A more amusing place for the reporter to have gone with this is to actually get someone to pose as a customer and see just how well and how frequently the broker "explains" the loan.
I honest to Peat thought the reporter did a great job with that little understated juxtaposition of "I feel sorry for anyone who can't get into a house" and "Nobody feels sorry for me."
The thing is, if you strip out all the sorry-feeling-for and, at least for a moment, the moral questions involved in subprime lending, you have to confront the problem of the business model. It does take approximately 47,000 tries to explain neg am to most people. I have been there, you know.
What I learned from my own experience is that, ethics aside, I don't make enough off any loan product I have to explain 47,000 times. I stick to things like 30-year fixed and amortizing ARMs, that you only have to explain 47 times.
This business isn't like selling jet aircraft or helical multi-slice CT scanners, where the dollars involved make up for the sales efforts invested in a very small number of transactions.
You can focus on "buyer beware" when you're thinking about predatory lending, but really what it comes down to for me is that, as a business model, subprime cannot help degenerating into predation. You have to get paid for those 47,000 attempts to explain things. That means that you have to get 5 back-end points on the deal.
Of course, you can refuse to try to explain things 47,000 times, but then you're predatory because you aren't disclosing sufficiently.
We need, in my view, to get back to talking about the business. It's built on a model that does not allow it to win legitimately, as long as the products offered are so exotic that the actual customer base can't follow them. You can't claim to be making loans to striving consumers and then use a product that is comprehensible only to three actuaries and a lawyer.
Plus, that "leopard print chair" was just the perfect little detail. Aeron, meet your match.
Yes...about that leopard print detail.
"We didn't do anything wrong." is good too --conjures up images of those toddlers clamoring after that basketball-sized guy in the Darth Vader suit "Are you, really The Bad Guy?" ...and 47,000 times of that is enough for the guy in the suit to wish he had another side job.
But we mostly aren't toddlers...just regular sized folk with toddler-sized wages confronting Darth Vader priced housing.
That's a great post, John, and not just because you're making me a rock star.
The thing is, the argument for "de-linking" the originator of the collateral from the issuer of the security is the bedrock of securitization. That was the deal long before all the fancy private-issue MBS got underway. Nobody who invests in ABS backed by auto dealer paper or corporate notes wants the cash-flow of the security to depend on the cash-flow of the originator of the asset. Think the whole "bankruptcy remote" issue.
So at some level, asking if the current mortgage fiasco is an example of the securitization machine being "broken" is kind of funny. It's doing what securitization is supposed to do: offer the end-investor no risk and no obligation to understand the business of whatever the asset is. Hence, "I don't want subprime, I stick to CDOs." Nobody questions an investor in CDOs who does not understand how a pig becomes a sausage. That's the securitization market.
Is it, or is it not in the LENDER's best interest for the loan to be repaid?
Can the answer be anything except, "Yes"?
In that case, what has clearly happened is that feculent, putrid middle-persons have entered the game (at all levels) who take fees and don't take risk.
It is the middle-persons who are the problem, not the hapless borrower and not the hapless lender, who, as it turns out has been pushed back to the buyer of mortgage-backed bonds.
Now, do I shed a tear for the bond buyers? No. Flat out, no. Are they pension funds, etc. Probably. Will I personally get hurt? Probably. But do I shed a tear, No.
Do I shed a tear for the poor zlubs for took out the loans? Yes, I do. They were the victims of fraud and dishonesty pure and simple.
It is the middle-persons who are the problem, not the hapless borrower and not the hapless lender
Just remember a couple of things, here. First, brokering mortgages is not a secondary market transaction. The broker takes the application, collects the documents, [does the lying when the borrower fails to do so], etc., and then turns the file over to the lender. The lender underwrites this file and then closes the loan, with its own money. Brokers don't got no money. Most of them have enough capital to buy a fax machine.
Second, in this article, we have a real estate lawyer who got handed the file, and who noticed right off the bat that there were some problems with the documents.
Now, I'm not here to insult our lawyer friends, but will you guys tell me that you all specialize in reading Good Faith Estimates? I thought not. How do you suppose the lawyer caught the problem and the lender didn't?
Of course lenders want to be paid back. Some of them want to be paid back at some fairly steep rates of interest. Some of them want to keep making new loans even in economic contexts when making new loans at the rate you used to doesn't make economic sense. This involves a willingness to believe that the economic context really does make sense, if you squint hard at it and carry your three again.
And the fact is that most lenders are still getting paid back. What else people could be doing with their money besides paying mortgage interest, and what else rent-seekers could be investing in besides mortgages, is another set of questions. We also need to keep the overcapacity in mind, as well as the liquidity problem. There's a nasty lender inventory problem to go along with that housing inventory problem.
Hey! I got a no-fee loan! I have zero-deductible insurance! I buy groceries on my no-interest AmEx at Harris Teeter, where somebody bags them for me! I bought a leopard-print chair for 90 days same as cash! I am super-consumer! Fear me!
Hey! I got a no-fee loan! I have zero-deductible insurance! I buy groceries on my no-interest AmEx at Harris Teeter, where somebody bags them for me! I bought a leopard-print chair for 90 days same as cash! I am super-consumer! Fear me!
Ummmm, Tanta... I'm not following you. You don't think no-fee mortgages are a good idea?
By David Cho
Washington Post Staff Writer
Monday, May 7, 2007; Page A01
Maggie Hardiman cringed as she heard the salesmen knocking the sides of desks with a baseball bat as they walked through her office. Bang! Bang!"
" 'You cut my [expletive] deal!' " she recalls one man yelling at her. " 'You can't do that.' " Bang! The bat whacked the top of her desk. As an appraiser for a company called New Century Financial, Hardiman was supposed to weed out bad mortgage applications. Most of the mortgage applications Hardiman reviewed had problems, she said.
