NYT: With Mortgages, Instant Wealth for Middlemen

The New York Times
October 8, 2005

With Mortgages, Instant Wealth for Middlemen
By JEFF BAILEY

A vast industry of real estate middlemen has sprouted recently, riding
the ups and downs of the mortgage market, and in many cases,
accumulating great wealth in the process.

Mortgage brokers, virtually nonexistent 25 years ago, now number
400,000 workers at more than 50,000 firms. They are scrappy
entrepreneurs and sales representatives who match up borrowers and
lenders on roughly 7 out of 10 mortgages. This year, they will collect
some $33 billion from their share of an estimated $2.8 trillion in home
mortgages.

Mortgage bankers, firms that lend their own money and then quickly
resell the loans, can operate even more profitably.

Against the backdrop of rising home prices, the industry is a lesser
known piece of the rising fortunes of real estate, money made in a
remarkably simple business. For evidence of that, look at the year-old
divorce proceedings of Ray Vinson Jr. and Deanna Daughhetee Vinson.

The case is playing out much like others in Family Court of St. Louis
County, Mo. Mr. Vinson, 54, has sought custody of the couple's dog,
Bogey, and some spending money from an account controlled by his
41-year-old wife. She, in turn, wants her husband of 12 years barred
from their suburban home and from her office.

But Vinson v. Vinson is not your typical divorce. Each side's lawyer
has already been awarded $1 million in fees. Along with the cars, there
are two private jets to divvy up. And the couple is fighting over a
business that could be worth considerably more than $100 million.

Mr. Vinson is a college dropout who declared personal bankruptcy in the
early 1990's.

Ms. Daughhetee is an accountant from a small town in southern Illinois,
who no longer uses the name Vinson.

Matching borrowers and lenders they typically earn more than $1,000 on
each transaction.

Now, however, there are signs of a shake-out. Home prices in some of
the hottest markets are cooling. Rising interest rates could slow
borrowing. That could mean fewer transactions, lower profits and fewer
jobs in businesses related to real estate.

But brokers are here to stay.

A computer, phone, fax machine, state lending license and a few months'
rent is essentially all that is needed to become a broker. The Vinsons
started with just $7,000 from Ray's grandmother, Flora Vinson.

"It's pretty easy to learn," said David Olson, a founder of Wholesale
Access Mortgage Research and Consulting, based in Columbia, Md., and
considered one of the nation's leading experts on mortgage brokers.

The rise of brokers as the retail arm of the mortgage industry was
spurred by the decline of savings and loans, which made and then held
mortgages, and by the growth of Fannie Mae and Freddie Mac,
quasi-government agencies that purchase vast numbers of mortgages from
lenders.

Smaller players are able to thrive because "there are no economies of
scale," Mr. Olson said.

Each borrower must be questioned, each loan file walked through a
simple yet time-consuming series of procedures. Surviving and
prospering as a company is not dependent on size but on hustle,
attention to detail and marketing pizazz.

Both mortgage brokers and bankers are licensed at the state level where
there is little to moderate oversight.

Joseph Aldeguer, a college dropout and former commodities salesman,
generates sales leads for his 200-employee suburban Chicago mortgage
firm, the Mortgage Exchange, with a Saturday morning call-in radio show
that he pays $5,000 a week to put on WLS, an AM station.

Mr. Aldeguer, 38, could still pass for a commodities salesman, favoring
tailored suits and wearing his dark hair long with blond highlights. He
said that he was a success in commodities, but when he and his
girlfriend at the time started the business that became the Mortgage
Exchange, he put the $12,000 start-up costs on his credit card.

The girlfriend, Jill Moore, 34, later became his wife and is now his
former wife, 50-50 partner and the company's chief financial officer.
She grew up on a farm outside Peoria and completed high school there.
They met when she worked as a receptionist and fill-in aerobics
instructor at a health club near the commodities exchange. She later
managed a leather clothing shop, making as much as $35,000 a year, she
said.

In mortgages, she thrives. "I like paper; I like numbers," she said.

Mr. Aldeguer had used radio advertisements in the United States and
Canada to troll for commodities investors. Eventually tiring of
commodities, a friend in the markets suggested mortgages, saying it was
an easy way to make money.

Mr. Aldeguer opened an office. But calling real estate agents for
referrals was degrading, he felt. So he turned to radio again, buying
spots and then producing his hourlong show, featuring himself and some
associates talking about real estate investing.

On a recent Saturday, one caller had a lot of credit card debt. Mr.
Aldeguer and his associates explained how to refinance the caller's
home, switching out of a 30-year, fixed-rate loan to a so-called option
ARM, or adjustable rate mortgage, which allows borrowers to pay
interest only, or even less, for a certain number of years.

Such loans at times result in a rising loan balance, or negative
amortization.

