The piece fails even to acknowledge that at some firms, the practices that have been called “mis-selling” and might less charitably be called “ripping off ignorant customers” have more than occasionally occurred at the institutional level. And not just at Orange County bucket shops either.
For example, in 2002, Household International entered into a $484 million settlement for predatory lending practices involving subprime mortgages. Mortgage broker Ameriquest reached a $325 million settlement in early 2006 for deceptive consumer lending practices and was also required to adopt many new practices, including scripted language for oral disclosures. Even so, affordable housing expert Doug Smith noted that the cost of the Ameriquest settlement was a mere slap on the wrist and provided an average recovery of only a few hundred dollars each to defrauded customers, many of whom had lost their homes. And Argent, Ameriquest’s biggest subprime subsidiary, was exempt from the reforms . The State of Ohio charged now bankrupt mortgage lender New Century with a variety of violations of consumer sales and mortgage brokerage regulations, including making false and misleading statements, accepting loan processing payments even though the company knew it did not have the money to fund them, and failing to act in good faith.
Mind you, we aren’t saying that there weren’t bad apples out there. But if you read the piece, it uses the term “mortgage brokers” to mean individuals like Shaikh, yet also cites statistics that clearly apply to mortgage brokerage firms (“Mortgage brokers originate about half of loans made to borrowers with good credit”). Guys like Shaikh didn’t operate out of home offices. They needed the forms, and more important, the capital and distribution relationships of larger entities. But the sloppy use of language reinforces the perception that any frauds were perpetrated by rogue individuals, and conveniently omits the fact there were rogue organizations as well.
And the Journal also cuts management way way too much slack: “When brokers cross the line into blatantly unethical or even criminal behavior, there’s often little to stop them.” Huh? It’s not hard. You fire them, as one of Shaikh’s many employers did a mere six months after hiring him, as soon as it learned of document discrepancies. If his misdeeds were apparent to one firm, why did the rest of them turn a blind eye? Because it was convenient and profitable not to.
From the Journal:
In 2005, World Savings Bank honored Secure Financial Inc. with a “Top Broker Award.” It was a tribute to the sales prowess of Zak Khan, who arranged more than a hundred mortgages out of the small real-estate firm’s Union City, Calif., office.
But Mr. Khan, a onetime professional cricket player, wasn’t all he seemed. For starters, his real name is Altaf A. Shaikh. Contrary to California law, he never held a license to broker mortgage loans. Still, he managed to find jobs at a variety of mortgage firms since 1997, leaving a trail of unhappy borrowers and a lengthening list of criminal charges and lawsuits filed against him.
As defaults pummel the home-loan industry, Mr. Shaikh represents an extreme case of one of the big vulnerabilities in the business: mortgage brokers. In recent years, these middlemen have assumed a crucial role in handling surging volumes of business for lenders. Today, mortgage brokers are involved in about 58% of home loans, up from 40% a decade ago, according to Wholesale Access, a research firm in Columbia, Md.
Mortgage brokers originate about half of loans made to borrowers with good credit. Their presence is even greater in other segments of the mortgage market where defaults are rising. Brokers originate about three-quarters of subprime mortgages made to borrowers with scuffed credit, according to Wholesale Access. They also originate 70% of so-called Alt-A mortgages, a gray area that falls between prime and subprime. World Savings, which gave the award to Mr. Shaikh’s employer, made prime and Alt-A loans.
Mortgage brokers didn’t set the standards for the many aggressive loans that are now going sour. But they provided the low-cost sales force that made it possible for lenders to quickly ramp up production without hiring employees. As business surged, some brokers put borrowers into loans they didn’t understand, couldn’t afford or were otherwise ill-suited for, one reason defaults have skyrocketed. In the worst cases, brokers have been known to falsify information and resort to other fraudulent means to get mortgage loans approved. Critics say regulators and lenders haven’t done nearly enough to insure the quality and integrity of this independent sales force.
“The mortgage brokers are the wild, wild West of mortgage finance,” Sen. Charles Schumer, a New York Democrat, says in an interview. “We need to bring a sheriff to town.”