\t
But "you didn't want to turn away a loan because all hell would break loose," she recounted in interviews. When she did, her bosses often overruled her and found another appraiser to sign off on it.
Money usually getting more and more value when you realize that you have to service old debt and new debt is offered to you only on unacceptable conditions.
When this happens people usually start working on two jobs and cut all big-ticket purchases, like cars. Wait a minute...
Outsider, you pay those fees somewhere. You really don't think that BoA is simply absorbing your transaction costs and giving you the same rate or loan terms that borrowers who pay their transaction costs get, do you?
Insofar as this is a true fee-waiver, what they're doing is saying that they'll lose some margin on the lowest-risk borrowers they have. That suggests to me that they are "buying credits" here. They'll stop doing it when they have the credit averages in the portfolio that they want.
They're also offering this fee-waiver to borrowers who don't require much in the way of "high maintenance." I suspect, in other words, that it's mostly coming out of the loan officer commission. From one point of view, there's some serious justice to that; I used to hate paying 50-60 bps commission to some loan officer for some loan to some accountant who could have done a better job self-service.
Loan officers won't care much for this.
Eventually BoA will run out of borrowers who can self-service, self-select, and possibly self-delude about the back-end costs, and then they'll go back to fees like everybody else for their bread-and-butter business.
Until that happens, credulous reporters will continue to reprint press releases that imply that BoA just discovered the formula for the free lunch.
Nothing irritates me more than to hear a loan salesman act like an altruistic hero. Getting people to buy things they can't afford is a disaster. Saying no, you cannot buy this house is OK. Go and get your financial house in order and try again in the future.
On 'middle men'... something that I am a self-described 'expert' on... before you get to harsh arbo consider this... they are really just employees the loan originators would rather not pay.
So instead of paying them a salary, furnishing an office, covering their medical & pensions... all fixed cost & well understood by both parties... then marking the product up by that amount... Instead of doing that they just throw 'a little' variable cost commish at them and tell them to buy their own fax machine, copier & leopard print chair (something like that makes me wonder if she's a hottie like Erin Brockovich).
No one complains (except the middle man) when things are slow, commish & expenses are small and the biggest perk they get (after paying their mortgage and rent to own copier payment) is a leopard print chair...
But everyone and their brother is after them with a pitch fork and torch when the model unexpectedly BOOMS & those dreaded bottom dwelling middlemen actually make good money. How dare they!
As a middle man myself I can tell you exactly where the problem is - control. Control of process, control of pricing & control of contract terms. It's always the problem when you turn over a small backwater business to middlemen who then 'explode it'.
If you go to market via middlemen you had better have a BETTER understanding of channel practices & risks (actual & anticipated) than if you run your own retail line. If you keep the channel in-house you can quickly 'audit' process & discover where cost & risk is hiding... once it is out there 'in the market'... it might as well be in deep space... you will only discover it again when it comes flaming back to earth. Too late then - its extinction time all over again.
So Ray, are you saying that not "bailing out" any borrower would be free to the taxpayers?
I wonder how long it takes for one single MSA to spend $300 million on reduced property tax rolls and sheriff's deputies to handle all the FCs. . . .
I'm not a proponent of bailouts, but I confess to being deeply unimpressed by $300 million against a $10.5 trillion book. If that's all it costs us, write the check.
"She caters to people with bad credit, low incomes and no savings."
In the old days the same service was performed by "Cousin Vito" or "Uncle Boris" except the fee structure and terms were easier to understand. And sometimes less onerous.
Tanta needs a raise. Not because we love and respect her but because of her job. The business is upside down. The traditional 30yr fixed or fully amort ARMs are harder to write, document and get approved yet they get the originator less. This needs to change. If it means responsible gatekeepers like Tanta get paid like the rock stars they are, all the better.
It's always the problem when you turn over a small backwater business to middlemen who then 'explode it'.
If you go to market via middlemen you had better have a BETTER understanding of channel practices & risks (actual & anticipated) than if you run your own retail line. If you keep the channel in-house you can quickly 'audit' process & discover where cost & risk is hiding... once it is out there 'in the market'... it might as well be in deep space... you will only discover it again when it comes flaming back to earth. Too late then - its extinction time all over again.
At larger scales and higher throughput, planning and risk management becomes much more critical. Mom and pop places don't have much at risk so mistakes are cheap. Once you are running at larger scale, a million more things can go wrong and put you under. It is better to find your "bugs" while in the business plan phase rather than after you are running because the costs to fix flaws are orders of magnitude higher after you are operational. Backwater businesses running at small scale adapt to their requirements of operation, which usually means they don't have to worry about risks that only become fatal at larger scales or in more competitive environments -- which means you can't just scale their models. Your planning for and mitigation of a given risk should be proportional to the cost of fixing it. Of course, all this lending wasn't at all prudent risk management in any logical sense. It appears to have just been a race to the bottom where the long term cost of the risk was just going to be somebody else's problem. THIS IS YOUR FAULT, FEDERAL RESERVE, DEFENDER OF THE CURRENCY, LEADER OF THE BANKS.
It is a very simple option to ask a client" do you wish for a rate of 6.25% with the lender paying your closing cost or would you prefer a rate of 6% and you pay your closing cost"
Again, nothing innovative, just advertising another option at a higher rate!
The borrower should have the oportunity to compare the rate matrix, payment matix, and an accurate disclosure of all of the cost including closing cost, escrows and prepaid items.
Mom and pop places don't have much at risk so mistakes are cheap.
Its more like plankton theory again.
From their prospective, the Mon-n-Pops have everything at risk... which is why they pay such close attention to issues that affect them directly... their individual risk.
But they rely on their MUCH larger partners to take care of everything else... once M&P hand it off they ASSUME the big sophisticated home office has their $hit together.
And if one or two of the M&Ps fail its not a big deal because like plankton there are gazillions of them... and no single 'failure' threatens the system... That is until the environment is so hostile & high risk that most or all die... Then the behemoths that rely on them also fail.
