The Broker Who Called the Crisis and Was Ignored
McClatchy Washington Bureau
Real estate agent's warnings of housing bubble unheeded
Greg Gordon | McClatchy Newspapers
last updated: October 10, 2010 09:08:29 PM
WASHINGTON — Former Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and other top government officials have said they didn't notice the dangers that Michael Blomquist saw in the runaway California housing market until five years after he did.
As home prices and loan amounts in California's Silicon Valley, one of the nation's hottest markets, began mushrooming in late 2003, Blomquist said, lying, scheming and recklessness were becoming everyday occurrences.
Blomquist, a San Jose real estate and mortgage broker, was sure that the inflated incomes on loan applications and the tricky loans would lead to a housing bubble with disastrous consequences.
Refusing to commit "felony mortgage fraud," he closed his offices in January 2004, long before the housing meltdown, and began a sort of one-man crusade to expose what he calls "a criminal conspiracy to turn the housing market into a giant Ponzi scheme."
Over the next four years, Blomquist futilely tried to dissuade clients and friends from putting their life savings into pricey homes. He wrote letters warning federal regulators and members of Congress that mortgage fraud was creating "a perfect storm" in the housing industry.
Acting as his own attorney, he even waged a federal court fight against some of the biggest subprime players, as well as Paulson and other top federal regulators, accusing them of conspiring to fraudulently inflate home prices and asking the court to bar the issuance of one widely used type of risky mortgage.
Responding to Blomquist's letter on Sept. 1, 2005, Democratic Sen. Dianne Feinstein of California assured him that she was "monitoring the situation closely." Suzanne Killian, an assistant director of the Federal Reserve's consumer unit, advised him later that month that his concerns would be considered.
In the end, however, his warnings brought no serious action until the bubble began to burst.
Did Blomquist, with his inside view of the market, have a better understanding than did Bernanke and his predecessor at the Fed, Alan Greenspan, who failed to rein in subprime mortgage lenders? Could Blomquist, with a two-year college degree, have a better grasp of the danger than did Paulson, who oversaw Wall Street giant Goldman Sachs' investment in subprime mortgage securities and was the treasury secretary when the market crested?
That's hard to know.
What's clear is that Blomquist set himself apart from tens of thousands of real estate agents nationwide who rode the mania and kept selling properties for spiraling prices until they crashed.
"When fraud becomes the competition, anybody who has any ethics is driven out of business," he said. "As a fiduciary, I felt I couldn't do my job. Your role is to be aware of market conditions. . . . You're supposed to put clients' interests ahead of your own."
"I'm by no means a saint, but I'm not going to be the cause of somebody losing their life savings or becoming enslaved in a debt for a grossly overpriced house just to make a living," he said.
In California's Santa Clara County, Blomquist said, the median price of a modest home more than doubled, to $900,000. The most prevalent loans in the county, he said, were option adjustable-rate mortgages, in which borrowers could pick their initial monthly payments for five years. Most of them chose the lowest payments, but that increased their loan balances and all but assured huge monthly payment hikes when their interest rates jumped.
Most of Blomquist's clients and friends shrugged off his warnings, stretched their finances and traded up to more expensive houses, he said. When the market crashed in 2008, the county's average median home price plunged from $869,000 to $450,000 "in about six months," he said.
In August 2007, Blomquist sued major subprime lenders and Wall Street firms that packaged mortgages as securities, alleging that they'd helped sustain the housing bubble. The defendants included Washington Mutual Inc., Countrywide Savings and Loan, Citigroup, Goldman Sachs, Bear Stearns, Paulson, then-Citigroup CEO Charles Prince, the Wall Street ratings agency Moody's and a half-dozen federal regulators.
Blomquist battled a throng of lawyers for more than a year before a judge dismissed his claims, ruling that he lacked standing and jurisdiction. Blomquist says he may appeal.
Washington Mutual later collapsed in the biggest bank failure in U.S. history. Countrywide and Bear Stearns were rescued in mega-mergers, while Goldman and Citigroup got federal bailout loans. Prince retired after Citigroup reported massive mortgage losses in late 2007.
Now 43, Blomquist got back into the housing business this year, since the pendulum has swung and borrowers again must produce tax returns and other records to prove their incomes.
GREG GORDON, INVESTIGATIVE REPORTER, MCCLATCHY NEWSPAPERS: I’m Greg Gordon with McClatchy Newspapers. Federal Reserve chairman Ben Bernanke and former Treasury secretary Henry Paulson, the two men who were at the center of the government’s response to the meltdown of 2008, say they couldn’t recognize big problems in the housing industry until earlier that year. But a California real estate and mortgage broker says he saw it coming in late 2003. I’m talking now with Michael Blomquist, who is doing business again in California’s Silicon Valley, one of the hottest real estate markets in the country during the real estate bubble that led to the crisis. Michael, can you describe what you saw in late 2003?
MICHAEL BLOMQUIST, REAL ESTATE BROKER IN SAN JOSE, CA: Throughout the years, I saw a decline in lending standards. What we saw was a huge increase in the amount of stated income [loans], or otherwise known as liar loans. And throughout the years, those had been set up just for self-employed borrowers, with 20 percent down payment, excellent credit, six months of stated income in reserves, many other qualifications where, if there were losses incurred, they would be on the borrower versus the banks or society at whole. Throughout, as securitizations became more popular, these guidelines were tossed out the window, started being provided to wage earners who, really, there was no reason to provide stated incomes to, somebody [whose] income’s easily documented on a W-2 [tax form]. So at that time I started to notice that prices were directly correlated to this fraud that was happening and with the stated income, the proliferation of stated income loans. And it was very concerning to me, especially in this area, ’cause we had already seen a huge bubble just based on the dot-com and other issues that can occur in a normal market. But when you introduce the magnitude and frequency of fraud that we saw in 2003, it was a recipe for disaster.
