Who's your mortgage broker working for?

Dutch and Brecky Bihary are three months behind on their mortgage payments and scrambling to hold onto the three-bedroom rambler they've had for 12 years.

Their troubles began when they refinanced four years ago. Looking back, they wished they had been more educated and put less trust in their mortgage broker.

		Grant M. Haller / P-I
	Dutch and Brecky Bihary, with daughters Arreah, 5, and Zayda, 3, stand in from of the Mount Vernon home they've had for 12 years. They recently refinanced and said they asked for a 30-year fixed-rate loan, but instead got an ARM that doubled their payments.

Despite asking for a 30-year fixed-rate loan, they realized at closing that their mortgage broker got them a two-year adjustable-rate mortgage they repeatedly told him they didn't want. He also failed to tell them that monthly payments didn't cover escrow.

When their interest rate reset last year, at the same time Dutch Bihary lost his job, the family couldn't keep up payments that had doubled to $1,505 a month.

"We made our decision. We don't blame anybody. He did his job, and he didn't look out for our best interest," Brecky Bihary said. "But buyer beware. You trust that they're looking out for you. It didn't happen, and now we're having a hard time getting by."

Like many borrowers, the Biharys, who live in Mount Vernon with their two young girls, assumed their broker was working for them. In reality, mortgage brokers aren't legally obligated to do so. Many say they work for borrowers, lenders and themselves.

But lawmakers here and in other states, such as New York and Missouri, are rethinking the relationship: Should mortgage brokers be beholden to borrowers?

Sen. Brian Weinstein, D-Mercer Island, is pushing to have mortgage brokers -- like lawyers, financial advisers, accountants and trustees -- owe a fiduciary duty to borrowers.

"Most people expect when they go see a mortgage broker that the mortgage broker is working for them, not for himself or herself or the lender," Weinstein said in committee last month. "The purpose of this bill is to codify that expectation into law."

His bill is one of several measures in the Legislature that seek to improve consumer disclosures, tighten lending standards and prevent abuses that contributed to rising mortgage defaults and foreclosures.

Supporters say requiring brokers to owe a duty to borrowers would cut down on predatory practices, such as steering them into higher-rate loans or refinancing loans with no net benefits.

The mortgage industry opposes the bill and has fought similar language introduced in Illinois, Minnesota and the U.S. Congress.

"It's going to create an open season for trial lawyers to sue mortgage brokers," David Erickson, president of the Washington Association of Mortgage Brokers, said of Weinstein's bill.

"We do our best, but at the end of the day we offer particular products to our customers and expect our customer to choose from them," he said.

Erickson said brokers are required by lenders to disclose to borrowers that they work as independent contractors.

But Ari Brown, an attorney who represented borrowers in a recent class-action settlement against NovaStar Mortgage, countered: "Borrowers go through a mortgage broker because that's their business and profession, and they know something that the borrower doesn't."

Brown said the one-page fiduciary bill does more for borrowers than any other measure, including an omnibus bill from the governor's task force that would provide money for financial counseling and a one-page, easy-to-read summary of fees and terms.

As the number of foreclosures rise, states and the federal government have been wrestling with whether and how to help borrowers.

During the housing boom, many lenders and brokers aggressively marketed risky loans to borrowers who say they didn't fully understand the terms or were not told the true cost of the loans. Meanwhile, borrowers with little or no credit took out risky loans they couldn't afford or borrowed heavily against their homes.

A recent Wall Street Journal Online/Harris Interactive Poll found that while only a quarter of the 2,082 persons surveyed said the government should help borrowers financially, a majority, or 64 percent, believed mortgage brokers should be better regulated.

Roger Ingalls, 50, doesn't see a problem with requiring mortgage brokers to act in borrowers' best interests. He says he already does it, and joined the Ethical Lending Foundation, which is working on a code of ethics.

"When I start a loan, my whole intention is, 'How can I best service this client?' " said Ingalls, of Loan Doctors Northwest. He supports Weinstein's bill but wants to know what his liabilities are because "it's just not spelled out."

"A lot of bad actors have left the business," he said. "We have a chance to change the culture, and that's what I want to do."

The Biharys sought the help of a mortgage broker because they expected him to work for them.

"We were told we were getting a fixed (rate loan), but through double-talk and side-stepping what we signed was an ARM," said Dutch Bihary. "I kept asking if things could be explained. He lulled us into a sense of security. ... This isn't the position I wanted to be in."

After the rate reset, the Biharys' money problems were compounded by the loss of Dutch's job and the realization that they hadn't been paying homeowner's insurance as part of their monthly payment. Both have since picked up various jobs, including face-painting gigs, to catch up. Their broker is no longer in the business, they said.

Theresa Dimartino, who lives in Burien, put her three-bedroom rambler up for sale late last year when she couldn't keep up with her mortgage.

She admits making bad decisions, including tapping her equity for home improvement, but she said her mortgage broker, whose name she can't remember, rushed her through refinancing. He told her the ARM would increase her mortgage about $150 a month, when it actually went up by more than $400.

"He saw me as someone who could fall into an easy loan that was good for him and not so good for me," she said, who paid about $15,000 in closing costs. When the ARM reset from 7 percent to 9.88 percent in October, around the time her live-in partner moved out, she couldn't afford her $2,390 mortgage payment.

"Had I known, I would have sought (financial) counseling," Dimartino said. "A lot of the mailings go to homeowners; they make it sound so easy and good. ... Getting into this mess has been humiliating, embarrassing. I lost a lot of sleep."

NUMBERS TO KNOW

If you're facing foreclosure, here are some nonprofit housing counselors you can call for help:

• Homeownership Preservation Foundation, 888-995-HOPE (4673)

• HUD-Approved Counseling Agencies in Washington, 800-569-4287

• NeighborWorks America's National Foreclosure Mitigation Counseling, 202-220-6313

• Washington ACORN, 206-723-5845

• Solid Ground's Mortgage Counseling Hotline, 206-694-6766 or 866-297-4300