But that doesn't seem to be what happened this time.
This sub-prime thing is almost in reverse... the plankton fed the behemoth toxic product... almost like red tide. Now the behemoths are dying & washing up on the beach... the whole system is sick.
On a similar note the the "closing costs are never free," subthred. When I bought my house in '99, I had a very difficult time explaining to the broker (loan officer?- I have no idea) that I wanted to compare getting the for amount (x)at the interest rate without buying points with getting it for amoung (x + the cost of points) at the lower interest rate with points. After all, the money to buy points wasn't falling on my head from the sky, I'd have to make a smaller downpayment to purchase them. I thought this seemed like the obvious comparison that anyone thinking of financing would do. Apparently not, because explaining to her that I wanted an ammortization table comparing the two was seeming very complex.
Personally, I wish 'closing costs' were just wrapped into the rate. 'Closing costs' are just front loading, and everyone knows it. It all comes back to not really being able to gaurentee a fixed interest rate for 30-years - not being able to gaurantee being defined as not economically feasible once actual risk is reflected. There is a reason why 30-year fixed mortgages are almost exclusively found in the US. It is the reason why pre-pay penalties are more often found internationally.
'Closing costs' are just front loading, and everyone knows it.
Of course. Closing costs were the original "prepayment penalty." If there are transaction costs to a refi, and they require cash outlay, then you gotta be really deep into the money on rate to be motivated to refinance.
Once we started rolling closing costs into the loan, which eliminated the disincentive to refi for another .125, then we had to put the prepayment penalty on the back of the loan.
If you have no upfront closing costs and no prepayment penalty, you charge the borrower a $25 monthly "statement fee" and a $69 "payoff quote fee" and a $300 "release recording fee."
Mortgages have "free puts" only by a fairly approximate definition of "free."
In praise of the no-fee mortgage, what it does offer is more certainty. Obviously, BoA is getting its pound of flesh somewhere, but if I can see the pound of flesh in the mortgage rate, at least I know where it is and that it's not three pounds of flesh, or five.
With closing costs, by contrast, who knows? From my untutored but cynical perspective, the Good-Faith Estimate seems largely useless. If it doesn't bind the lenders in any real way, what prevents them from showing up at the table with $500 in extra fees? Or $1000? It's this vague shadow world that prevents me, the consumer, from figuring out what the best deal for my mortgage actually is. Certainty is much better.
"This sub-prime thing is almost in reverse... the plankton fed the behemoth toxic product... almost like red tide. Now the behemoths are dying & washing up on the beach... the whole system is sick."
Aye, that's the way I see it too although we've yet to see how sick the giants (the investment banks) in the 'other' food chain get; there's an awful lot of CDO/CDS dung in that, umm, pipeline.
"But when the couple with no savings and about $20,000 in credit-card debt shopped for a mortgage to buy their 1,200-square-foot house in Tukwila last year, they heard the same thing from lenders and in a home-buying class they attended: Forget it.
"You basically had to be Scot free, no massive credit debt, which we had, and to have money in the bank, which we didn't," said Swartz, 31. "How do people buy houses in America anymore?" "
I know I'll end up on Tanta's bad side here, but I wish that she'd posted more of the article here. Above is the way it begins. While the broker obviously screwed the borrowers, the borrowers KNEW they couldn't afford a house and felt entitled to one anyway. I mean c'mon, you aren't supposed to have 20K in CC debt and then quit your job after buying a house. It seems to me that the borrowers deserve what they get and so does the broker...
Jeff, this borrower is not just a poor mortgage credit risk, he's a dolt. The sort of problem any sane mortgage lender can see coming. Apparently all of them but one did.
So? He kept going until he found a broker willing to "help" him.
So really, who's the bigger dolt? The borrower who still doesn't understand why, with $20K on his cards, someone wants a down payment before making him a mortgage loan, or the lender behind this broker--not to mention the broker--who made him a loan?
It's not a Betty Crocker Pity-Off. It's a matter of whom you expect more from, a 31-year old fish-food truck driver with no apparent financial skills, or somebody with a mortgage lending license. All Ms. Leopard Chair had to do was say no. These borrowers were not charged with holding a gun to her head until she made them a loan.
Look, I've worked in this business. Very naive people with a bizarre sense of entitlement show up in your lobby all the time asking you to make them loans. This problem was not unheard of before last year. The traditional response from anyone wanting to stay in business was, "your loan application has been denied." The article says this woman has been in the subprime business for seventeen years.
Yes, I am more stunned about what this says about the industry than I am surprised that there is yet one more idiot borrower on the face of the earth. Underwriting and credit risk management have existed for centuries because for centuries lenders have known that idiot borrowers exist, and have developed ways to identify them. The business about the wife quitting her job is smoke--those borrowers were denied by several lenders before that ever happened. And that is as it should be. The problem here is that they managed to find a bigger idiot.
Tanta, dya see what I mean? I do think the press deserves some praise for stories like this, but you are leaving the door open for Jeffs to argue that buyers, no matter how foolish, always get what they deserve.
My hunch about old leapord chair (and her many subprime-lending compatriots) is that they could either A. Rose-color the loan and get a fat fee B. Try to explain the unexplainable and risk the buyer walking away. Hmm...option A or B... It's one thing to have a hunch though, and another more powerful thing to see it laid out in print or video.
And Jeff - I'd also ask you to consider the fear factor deployed by realtors and brokers -- 'buy now or be priced out!' when you are judging these unqualified buyers for rushing into the market. Many fools rushed in simply because they were being told it was their last chance to own a home.
It would be a different issue if the improper line of credit harmed only the lender and the borrower. But what we have is akin to a phony buyer at an auction. He bids on a property like everyone else, but in actuality does not have the ability to purchase the item, resulting in the prices for everyone being driven up. That we don't recognize this until 3 years down the road has to be the fault of someone, and the bank is a reasonable place to assign that fault.