GORDON: What did you do when you saw this recipe for disaster developing?
BLOMQUIST: I was forced to close down my business. As the broker, I was contractually obligated to repurchase any loans that were fraudulently originated, but yet that became the industry standard. Reps from the big lender could come by, you know, ask if we had any business for them; they’d look at files, and more times than not, they would recommend just throwing out the income documentation, increasing the borrower’s stated income by $2,000, $3,000, sometimes $5,000, and that way they could get business. But I was the one who was on the hook legally, not to mention the duties, the responsibilities that I would have to my clients.
GORDON: What were those duties, Michael?
BLOMQUIST: Well, it’s a thing called fiduciary duties, which basically states that just like the attorney-client relationship, that you have a duty to act in your client’s best interest. And selling them homes that you knew were predicated on rampant fraud, whose values were predicated on rampant fraud, in my opinion, was a huge breach of that duty. So it made it literally impossible, regardless if you participated in that fraud, to properly represent your clients.
GORDON: So you shut your business and you felt that you couldn’t do your ethical duty as a real estate agent to sell these homes where this kind of lending shenanigans were going on. Did you advise your friends or your clients on what they should do?
BLOMQUIST: Yes. Now, I recommended to most of the people that I knew or that would come through my office to wait to purchase, because those peak values would come down. And in fact the median home price in our area got close to $900,000 at the peak, and essentially cratered to about $450,000, so a cut in half. So, obviously, any of their down payments have been erased, and now they’re enslaved to this debt. Many are walking away. In my opinion and experience, there was probably—at least half of all loans that were going on during ’05, ’06, and even ’07 were fraudulent.
GORDON: Did your friends listen to you? Did your clients listen?
BLOMQUIST: No. The desire to have the American dream of home ownership is huge. Just that and a black market is difficult to overcome, you know, reasoning or logic. But coupled with 10, 15 percent appreciation every year, it’s really difficult to talk somebody out of it. So, unfortunately, many of them did, even without my help, would go out and purchase those, and unfortunately, many of them are now in foreclosure. They have families and it’s a real mess.
GORDON: So I understand that you started writing letters to people in government to try to warn them what was coming.
BLOMQUIST: Yes. Now, I was writing the regulators or the banking regulators at the OCS, the Federal Reserve, the OCC [Office of the Comptroller of the Currency], as well as different representatives here locally—Senator Feinstein, [inaudible] and many others—because not only—you know, for me personally, I knew this was going to be a huge mess, but as a competitor it was impossible to compete in a marketplace like that and still uphold your legal duties, your fiduciary duties to your clients. And I know some people would probably, you know, roll their eyes at that, but look at the damage that this would do to somebody. I think it’s much more polite to punch somebody in the face than to have recommended and pushed, you know, people into these homes knowing that they were so grossly and fraudulently inflated.
GORDON: Michael, in 2007 you took another step that is quite extraordinary. And I guess I should back-step briefly to say that while you were sidelined, you weren’t getting any income from your business, and you saw this crash coming, so you actually started betting against some of the major players in the lending market, actually buying puts or options, betting that their stock would go down. And yet the crash didn’t come. So you lost on that, didn’t you?
BLOMQUIST: Oh, I think a lot of the loss, at least from a legal standpoint, is correctly tied to securities fraud, as well as unjust enrichment. There’s—many of these CEOs clearly knew what was going on while they were selling out of their shares, doing company buybacks, doing lots of things that the regulators should have probably never let happen.
GORDON: So in 2007, in the summer of 2007, you actually filed a suit charging some of the top players in this whole subprime industry, from some of the lenders like Washington Mutual all the way to Wall Street, including Goldman Sachs and Citigroup, and I believe Bear Stearns, even—you sued all these big players. And yet the top government officials were not even zeroing in on this housing meltdown yet. Do you have a thought about that? You kind of laid it out in—a lot of it, what you thought was happening, in your lawsuit. Do you have a thought about how you could see this and they couldn’t?
BLOMQUIST: Well, most definitely. I felt like I was living in the Twilight Zone back in 2003 and ’04 when this really started taking off. I think Silicon Valley in general is sort of the—for housing and many other parts of industry, at the forefront, and we can predict and see what happens there. But it just blew me away that there were so many other players that were involved in this and turning a blind eye to it. And what’s even more frustrating now is that we’re still trying to do everything to maintain these inflated prices, which is going to be an extremely costly venture for us. I think there’s certain protections that should be made to homeowners. Obviously, this could turn into a huge social issue, or already has, with the amount of homelessness and with the foreclosures. But it’s really unfair to those who did play by the game then to have to share the burden, the expense of this, or actually, you know, bear the entire burden. So we really need to restore rule of law, go after, convict, at least indict, let these people go through our system of justice.
GORDON: That was Michael Blomquist, a real estate and mortgage broker from San Jose, California, who saw it all coming but couldn’t get anyone to listen. I’m Greg Gordon with McClatchy Newspapers.
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