Consumer advocates have criticized these loans as risky because rising
interest rates could lead to a steep payment increase.

The caller could cut his monthly payment to $950 from $2,100, Mr.
Aldeguer estimated.

"You either are a homeowner or an investor," he tells listeners,
extolling the virtues of freeing up home equity to invest in more real
estate or other assets.

Of course, the advice is self-serving in that it encourages people to
take on additional debt.

Other callers end up talking to a loan officer like Gavin Beal, 35, who
said he was laid off three times from corporate accounting jobs before
joining the Mortgage Exchange in 2001.

"I only made $40,000 in my last accounting job," he said. "I was very
depressed." Now he makes more than $100,000 a year, he said.

Like real estate agents, mortgage brokers are paid a percentage of the
total transaction, about 1.5 percent on standard 30-year loans and up
to 3 percent or more on less creditworthy loans that require more
labor, according to Mr. Olson, the consultant. More often than not, the
fee comes from the lender instead of the borrower.

It is an arrangement with a built-in conflict of interest, said
Kathleen Keest, a consumer advocacy lawyer at the Center for
Responsible Lending in Durham, N.C.

A broker who steers a borrower to a more expensive loan can snag a
bigger fee for himself. "That undermines the whole system," she said.

Efforts to increase disclosure of the fee arrangement, notably by the
Department of Housing and Urban Development, have been beaten back by
mortgage brokers, a department spokesman said.

"There are unscrupulous people in every business," said Harry Dinham, a
mortgage broker in Dallas and president-elect of the National
Association of Mortgage Brokers. He said consumers need to shop for the
best rate, adding that brokers "must be doing something right" to have
grabbed a nearly 70 percent market share.

Mr. Beal, the Mortgage Exchange loan officer, said he tried to find
customers the best rate. To save them cash, he proposes that they pay a
slightly higher interest rate, which produces a big enough fee from the
lender to cover both the borrower's closing costs and his firm's fee.

On fee revenue of about $12.5 million last year, Mr. Aldeguer said, he
and Ms. Moore had a profit of 5 percent to 10 percent. That helped
finance his 20-room French Provincial suburban house, replete with
12-car garage.

"It is very tastefully done," said Meg Cleavenger, a realtor who tried
to sell the place for $6.75 million to $8.25 million before Mr.
Aldeguer decided to keep it. "Joe's house is very big."

Mr. Olson believes that online lending and Internet-based processing of
paperwork now handled physically between banks, governments, title
insurers, lawyers and others is the one development that could spur
consolidation of the fragmented mortgage broker business. That appears
to be far off.

What seems more imminent is a slowdown in the real estate boom. Even
that would not be all bad for the company owned by Ray Vinson and
Deanna Daughhetee, American Equity Mortgage. It specializes in debt
consolidation loans and could benefit from bad economic times.

To attract borrowers, the company spends as much as $25 million a year
on radio spots featuring Mr. Vinson, who is from West Virginia,
unforgettably drawling out the phone number, which ends in
"ninety-nine, ninety-nine."

With more than 40 offices, American Equity produced more than $28
million in income for the couple each of the last two years, according
to a court filing in the divorce.

Mr. Vinson said he initially put the company's stock in his wife's name
because he had recently filed for bankruptcy, which could complicate
getting a lending license. As the years went on, he said, he asked to
have the stock put in his name. He also had less to do with running the
business, he said.

"The more responsibility I gave Deanna, the more she fell in love with
power, and out of love with me."

"I'd tell her, 'I love you, but Deanna I just want the company back in
my name.' It was a battle every time it came up. And the more we
argued, the more I drank."

Ms. Daughhetee filed for divorce a year ago. He sought reconciliation,
but said it did not work.

Mr. Vinson's lawyer calls the divorce a "hostile takeover" of the
company, half of which, the lawyer asserted, rightfully belongs to Mr.
Vinson. Angry at how Ms. Daughhetee handled marketing, Mr. Vinson cut
off his radio advertisements in January. Ms. Daughhetee started a
different advertisement campaign.

Meanwhile, in the divorce, each was allowed $3.5 million in spending
money. Mr. Vinson, accompanied by Bogey the dog, who is now in his
care, walked across the lobby of the Four Seasons Hotel in Las Vegas
one recent day, dressed in a Brioni suit. He was in town to look at
investments, he said.

Now, however, he is worried. The ad campaign switch "caused call volume
from potential customers to decrease precipitously," Mr. Vinson
asserted in a June court filing. Separately from the divorce, Mr.
Vinson last week sued his wife in Missouri state court, contending
breach of fiduciary duty and seeking a receiver to run American Equity.

She would not comment.

Looking out over Las Vegas, with Bogey snoring softly on the couch, Mr.
Vinson said, "The competition is eating our lunch."