She was probably just too exhausted after explaining how the deal might work out 47,000 times to bring up that one scenario--basing the loan on facts--that could suggest "no" as an answer.
Its an incredible story - the last few posts... On one end you have Ms Leopard print just trying to 'help out'... then at the other end of the fax machine you have AEs running around with baseball bats.
Huzzah, time to leap to my own defense, pitiful though it may be.
I'm not speaking out against regulation or disagreeing with you Tanta or Alo, more playing devil's advocate.
So here's a question for you Tanta. Ten or fifteen years ago, if buyers in a similar situation had shopped around hard enough, would they have found someone dumb enough to make them a loan?
I'm very late to this party, but I bring a perspective that comes up in the story but doesn't get explord.
I work for a non-profit that does housing counseling and runs homebuyer seminars. It is noted in the article that the couple attended a seminar, but was shot down by every lender there.
That is not where that part of the story ends, I am all but certain. If that is a legitimate housing counseling agency the couple was offered one-on-one counseling (for free)and possibly entry into programs that would ultimately subsidize their home purchase.
The situation is summed up in just five words, "we didn't want to wait."
The agency's counselor's would have given them a plan that required them to be disciplined with their money (probably discouraging a vacation on the other side of the country)and gotten them to pare down their debt and create a budget.
There also is no way they would have put them into a home that required them to make mortgage payments equal to 40% of their pretax income.
The broker can cry me a river. She's a predator who is taking advantage of people, the fact that they are begging to be taken advantage of does not make it OK.
The lenders built the system that allows the predators to catch their prey and they are reaping what they sowed, as are the bond buyers who went for the fast buck and turned a blind eye to how that buck was being created.
There is a completely viable system where everyone could have gotten what they seek, maybe not quite as big, or quite as quickly, but it is there and everyone involved in this system is getting what a little bit of sense would have told them is what they should have expected.
I wouldn't be so quick to dis BOA's new loan program. They spelled out quite clearly what their plan is and it sure doesn't sound like a scam. By eliminating closing costs they do have a little room to push the interest rate up a few basis points and I'm betting they do.
In the market they are targeting most consumers have enough sense to figure out that the fees are part of the cost of the mortgage and can decide accordingly.
I would guess that BOA has found that it isn't costing them as much to do the transaction work in the past and this is an actual example of competition in the market place. They can dump the fees and make up whatever revenue they expect to lose in volume and other business once they have these people as customers. This kind of story is just how their marketing the move.
For what its worth, I have found BOA to be one of the more honorable participants in our affordable housing programs. I know they do it because they have to, but they do take the obligation seriously and have resources they make available. There are plenty of others who don't.
If BofA is offering no closing costs in exchange for your bank account, they're making money unless you default for fun.
Theeir clearance system(developed with JPMorgan(pre chase) and IBM clears checks instantly, which gives them an extra day or 2 of float to work with, and the economies of scale means that any customer is free money: the Fleet deal basically paid for itself off of the additional float volume.
Lindsey, thanks for the great contribution. My experience with legit homebuyer counseling services is exactly like yours: when they tell somebody "you don't qualify for a loan right now," they mean it. And they will work with a borrower until he does qualify. That's why I, as a lender, am very ready to make loans to graduates of those programs. And why making a loan to a dropout is not a good idea. Let's face it, if most non-profits have a bias, it is toward graduating these folks into a home loan: that's what their mandate is. So if one of them tells me this borrower is not ready, that means something.
I have no particular beef with BoA or that loan program. I am simply trying to point out to people that the bank makes money somewhere, and it isn't always obvious that paying costs in the rate is a better idea than paying them upfront. It will depend on the loan and the costs and the context. I am reminded of folks who took high-rate "lender-paid MI" loans because the borrower-paid MI wasn't tax-deductible. Some of those folks ended up paying more, even after taxes, than MI would have cost them.
It is, certainly, refreshing to think that any lender is actually passing on some of these vaunted "efficiencies" and technological advances to the consumer in the form of lower costs for the loan. I have my concerns that it some cases--not necessarily BoA, mind you--that some of that is coming off the backs of professional appraisers. You can also not cry for them, Argentina, except that what this industry needs now, more than ever, is a set of grizzled veteran professional appraisers who are paid reasonably for their work. Otherwise it will be left to the "trainees" and the bribable and we'll never get out of the fraudulent appraisal dynamic. Too many appraisers don't get paid if the loan doesn't go through, because the deal is the borrower doesn't pay an upfront application fee that can be passed through to the appraiser; he only gets paid if the loan closes. This builds in an incentive for the appraiser to go along with anything that helps the loan close. If I were a regulator, I'd be making damned sure that BoA or anyone else is cutting checks to appraisers promptly, when services are rendered, regardless of what happens with the loan.
A more amusing place for the reporter to have gone with this is to actually get someone to pose as a customer and see just how well and how frequently the broker "explains" the loan.
"47,000 freaking times"???? Sounds credible....
I agree that changing income levels on faxed apps (to different lenders with different guidelines, no doubt) might raise an eyebrow.
I honest to Peat thought the reporter did a great job with that little understated juxtaposition of "I feel sorry for anyone who can't get into a house" and "Nobody feels sorry for me."
The thing is, if you strip out all the sorry-feeling-for and, at least for a moment, the moral questions involved in subprime lending, you have to confront the problem of the business model. It does take approximately 47,000 tries to explain neg am to most people. I have been there, you know.
What I learned from my own experience is that, ethics aside, I don't make enough off any loan product I have to explain 47,000 times. I stick to things like 30-year fixed and amortizing ARMs, that you only have to explain 47 times.
This business isn't like selling jet aircraft or helical multi-slice CT scanners, where the dollars involved make up for the sales efforts invested in a very small number of transactions.
