Due diligence

Tanta caught this story from the Orange County Register:

In November, Wells Fargo issued a $289,275 mortgage for 920 W. Camile to an investor who had purchased the home at a foreclosure auction. In January, after the house was spruced up, Wells Fargo issued a $500,000 mortgage to the new owners, the Gomezes.

Tanta cuts through the details of this deal with her inimitable wit:

Ridiculous? Sure. It turns out that the seller provided the $125,000 down payment, and also executed an “addendum” to the sales contract agreeing to pay the buyers $30,000 in cash, cover the borrowers’ first three mortgage payments, and toss in a 52-inch TV. Subtract out all that, and the true sales price of the property was $460,000. But apparently nobody did subtract out any of that, because Wells Fargo made a $500,000 loan to these buyers to purchase this property.

The OC Register reporter, bless his heart, tracked down the various parties who had their hands in this transaction, and got the following comments:

From the mortgage broker who put the deal together: “Whatever agreement the buyer and seller made, it was between them.”

From the appraiser who dutifully came up with a value of $625,000: “Like Sanchez, she had no knowledge of the terms of the sale.”

From the escrow agent who closed this loan: “It sounds to me like the seller helped out,” she said. “If someone gave them $125,000, what’s the problem? That’s a beautiful thing, if you ask me.”

From Wells Fargo: “In many instances, borrowers are able to use gifts from family members or friends for a portion of their down payment, provided the amount and source of the gifts are documented.”

Excellent point, Wells Fargo. Too bad in this case the down payment didn’t come from friends or family members and wasn’t documented. Too bad that the broker who originated the loan seems to think the details of the purchase contract aren’t any of his business. Too bad your escrow agent doesn’t care where the down payment money came from, either. Too bad your appraiser has apparently never heard of the Uniform Standards of Professional Appraisal Practice, to which she is obligated to conform if she wants to do appraisals for Wells Fargo, that say she is required to inquire into “the terms of the sale.”

It’s hard to know what to make of anecdotal accounts like this. How widespread can such behavior be? But in retrospect, the biggest mistake I made in interpreting the housing boom two years ago was that I was putting too little weight on anecdotal accounts like this one.

In any case, I certainly reacted to this story with exactly the same question as Tanta:

If this is the level of elementary due diligence we can expect after the most atrocious mortgage blowup in history, what will it take to scare people into doing their jobs?

Originally published at Econbrowser and reproduced here with the author’s permission.