Mortgage brokers say it isn’t fair to single them out. Joseph Falk, legislative chairman of the National Association of Mortgage Brokers, says regulators, lenders and their Wall Street financiers all contributed to the subprime mess. Borrowers also can be cheated by loan officers at banks, he notes, adding: “There’s plenty of blame to go around.”
The ranks of mortgage brokers have surged in part because they offer lenders such as banks or thrifts a way to reach more borrowers without the heavy expense of operating large numbers of branches. Brokers find customers, advise them on which types of loans are available and collect fees from lenders for handling the initial processing. Unlike bank employees, brokers don’t get medical benefits or need to be laid off when business is slow. Brokers are particularly active in low-income neighborhoods where there are few bank branches and where many residents may assume that a big institution wouldn’t want to deal with them.
When brokers cross the line into blatantly unethical or even criminal behavior, there’s often little to stop them. Surveys by the Conference of State Bank Supervisors show that 32 states don’t require people to pass a test before obtaining a mortgage-broker license, and nine states don’t require criminal background checks on license applicants. Brokers who run afoul of authorities in one state often can set up shop in another.
Mr. Shaikh, 46 years old, was able to skip from one employer to another for years with little scrutiny — until California prosecutors finally caught up with him. In May, Mr. Shaikh pleaded no contest to charges of grand theft in a plea agreement reached with nine California counties. Prosecutors alleged that he lied to borrowers about the terms of their loans, forged documents and had checks written to companies he controlled without the borrowers’ knowledge. A court hearing, set for August, will determine the amount of restitution Mr. Shaikh must pay and whether he will be required to serve a one-year jail term, as the prosecutors have requested.
“The tragedy of this thing is that many of these people had better credit than the product that was offered to them,” says William Denny, a deputy district attorney in Alameda County, Calif., who coordinated the multicounty settlement of the criminal case.
A spokesman for Wachovia Corp., which bought World Savings last year, says the company “acted appropriately at all times in this situation.” The spokesman adds that Mr. Shaikh “was not an employee or an agent” of the company, which wasn’t a defendant in the criminal proceeding. “We feel that World Savings is a victim of fraud in this matter as well,” the spokesman says.
Jeff Widman, the lawyer representing Mr. Shaikh in a lawsuit brought by borrowers, says his client has “generally denied the allegations.” Most of the borrowers “consented happily to the terms of these loans and their fees,” he adds.
In an interview earlier this year, Mr. Shaikh, a stocky, genial man with gray hair, declined to discuss his legal problems. He said he immigrated to the U.S. from Pakistan in 1989. He settled in Fremont, home to some of his wife’s relatives. At first, he worked at a Taco Bell restaurant and sold leather jackets, imported from Pakistan, at a flea market. Court records show that he and his wife filed for Chapter 7 bankruptcy protection in 1994, citing assets of $17,000 and liabilities of $416,000. That year, Mr. Shaikh earned $3,000 a month as a salesman at a Mitsubishi dealership, according to bankruptcy filings.
In 1997, a friend who worked at Ameriquest Mortgage Co. persuaded Mr. Shaikh to join the company, then a small but fast-growing subprime mortgage lender.
He was getting in on the early stages of a gold rush. Spurred by the housing boom of the first half of this decade, the number of mortgage brokerage firms nationwide has soared to more than 50,000 from 23,000 in 1995, according to Wholesale Access. At the height of the boom in 2003 and 2004, the most successful loan officers at those firms could earn as much as $400,000 a year, says Tom LaMalfa, managing director of Wholesale Access.
Court records show Mr. Shaikh was an assistant manager and, in October 1998, was promoted to manager of Ameriquest’s Campbell, Calif., office. In that job, he didn’t need a license.
In 2000, Mr. Shaikh and Ameriquest were sued by a borrower whose home was foreclosed on the previous year because a refinancing wasn’t completed by a promised deadline. Mr. Shaikh failed to tell the holder of a second mortgage, who was foreclosing on the loan, to postpone the foreclosure sale, according to the lawsuit, filed in Alameda County Superior Court. The case was settled in 2002, according to Joseph Kafka, the borrowers’ attorney.