You can focus on "buyer beware" when you're thinking about predatory lending, but really what it comes down to for me is that, as a business model, subprime cannot help degenerating into predation. You have to get paid for those 47,000 attempts to explain things. That means that you have to get 5 back-end points on the deal.
Of course, you can refuse to try to explain things 47,000 times, but then you're predatory because you aren't disclosing sufficiently.
We need, in my view, to get back to talking about the business. It's built on a model that does not allow it to win legitimately, as long as the products offered are so exotic that the actual customer base can't follow them. You can't claim to be making loans to striving consumers and then use a product that is comprehensible only to three actuaries and a lawyer.
Plus, that "leopard print chair" was just the perfect little detail. Aeron, meet your match.
Off topic ...
I've now posted the rest of that interchange at the AEI seminar when Tom Zimmerman was talking about credit enhancements: Securitization on Trial - Berts First Question.
... oops! misspoke, that was Chris Whela
Yes...about that leopard print detail.
"We didn't do anything wrong." is good too --conjures up images of those toddlers clamoring after that basketball-sized guy in the Darth Vader suit "Are you, really The Bad Guy?" ...and 47,000 times of that is enough for the guy in the suit to wish he had another side job.
But we mostly aren't toddlers...just regular sized folk with toddler-sized wages confronting Darth Vader priced housing.
That's a great post, John, and not just because you're making me a rock star.
The thing is, the argument for "de-linking" the originator of the collateral from the issuer of the security is the bedrock of securitization. That was the deal long before all the fancy private-issue MBS got underway. Nobody who invests in ABS backed by auto dealer paper or corporate notes wants the cash-flow of the security to depend on the cash-flow of the originator of the asset. Think the whole "bankruptcy remote" issue.
So at some level, asking if the current mortgage fiasco is an example of the securitization machine being "broken" is kind of funny. It's doing what securitization is supposed to do: offer the end-investor no risk and no obligation to understand the business of whatever the asset is. Hence, "I don't want subprime, I stick to CDOs." Nobody questions an investor in CDOs who does not understand how a pig becomes a sausage. That's the securitization market.
Tanta, thanks for the kind words. I've taken the liberty of quoting the analysis part under my post.
Look, let's get straight here.
I'm losing patience.
Is it, or is it not in the LENDER's best interest for the loan to be repaid?
Can the answer be anything except, "Yes"?
In that case, what has clearly happened is that feculent, putrid middle-persons have entered the game (at all levels) who take fees and don't take risk.
It is the middle-persons who are the problem, not the hapless borrower and not the hapless lender, who, as it turns out has been pushed back to the buyer of mortgage-backed bonds.
Now, do I shed a tear for the bond buyers? No. Flat out, no. Are they pension funds, etc. Probably. Will I personally get hurt? Probably. But do I shed a tear, No.
Do I shed a tear for the poor zlubs for took out the loans? Yes, I do. They were the victims of fraud and dishonesty pure and simple.
Arbogst: I think it is different this time. The most important thing for the lender is to make the loan and report the neg-arm as profits.
This way the stock moves up and the lenders CEO can sell many shares at profit.
Also because of this profit the lender can get a large loan and do stock buy-back (to make sure the CEO can sell)
Can you say: CFC ?
It is the middle-persons who are the problem, not the hapless borrower and not the hapless lender
Just remember a couple of things, here. First, brokering mortgages is not a secondary market transaction. The broker takes the application, collects the documents, [does the lying when the borrower fails to do so], etc., and then turns the file over to the lender. The lender underwrites this file and then closes the loan, with its own money. Brokers don't got no money. Most of them have enough capital to buy a fax machine.
Second, in this article, we have a real estate lawyer who got handed the file, and who noticed right off the bat that there were some problems with the documents.
Now, I'm not here to insult our lawyer friends, but will you guys tell me that you all specialize in reading Good Faith Estimates? I thought not. How do you suppose the lawyer caught the problem and the lender didn't?
Of course lenders want to be paid back. Some of them want to be paid back at some fairly steep rates of interest. Some of them want to keep making new loans even in economic contexts when making new loans at the rate you used to doesn't make economic sense. This involves a willingness to believe that the economic context really does make sense, if you squint hard at it and carry your three again.
And the fact is that most lenders are still getting paid back. What else people could be doing with their money besides paying mortgage interest, and what else rent-seekers could be investing in besides mortgages, is another set of questions. We also need to keep the overcapacity in mind, as well as the liquidity problem. There's a nasty lender inventory problem to go along with that housing inventory problem.
A little OT, but Bank of America is eliminating closing costs???? Now THAT'S innovation! I wonder if it will catch on.
Expired
Hey! I got a no-fee loan! I have zero-deductible insurance! I buy groceries on my no-interest AmEx at Harris Teeter, where somebody bags them for me! I bought a leopard-print chair for 90 days same as cash! I am super-consumer! Fear me!
Hey! I got a no-fee loan! I have zero-deductible insurance! I buy groceries on my no-interest AmEx at Harris Teeter, where somebody bags them for me! I bought a leopard-print chair for 90 days same as cash! I am super-consumer! Fear me!
Ummmm, Tanta... I'm not following you. You don't think no-fee mortgages are a good idea?
Money has no value anymore.
or at least at some level way above mine.
How do you factor in this kind of pressure by reading through the data?
Pressure at Mortgage Firm Led To Mass Approval of Bad Loans
By David Cho
Washington Post Staff Writer
Monday, May 7, 2007; Page A01
Maggie Hardiman cringed as she heard the salesmen knocking the sides of desks with a baseball bat as they walked through her office. Bang! Bang!"
" 'You cut my [expletive] deal!' " she recalls one man yelling at her. " 'You can't do that.' " Bang! The bat whacked the top of her desk. As an appraiser for a company called New Century Financial, Hardiman was supposed to weed out bad mortgage applications. Most of the mortgage applications Hardiman reviewed had problems, she said.
