by Calculated Risk on 3/19/2006 01:50:00 PM

David Streitfeld writes in the LA Times: For Home Loan Broker, Troubles Come With Creative Refinancing

Orange County homeowners ... essentially get paid to borrow money.

Mark Gallagher, the founder and president of Park Place Funding in Laguna Hills, uses a technique ... to cut his customers in on the action, giving them a share of the premium he earns for placing loans with high interest rates.

The homeowners receive cash on a regular basis they can use for vacations, remodeling or to pay off that expensive house faster. Not surprisingly, they love their broker.

Here is how it worked (completely legal):

1) Park Place would charge a higher than normal interest rate (with customer approval).

2) Park Place would charge no fees and receive a rebate of upto 5% from the lender. On a $350K loan, Park Place would receive $17.5K.

3) Park Place would give a portion of the rebate to the customer (far more than enough to cover the extra interest payments for four months).

4) Four months later, Park Place would refinance the customer again and receive another rebate (the loan balance would stay the same). They had to wait four months or refund the rebate on the previous loan.

5) The lender (frequently National City Mortgage) would sell the loans to Freddie Mac. Freddie Mac would package the loans into investment pools. As long as the pools didn't have too many loans that were repaid early, everyone was happy.

Bizarre story! I expect that other problems will be exposed as the housing market slows.