Mr. Shaikh left Ameriquest in May 1999 for the San Jose branch of Atlantic Financial Mortgage Inc., a local firm. Later that year, Ameriquest sued him in Santa Clara County Superior Court for allegedly trying to steal Ameriquest customers and employees. In 2002, a Superior Court judge ruled in favor of Ameriquest.
“Mr. Shaikh’s employment was terminated, and we’re not able to comment on the reasons behind it,” says an Ameriquest spokesman.
At Atlantic, Mr. Shaikh’s customers included Nathaniel Winn and Arnetta Petty Winn, an elderly couple in Oakland. In a telephone call in May 1999, Mr. Shaikh told the Winns his company specialized in making low-interest home loans to senior citizens on fixed incomes, according to a lawsuit the couple filed in 2002 in Alameda County Superior Court. At a meeting at their home days later, Mr. Shaikh said he could refinance the Winns into a new mortgage with a “senior discount” that would lower their monthly payments and allow them to pay off $4,200 in debts. He also offered to hire Nathaniel to do some landscaping, Ms. Winn says in an interview.
But the couple’s monthly payments rose with the new mortgage, and their loan balance climbed by about $15,000 to $100,000. The Winns received just $1,600 in cash from the refinancing, according to loan documents, while Atlantic got more than $5,700. The couple also paid a $3,500 prepayment penalty.
In February 2004, a Superior Court judge issued a default judgment and ordered Atlantic and Mr. Shaikh to pay the couple $340,000. Mrs. Winn says she is still hoping to collect. Edwin Mendaros, Atlantic’s owner, didn’t respond to repeated calls requesting comment.
Mr. Shaikh was next hired as an assistant to a loan officer at Home Advantage Corp., a Fremont mortgage broker located in a stucco building adjacent to a shopping center. Within six months, the company received a call from a wholesale lender complaining about a “discrepancy” in a mortgage application Mr. Shaikh had worked on, says the firm’s president, Rana Ahmed. “We actually had to fire him,” Mr. Ahmed says.
Mr. Ahmed says he doesn’t always check references because, in the mortgage business, “references are not reliable.” And he says he never heard from prospective employers seeking to check Mr. Shaikh’s references.
In January 2001, Mr. Shaikh signed on with Hampton Financial, a local San Jose real-estate and mortgage firm. In nearby Union City, he opened an office called As West Coast Marketing, scouting for potential borrowers and helping them fill out mortgage applications that were then processed by Hampton.
In December 2001, Mr. Shaikh arranged for Mohammad and Karima Ebrahimi to get a $198,000 mortgage from World Savings to buy a home in Fremont. The good-faith estimate, a calculation of the fees borrowers can expect to pay at closing that is required by regulators, provided that the Ebrahimis would pay the broker $1,980. But when the loan closed, it included additional commissions of $8,570, according to a lawsuit by the couple and two other borrowers that was before Santa Clara County Superior Court.
Patricia DeLuca, Hampton’s owner, terminated her relationship with Mr. Shaikh in early 2002 because of complaints and questions from borrowers, according to her attorney, John Crowley. Ms. DeLuca settled the lawsuit brought by the Ebrahimis and the other borrowers for $25,000 and filed a cross-complaint alleging that Mr. Shaikh and others conspired to engage in “wrongful and fraudulent conduct,” according to court records. In testimony related to her cross-compliant, Ms. DeLuca said World Savings briefly cut its ties to her because of problems with loans originated by Mr. Shaikh. The Ebrahimi lawsuit names Mr. Shaikh, Ms. DeLuca and “Does 1 through 10.”
In testimony related to Ms. DeLuca’s cross-complaint, Mr. Shaikh said he failed the licensing exam “three or four times,” beginning first in 2000 or 2001.