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But "you didn't want to turn away a loan because all hell would break loose," she recounted in interviews. When she did, her bosses often overruled her and found another appraiser to sign off on it.
Pressure at Mortgage Firm Led To Mass Approval of Bad Loans - washingtonpost.com
Money usually getting more and more value when you realize that you have to service old debt and new debt is offered to you only on unacceptable conditions.
When this happens people usually start working on two jobs and cut all big-ticket purchases, like cars. Wait a minute...
Outsider, you pay those fees somewhere. You really don't think that BoA is simply absorbing your transaction costs and giving you the same rate or loan terms that borrowers who pay their transaction costs get, do you?
Insofar as this is a true fee-waiver, what they're doing is saying that they'll lose some margin on the lowest-risk borrowers they have. That suggests to me that they are "buying credits" here. They'll stop doing it when they have the credit averages in the portfolio that they want.
They're also offering this fee-waiver to borrowers who don't require much in the way of "high maintenance." I suspect, in other words, that it's mostly coming out of the loan officer commission. From one point of view, there's some serious justice to that; I used to hate paying 50-60 bps commission to some loan officer for some loan to some accountant who could have done a better job self-service.
Loan officers won't care much for this.
Eventually BoA will run out of borrowers who can self-service, self-select, and possibly self-delude about the back-end costs, and then they'll go back to fees like everybody else for their bread-and-butter business.
Until that happens, credulous reporters will continue to reprint press releases that imply that BoA just discovered the formula for the free lunch.
Nothing irritates me more than to hear a loan salesman act like an altruistic hero. Getting people to buy things they can't afford is a disaster. Saying no, you cannot buy this house is OK. Go and get your financial house in order and try again in the future.
On 'middle men'... something that I am a self-described 'expert' on... before you get to harsh arbo consider this... they are really just employees the loan originators would rather not pay.
So instead of paying them a salary, furnishing an office, covering their medical & pensions... all fixed cost & well understood by both parties... then marking the product up by that amount... Instead of doing that they just throw 'a little' variable cost commish at them and tell them to buy their own fax machine, copier & leopard print chair (something like that makes me wonder if she's a hottie like Erin Brockovich).
No one complains (except the middle man) when things are slow, commish & expenses are small and the biggest perk they get (after paying their mortgage and rent to own copier payment) is a leopard print chair...
But everyone and their brother is after them with a pitch fork and torch when the model unexpectedly BOOMS & those dreaded bottom dwelling middlemen actually make good money. How dare they!
As a middle man myself I can tell you exactly where the problem is - control. Control of process, control of pricing & control of contract terms. It's always the problem when you turn over a small backwater business to middlemen who then 'explode it'.
If you go to market via middlemen you had better have a BETTER understanding of channel practices & risks (actual & anticipated) than if you run your own retail line. If you keep the channel in-house you can quickly 'audit' process & discover where cost & risk is hiding... once it is out there 'in the market'... it might as well be in deep space... you will only discover it again when it comes flaming back to earth. Too late then - its extinction time all over again.
Chuck Schumer and the Congressional Banking Committee will bail out both parties with $300 million.
Way to stick it to the taxpayers.
So Ray, are you saying that not "bailing out" any borrower would be free to the taxpayers?
I wonder how long it takes for one single MSA to spend $300 million on reduced property tax rolls and sheriff's deputies to handle all the FCs. . . .
I'm not a proponent of bailouts, but I confess to being deeply unimpressed by $300 million against a $10.5 trillion book. If that's all it costs us, write the check.
"She caters to people with bad credit, low incomes and no savings."
In the old days the same service was performed by "Cousin Vito" or "Uncle Boris" except the fee structure and terms were easier to understand. And sometimes less onerous.
Tanta needs a raise. Not because we love and respect her but because of her job. The business is upside down. The traditional 30yr fixed or fully amort ARMs are harder to write, document and get approved yet they get the originator less. This needs to change. If it means responsible gatekeepers like Tanta get paid like the rock stars they are, all the better.
It's always the problem when you turn over a small backwater business to middlemen who then 'explode it'.
If you go to market via middlemen you had better have a BETTER understanding of channel practices & risks (actual & anticipated) than if you run your own retail line. If you keep the channel in-house you can quickly 'audit' process & discover where cost & risk is hiding... once it is out there 'in the market'... it might as well be in deep space... you will only discover it again when it comes flaming back to earth. Too late then - its extinction time all over again.
At larger scales and higher throughput, planning and risk management becomes much more critical. Mom and pop places don't have much at risk so mistakes are cheap. Once you are running at larger scale, a million more things can go wrong and put you under. It is better to find your "bugs" while in the business plan phase rather than after you are running because the costs to fix flaws are orders of magnitude higher after you are operational. Backwater businesses running at small scale adapt to their requirements of operation, which usually means they don't have to worry about risks that only become fatal at larger scales or in more competitive environments -- which means you can't just scale their models. Your planning for and mitigation of a given risk should be proportional to the cost of fixing it. Of course, all this lending wasn't at all prudent risk management in any logical sense. It appears to have just been a race to the bottom where the long term cost of the risk was just going to be somebody else's problem. THIS IS YOUR FAULT, FEDERAL RESERVE, DEFENDER OF THE CURRENCY, LEADER OF THE BANKS.
I.E. WITH GREAT POWER COMES GREAT RESPONSIBILITY (THAT MEANS ACCOUNTABILITY SINCE THE WORD RESPONSIBILITY SEEMS TO BE USED WITH IMPUNITY THESE DAYS).
Sorry for the caps.
There is nothing innovative about this
"A little OT, but Bank of America is eliminating closing costs???? Now THAT'S innovation! I wonder if it will catch on.
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Outsider | 05.07.07 - 9:50 am | #
It is a very simple option to ask a client" do you wish for a rate of 6.25% with the lender paying your closing cost or would you prefer a rate of 6% and you pay your closing cost"
Again, nothing innovative, just advertising another option at a higher rate!
