Real estate has been a swell deal for just about everyone who owned a home in California during the last few years.
For hundreds of Orange County homeowners, it's been even better. Thanks to their mortgage broker, they essentially get paid to borrow money.
Mark Gallagher, the founder and president of Park Place Funding in Laguna Hills, uses a technique that unscrupulous brokers employ to bilk clients.
Gallagher's innovation was 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.
Mortgage lenders were once fond of Gallagher too, helping him become one of the biggest independent brokers in the state.
Recently, however, the relationship soured. No one disputes that Park Place's system is completely legal, but it has suddenly become controversial as well.
Is Gallagher the consumer's champion, as he bills himself? Or do his mortgages, which are refinanced almost as soon as the ink is dry, make implicit promises to lenders and investors they don't keep?
In an attempt to clear his name, the broker has filed suit against some of his former partners. The case opens a window on a bigger issue: In a mortgage system that is loosely regulated but increasingly complicated, who is responsible for ensuring its integrity?
In the last five years, lenders have become increasingly ingenious in their effort to get people whose finances may have seemed dubious into homes.
At the height of the boom, borrowers got loans for 100%, or more, of the value of their property. They got loans without having to prove their income. They got loans with no requirement to pay the minimum interest due each month.
Park Place, by refashioning another part of the mortgage business, stoked demand for its exotic "structured refinancings" from both the loan suppliers and borrowers.
"In boom times, all sorts of crazy things happen," said James Croft, executive director of the Mortgage Asset Research Institute near Washington. "New programs are invented that have no history. You say, 'This is going to work,' and then you find out three years later it wasn't such a great idea."
With the housing market cooling off, the evaluation period Croft is talking about seems set to begin. The mortgage industry, and some mortgage holders, may be in for an extensive period of second thoughts.
Bob and Kathy Urell of Mission Viejo would hate to see that happen. They refinanced three times last year with Park Place, making a profit of $6,000.
Park Place produces cash for the Urells -- and, not incidentally, for itself -- by taking advantage of mortgage lenders' eagerness for profit.
One way lenders make money is by making loans at high interest. They are so eager for these loans that they pay brokers a bounty for them.
Gallagher, who will turn 45 at the end of this month, decided to share this bounty with clients who had good credit and met other criteria.
The process works like this: A Park Place agent might explain to a homeowner that he qualifies for a 6% mortgage.
"Why don't we make it 7%?" the agent will ask. "Sure, you'll pay a little more each month, but we'll give you more than enough cash to make up for it."
For the Urells, the math was simple: Their monthly house payment rose to $2,022, about $250 more than they would have paid with the prevailing interest rate.
Over four months, therefore, they pay $1,000 more than they could have. But that deficit is outweighed by a $3,000 check per refinancing, the Urells' share of the lender's bounty. Park Place pays all the fees too. This lucrative transaction can be repeated every four months.
A generation ago, a homeowner could live in his house for many years and never refinance. For Park Place customers like the Urells, however, it's a routine event, somewhere between mowing the lawn and changing the oil in the car.
Traditionally, borrowers paid to refinance a mortgage. Park Place clients are often fuzzy about exactly why they're getting paid instead. But if it's legal, why worry?
"We can use the money for anything we want," said Bob Urell, a 55-year-old accounting professor. "I'm getting near retirement. My goal is to pay down my loan."
Broker bounties are standard in the home lending industry. The higher the interest rate is over the prevailing rate, the more valuable the loan and thus the greater the premium. The lender usually pays the broker 1% to 4% of the value of the loan.
In California, the bounties must be noted on the closing papers of the loan. But many brokers don't talk much about them, consumer advocates say, and therefore few home buyers are fully informed. In the worst cases, a high premium can tempt a broker to put unwitting clients into expensive loans. Such fraud occurs regularly, according to authorities.