In a decision filed in April of this year, Superior Court Judge Mary Jo Levinger found “no evidence” that Ms. DeLuca knew that commissions had been altered so the payments would be higher. The judge ordered Mr. Shaikh to pay $75,000 in damages and attorney’s fees. Mr. Shaikh is appealing the decision.
Mr. Shaikh moved to Golden Gate Mortgage, a local mortgage broker in Hayward, Calif., in early 2003. There he introduced himself to customers as Zak Khan. Dean E. Johnson, a lawyer for Mr. Shaikh, says he used the name “because he found that many of his American friends and customers found Altaf Shaikh hard to pronounce and spell.”
In 2004, he arranged for JoAnn Curran, a retired manager, to refinance the mortgage on her home in Alamo, Calif.
Ms. Curran says that at a meeting with Mr. Shaikh at a Starbucks coffee shop, he told her he owned his own mortgage company and could get her a new mortgage with a low interest rate that would allow her to pull out cash to pay some of her son’s medical bills. “It was too good of a deal to pass up,” she says. Still, she found it odd that Mr. Shaikh notarized her loan documents on the hood of a car.
While Mr. Shaikh was working at Golden Gate, he and his wife bought a $2 million two-story beige stucco house with a swimming pool on a cul-de-sac in Fremont, according to public-records data compiled by RealQuest.com. The following year, the couple bought a three-bedroom home in Las Vegas for $328,000.
Mr. Shaikh says he left Golden Gate in September 2004 because the owner, Nadeem Shahzada, hadn’t lived up to his promises on compensation and because he had an offer from Secure Financial. Michael Lauer, an attorney representing Mr. Shahzada, says, “It was a mutually desirable parting.”
Mr. Lauer says Mr. Shaikh didn’t need a license for the duties he was supposed to perform at Golden Gate, but declines to specify what those duties were. Mr. Shahzada “didn’t know he [Mr. Shaikh] was doing the things he was alleged to have done,” Mr. Lauer says.
In response to complaints from several borrowers, the California Department of Real Estate issued an order in January 2005 that told Mr. Shaikh, also known as “Zack Khan,” to “desist and refrain” from making mortgages without a license.
Tom Pool, an assistant real-estate commissioner, says the department doesn’t send notices of such orders to lenders because “there are thousands and thousands of lenders out there. I don’t think it’s practical.” He notes that anyone can check whether a broker is licensed or has been disciplined on the department’s Web site.
Mr. Pool calls Mr. Shaikh’s continued presence in the mortgage industry “kind of perplexing. I’m not sure those who allowed him to work are doing their due diligence.”
Atiya Khan says she was working as a property manager when a family friend introduced her to Mr. Shaikh, and he persuaded her to set up Secure Financial. “He is a famous personality back home with a good decent family,” she says. “We went to his house. He introduced his family” she adds. “All these things to make you trust him.”
Mr. Shaikh then persuaded Ms. Khan, a property manager at the time, to obtain a broker’s license, says Thomas Swihart, her attorney. The two leased an office, but Ms. Khan, who lived in another part of California, says her understanding at the time was that he hadn’t yet gone into business. But in fact, using Ms. Khan’s broker’s license and picking up the pseudonym Zak Khan he had used previously, he started churning out mortgage sales, says Ms. Khan’s lawyer. “He took her license and ran with it and defrauded a lot of people,” Mr. Swihart says.
In May 2005, Pedro Franco, a landscaper, showed up in lawyer Pamela Simmons’s office after receiving a closing statement for a mortgage loan with a check stapled to it. Mr. Franco thought that was odd because, while he had talked to Mr. Shaikh, he didn’t recall ever signing the final loan documents. Mr. Franco also discovered that some numbers on his closing statement had been whited out: A $15,650 payment to Secure Financial appeared as $650. Mr. Franco had also received a $29,787 check as part of the deal, not the $40,000 he says he had discussed with Mr. Shaikh.