The borrower should have the oportunity to compare the rate matrix, payment matix, and an accurate disclosure of all of the cost including closing cost, escrows and prepaid items.
Mom and pop places don't have much at risk so mistakes are cheap.
Its more like plankton theory again.
From their prospective, the Mon-n-Pops have everything at risk... which is why they pay such close attention to issues that affect them directly... their individual risk.
But they rely on their MUCH larger partners to take care of everything else... once M&P hand it off they ASSUME the big sophisticated home office has their $hit together.
And if one or two of the M&Ps fail its not a big deal because like plankton there are gazillions of them... and no single 'failure' threatens the system... That is until the environment is so hostile & high risk that most or all die... Then the behemoths that rely on them also fail.
But that doesn't seem to be what happened this time.
This sub-prime thing is almost in reverse... the plankton fed the behemoth toxic product... almost like red tide. Now the behemoths are dying & washing up on the beach... the whole system is sick.
On a similar note the the "closing costs are never free," subthred. When I bought my house in '99, I had a very difficult time explaining to the broker (loan officer?- I have no idea) that I wanted to compare getting the for amount (x)at the interest rate without buying points with getting it for amoung (x + the cost of points) at the lower interest rate with points. After all, the money to buy points wasn't falling on my head from the sky, I'd have to make a smaller downpayment to purchase them. I thought this seemed like the obvious comparison that anyone thinking of financing would do. Apparently not, because explaining to her that I wanted an ammortization table comparing the two was seeming very complex.
Personally, I wish 'closing costs' were just wrapped into the rate. 'Closing costs' are just front loading, and everyone knows it. It all comes back to not really being able to gaurentee a fixed interest rate for 30-years - not being able to gaurantee being defined as not economically feasible once actual risk is reflected. There is a reason why 30-year fixed mortgages are almost exclusively found in the US. It is the reason why pre-pay penalties are more often found internationally.
'Closing costs' are just front loading, and everyone knows it.
Of course. Closing costs were the original "prepayment penalty." If there are transaction costs to a refi, and they require cash outlay, then you gotta be really deep into the money on rate to be motivated to refinance.
Once we started rolling closing costs into the loan, which eliminated the disincentive to refi for another .125, then we had to put the prepayment penalty on the back of the loan.
If you have no upfront closing costs and no prepayment penalty, you charge the borrower a $25 monthly "statement fee" and a $69 "payoff quote fee" and a $300 "release recording fee."
Mortgages have "free puts" only by a fairly approximate definition of "free."
In praise of the no-fee mortgage, what it does offer is more certainty. Obviously, BoA is getting its pound of flesh somewhere, but if I can see the pound of flesh in the mortgage rate, at least I know where it is and that it's not three pounds of flesh, or five.
With closing costs, by contrast, who knows? From my untutored but cynical perspective, the Good-Faith Estimate seems largely useless. If it doesn't bind the lenders in any real way, what prevents them from showing up at the table with $500 in extra fees? Or $1000? It's this vague shadow world that prevents me, the consumer, from figuring out what the best deal for my mortgage actually is. Certainty is much better.
"This sub-prime thing is almost in reverse... the plankton fed the behemoth toxic product... almost like red tide. Now the behemoths are dying & washing up on the beach... the whole system is sick."
Aye, that's the way I see it too although we've yet to see how sick the giants (the investment banks) in the 'other' food chain get; there's an awful lot of CDO/CDS dung in that, umm, pipeline.
"But when the couple with no savings and about $20,000 in credit-card debt shopped for a mortgage to buy their 1,200-square-foot house in Tukwila last year, they heard the same thing from lenders and in a home-buying class they attended: Forget it.
"You basically had to be Scot free, no massive credit debt, which we had, and to have money in the bank, which we didn't," said Swartz, 31. "How do people buy houses in America anymore?" "
I know I'll end up on Tanta's bad side here, but I wish that she'd posted more of the article here. Above is the way it begins. While the broker obviously screwed the borrowers, the borrowers KNEW they couldn't afford a house and felt entitled to one anyway. I mean c'mon, you aren't supposed to have 20K in CC debt and then quit your job after buying a house. It seems to me that the borrowers deserve what they get and so does the broker...
Jeff, this borrower is not just a poor mortgage credit risk, he's a dolt. The sort of problem any sane mortgage lender can see coming. Apparently all of them but one did.
So? He kept going until he found a broker willing to "help" him.
So really, who's the bigger dolt? The borrower who still doesn't understand why, with $20K on his cards, someone wants a down payment before making him a mortgage loan, or the lender behind this broker--not to mention the broker--who made him a loan?
It's not a Betty Crocker Pity-Off. It's a matter of whom you expect more from, a 31-year old fish-food truck driver with no apparent financial skills, or somebody with a mortgage lending license. All Ms. Leopard Chair had to do was say no. These borrowers were not charged with holding a gun to her head until she made them a loan.
Look, I've worked in this business. Very naive people with a bizarre sense of entitlement show up in your lobby all the time asking you to make them loans. This problem was not unheard of before last year. The traditional response from anyone wanting to stay in business was, "your loan application has been denied." The article says this woman has been in the subprime business for seventeen years.
Yes, I am more stunned about what this says about the industry than I am surprised that there is yet one more idiot borrower on the face of the earth. Underwriting and credit risk management have existed for centuries because for centuries lenders have known that idiot borrowers exist, and have developed ways to identify them. The business about the wife quitting her job is smoke--those borrowers were denied by several lenders before that ever happened. And that is as it should be. The problem here is that they managed to find a bigger idiot.
Tanta, dya see what I mean? I do think the press deserves some praise for stories like this, but you are leaving the door open for Jeffs to argue that buyers, no matter how foolish, always get what they deserve.