The next day, Ms. Simmons received a visit from Rosendo Zamudio, whose loan from Mr. Shaikh and World Savings included a $7,655 payment to Bay Area Marketing, a company owned by Mr. Shaikh, that didn’t appear on his closing statement. This meant the numbers on Mr. Zamudio’s loan documents didn’t add up properly. As Ms. Simmons began making inquiries, Mr. Shaikh called Mr. Zamudio and offered to come to the borrower’s home to work out the misunderstanding.
“I called the local police because I didn’t want my client meeting with him,” Ms. Simmons recalls. Mr. Shaikh was arrested in May 2005 and charged by the Santa Cruz County District Attorney with criminal fraud and grand theft.
Prosecutors say Mr. Shaikh didn’t disclose to borrowers payments to Bay Area Marketing or that he was earning an extra 2% of the loan amount from World Savings for putting borrowers into more costly mortgages that also contained prepayment penalties. They further allege that he failed to tell borrowers that their loans carried prepayment penalties and that those who made the minimum payment would see their loan balances rise. And they say he forged notarization seals on borrowers’ closing statements, though his notary license expired in 2001. Prosecutors say they are continuing to investigate whether other individuals in the real-estate industry aided the fraud crimes.
Other aggrieved borrowers found their way to Ms. Simmons, who specializes in consumer real-estate law. In March 2006, Ms. Simmons filed a lawsuit in Alameda County Superior Court on behalf of borrowers who had contacted her about their dealings with Mr. Shaikh.
Ms. Simmons says she called World Savings to inform it of Mr. Shaikh’s first arrest just after the event. Instead of freezing all pending transactions involving Mr. Shaikh, the civil lawsuit alleges, World Savings “continued to fund at least 20 loans” presented to it by Mr. Khan and Secure Financial.
Borrowers who called World Savings to check out Zak Khan were reassured that they could rely on him, the lawsuit further alleges, and World Savings “ignored numerous, and often vociferous, complaints” from borrowers.
A spokesman for Wachovia, World Savings’ new parent, says World Savings “checked the license of Secure Financial,” rather than that of Mr. Shaikh, because the company “is the broker listed on the loans.” He adds the company terminated its relationship with Secure Financial on May 9, 2005, and contacted customers who “had loans in process to confirm that they were, in fact, seeking a loan and had received or expected to receive our disclosures.” Wachovia says it has since agreed to the rescission of dozens of loans originated by Mr. Shaikh.
The Wachovia spokesman adds that the “Top Broker” award was “not a company-sanctioned award. It was a local market certificate given by a World Savings salesperson” to roughly eight brokers. Secure Financial originated about 125 loans for World Savings in a one-year period, the spokesman says.
Ms. Khan, a defendant in the civil lawsuit, has filed a cross-complaint against Mr. Shaikh, alleging that she was tricked into forming Secure Financial and that Mr. Shaikh forged her signature on “numerous loan documents” without her knowledge or consent. Ms. Khan says she has never made a mortgage loan and never had any contact with World Savings. “I was out of the picture,” she says.
Around the country, efforts are now under way to improve quality control of mortgage brokers. Lenders are beefing up their scrutiny of mortgage brokers and other third parties. The Conference of State Bank Supervisors is setting up a national database that would allow consumers and regulators to check whether brokers are licensed or have been subject to regulatory enforcement actions. Sen. Schumer of New York in early May introduced legislation that would establish a fiduciary duty for brokers and others who arrange home mortgage loans to look after their customers’ interests.
Mr. Shaikh is now working in the Fremont area as a car salesman, according to Mr. Johnson, his attorney.
Excellent post. Household International liked to portray itself as the innocent victim of its own rogue employees. They agreed to a $484 million settlement without admitting wrongdoing at any level above the local offices. I have spoken with at least one former HOusehold employee who was rewarded as a top producer until her customers filed a lawsuit against her and the company. Then she was a rogue and a scapegoat who had to be fired.
Household showed enormous growth and was a hot stock for several quarters, thanks to employees like that.
At the end of the day, she was punished, and the stockholders were punished, but the people at headquarters worked out a sale to HSBC and at the end of the day they were fine.