My hunch about old leapord chair (and her many subprime-lending compatriots) is that they could either A. Rose-color the loan and get a fat fee B. Try to explain the unexplainable and risk the buyer walking away. Hmm...option A or B... It's one thing to have a hunch though, and another more powerful thing to see it laid out in print or video.
And Jeff - I'd also ask you to consider the fear factor deployed by realtors and brokers -- 'buy now or be priced out!' when you are judging these unqualified buyers for rushing into the market. Many fools rushed in simply because they were being told it was their last chance to own a home.
It would be a different issue if the improper line of credit harmed only the lender and the borrower. But what we have is akin to a phony buyer at an auction. He bids on a property like everyone else, but in actuality does not have the ability to purchase the item, resulting in the prices for everyone being driven up. That we don't recognize this until 3 years down the road has to be the fault of someone, and the bank is a reasonable place to assign that fault.
All Ms. Leopard Chair had to do was say no.
She is probably not very good at that...
She is probably not very good at that...
She was probably just too exhausted after explaining how the deal might work out 47,000 times to bring up that one scenario--basing the loan on facts--that could suggest "no" as an answer.
LOL.
Its an incredible story - the last few posts... On one end you have Ms Leopard print just trying to 'help out'... then at the other end of the fax machine you have AEs running around with baseball bats.
And we're all SURPRISED there are defaults...
Keep in mind that Seattle (and other parts of the northwest) are in a totally inexplicable not-yet-getting-crushed place right now.
They think they're totally immune from what is sweeping up the rest of the coast... poor fools.
Huzzah, time to leap to my own defense, pitiful though it may be.
I'm not speaking out against regulation or disagreeing with you Tanta or Alo, more playing devil's advocate.
So here's a question for you Tanta. Ten or fifteen years ago, if buyers in a similar situation had shopped around hard enough, would they have found someone dumb enough to make them a loan?
I'm very late to this party, but I bring a perspective that comes up in the story but doesn't get explord.
I work for a non-profit that does housing counseling and runs homebuyer seminars. It is noted in the article that the couple attended a seminar, but was shot down by every lender there.
That is not where that part of the story ends, I am all but certain. If that is a legitimate housing counseling agency the couple was offered one-on-one counseling (for free)and possibly entry into programs that would ultimately subsidize their home purchase.
The situation is summed up in just five words, "we didn't want to wait."
The agency's counselor's would have given them a plan that required them to be disciplined with their money (probably discouraging a vacation on the other side of the country)and gotten them to pare down their debt and create a budget.
There also is no way they would have put them into a home that required them to make mortgage payments equal to 40% of their pretax income.
The broker can cry me a river. She's a predator who is taking advantage of people, the fact that they are begging to be taken advantage of does not make it OK.
The lenders built the system that allows the predators to catch their prey and they are reaping what they sowed, as are the bond buyers who went for the fast buck and turned a blind eye to how that buck was being created.
There is a completely viable system where everyone could have gotten what they seek, maybe not quite as big, or quite as quickly, but it is there and everyone involved in this system is getting what a little bit of sense would have told them is what they should have expected.
Tanta,
I wouldn't be so quick to dis BOA's new loan program. They spelled out quite clearly what their plan is and it sure doesn't sound like a scam. By eliminating closing costs they do have a little room to push the interest rate up a few basis points and I'm betting they do.
In the market they are targeting most consumers have enough sense to figure out that the fees are part of the cost of the mortgage and can decide accordingly.
I would guess that BOA has found that it isn't costing them as much to do the transaction work in the past and this is an actual example of competition in the market place. They can dump the fees and make up whatever revenue they expect to lose in volume and other business once they have these people as customers. This kind of story is just how their marketing the move.
For what its worth, I have found BOA to be one of the more honorable participants in our affordable housing programs. I know they do it because they have to, but they do take the obligation seriously and have resources they make available. There are plenty of others who don't.
If BofA is offering no closing costs in exchange for your bank account, they're making money unless you default for fun.
Theeir clearance system(developed with JPMorgan(pre chase) and IBM clears checks instantly, which gives them an extra day or 2 of float to work with, and the economies of scale means that any customer is free money: the Fleet deal basically paid for itself off of the additional float volume.
Lindsey, thanks for the great contribution. My experience with legit homebuyer counseling services is exactly like yours: when they tell somebody "you don't qualify for a loan right now," they mean it. And they will work with a borrower until he does qualify. That's why I, as a lender, am very ready to make loans to graduates of those programs. And why making a loan to a dropout is not a good idea. Let's face it, if most non-profits have a bias, it is toward graduating these folks into a home loan: that's what their mandate is. So if one of them tells me this borrower is not ready, that means something.
I have no particular beef with BoA or that loan program. I am simply trying to point out to people that the bank makes money somewhere, and it isn't always obvious that paying costs in the rate is a better idea than paying them upfront. It will depend on the loan and the costs and the context. I am reminded of folks who took high-rate "lender-paid MI" loans because the borrower-paid MI wasn't tax-deductible. Some of those folks ended up paying more, even after taxes, than MI would have cost them.
It is, certainly, refreshing to think that any lender is actually passing on some of these vaunted "efficiencies" and technological advances to the consumer in the form of lower costs for the loan. I have my concerns that it some cases--not necessarily BoA, mind you--that some of that is coming off the backs of professional appraisers. You can also not cry for them, Argentina, except that what this industry needs now, more than ever, is a set of grizzled veteran professional appraisers who are paid reasonably for their work. Otherwise it will be left to the "trainees" and the bribable and we'll never get out of the fraudulent appraisal dynamic. Too many appraisers don't get paid if the loan doesn't go through, because the deal is the borrower doesn't pay an upfront application fee that can be passed through to the appraiser; he only gets paid if the loan closes. This builds in an incentive for the appraiser to go along with anything that helps the loan close. If I were a regulator, I'd be making damned sure that BoA or anyone else is cutting checks to appraisers promptly, when services are rendered, regardless of what happens with the loan.