This supports the idea that the driving force behind these loans was the capture of fees - not the overall, long-term value potential of the loan. Thus, we are screwed.
While I agree more study would be nice, I think it is safe (and prudent) to assume the worst regarding brokers in the current environment.
I sat in a broker's office not too long ago before I decided there was no way in hell I was buying in this market. When the broker told me my credit score, the guy in the next cubicle popped up and asked if I was interested in investment properties.
At one point during the conversation he was mentioning how our market didn't have many investors. Later in the conversation he slipped and bragged about how many clients he has from California. We are not in California.
The profession is a joke.
I am going directly to the lenders and shopping around myself.
I get accused from time to time of claiming that retail loan officers can do no wrong, which I confess cracks me up to the extent I often fall off my desk chair. I have spent more miserable hours of my life in often white-hot contention with retail loan officers than I or anyone else would care to think about.
That is the point. They do, mostly, have Tantas and MaxedOutMamas and Compliance Officers and Quality Control Managers and other beat-cops of the business breathing down their little necks in a depository environment. It's a long war, and the good guys don't win every battle. So retail lending surely ain't perfect, especially in those outfits where the cops have their hands tied by too-powerful forces on the sales side. Nonetheless, you have at least a fighting chance that someone in the bank itself is trying to rein in the sales force when necessary.
Wholesale lenders just don't ride herd on brokers. They could, but they tend to think that's the kind of hassle you're supposed to be saving yourself by being a wholesaler. There's this thing about treating them as "independent clients" instead of your own employees, whom you can escort to the woodshed when they need it.
Frankly, the world is littered with a lot of ex-retail loan officers who went out to establish brokerages precisely to get away from people like me.
The situation is analogous to the supermarket business. Large markets in middle class areas charge lower prices for staples then smaller independent markets in gettos where large markets wouldn't go.
Studies like this put sense back into the equation and take out the marketing and self promotion nonsense. All future lending should be done retail banks who are forced to keep a portion of the loan so they have a stake in making sure it doesn't go bad. Everyone else should be out of the loan business. PERIOD.
Gee, those nasty, untrustworthy mortgage brokers...again! I wonder where they got the idea that they could make 3% - 4% in overages on subprime loans and still charge points upfront??? It couldn't be from the emails & flyers the lenders and AEs kept bombarded them with could it? Nah. ("MAKE 4 POINTS YSP ON OUR OPTION ARMS" or WAMU LIMITS YSP TO ONLY 3 POINTS)
Tanta, there's no question that the subprime business took on the philosophy that it was okay to kick people while they were down, by burdening them with extra-high rates and fees, but the lenders (and presumably the securitizers on Wall St) encouraged this behavior. Brokers were just better at atapting than the 2-faced lenders offering these products.
I never had the stomach for the subprime business, but you know, FHA is the same way. There's some inherent belief that by offering fha loans, the lenders and originators should get double the compensation of prime business. Maybe you should point out the SRP business with FHA, now that FHA is being marketed as the saviour of the purchase market. -- Now, how do you blame brokers for ripping off the public when lenders are the ones masking compensation as an SRP which historically was not disclosed to the consumer (nor to many LOs) as compensation?
Does this tie into why WaMu is only doing retail mortgages now and not wholesale? I was trying to figure out yesterday what the advantage was in doing that.
Alan, I seriously doubt Tanta is "surprised." My educated guess is that she just likes to see actual data to support what she thinks is true . . .
Large markets in middle class areas charge lower prices for staples then smaller independent markets in gettos where large markets wouldn't go.
Well, but my point is that even if we used to be like grocery stores, we aren't any longer. Brick & mortar just doesn't matter as much as it used to. It's hard to buy groceries on the internet, or out of a tiny cheap storefront whose equipment needs are phone, fax, PC, and a couple of chairs. But you can "buy" mortgages that way. You don't have to drive out to the suburbs to find the cheaper ones any more.
So something's really wrong if the pricing patters of the "grocery" model persist in the mortgage model.
Tanta - A question about "What I find most refreshing about the approach is that it mostly dismisses the issue of "better disclosures" as a regulatory side-track. That's a long-time hobbyhorse of mine, too."
It has certainly been clear that you disagree with transparency being a key to fixing the subprime problem. But the only reason I've seen you give in the past is that the horse has already left the barn. Perhaps I've missed it, but I'd be interested in why you don't like transparency as part of the solution to prevent future issues (say 10 years down the road). I would certainly agree is will not have a major effect on the discontinuity between what a broker charges and what a lender charges. But I would suggest that it should have at least a modest effect on people getting into mortgages that they can't afford after the intro period is over.
Another example how the financially disadvantaged subsidize the the advantaged (like Alan's example of supermarkets) has to be the credit card industry. 'Dead beats' like myself pay off our balances and never pay interest or extra fees. Others pay through the nose. If it wasn't for those others, I'm sure the CC companies would have to find a way to make me pay.
The results are no doubt stunning as well as surprising to a certain reliably-stunned-and-surprised contingent of the regulatory and securitization enclaves.
Ah, classic Tanta. Didn't even need to see the length to know the author.
There's some inherent belief that by offering fha loans, the lenders and originators should get double the compensation of prime business. Maybe you should point out the SRP business with FHA, now that FHA is being marketed as the saviour of the purchase market.
So typical of the broker response: "They made us do it and . . . and . . . FHA! Look over there!"
FHA was actually on top of the "low balance loan pricing problem" waaaay before anyone else. FHA knows that its average loan balance, throughout its history until just recently, was substantially lower than conventional loans, and its borrowers had weaker credit profiles and less experience as homeowners, making them expensive to service. For that reason, FHA loans have always paid a higher servicing fee than conforming prime loans: when prime servicing fees were 25 bps for fixed rate and 37.5 bps for ARMs, FHA paid 44 bps.
That increased the servicing value of FHA loans: they were lower-balance and more work, but the fee percentage was increased accordingly, so servicers became interested in servicing them.
"SRP" or Servicing Released Premium is just a calculation of the present value of servicing income on a loan, less a profit margin for the party buying the servicing rights. In correspondent transactions, it is paid to the originator of the loan as compensation for release of the servicing rights. (It isn't paid to brokers since they don't close the loans and do not therefore own the servicing rights; the wholesaler does.) In some correspondent transactions, an "all in" price is paid for the loan that reflects the note asset as well as the servicing rights. In some cases, a base price for the note asset has a separate SRP added, to get the total price paid fo the loan.
Brokers, who for the most part fail to understand what SRP is, love to keep bringing it up as evidence that their "yield spread premiums" aren't the only kind of price-gouging. But of course, the prices they use to get sufficient overage to pay YSP have a servicing component already in them; it simply isn't visible to the broker as an SRP because the broker isn't compensated specifically for servicing rights.
"Drdebt," I don't know where you get your "dr" part.
Dear Tanta, are there any requirements on what credit rating mortgage insurer must have in order to be eligible for GSE business?
7:19AM Four U.S. mortgage insurers downgraded to reflect greater-than-expected housing slump at S&P : S&P lowered its counterparty credit rating on MGIC Investment (MTG) to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on the mortgage insurance subsidiaries to 'A' from 'AA-'. The ratings were removed from CreditWatch. The outlook is negative. S&P also said that it lowered its counterparty credit rating on Old Republic International (ORI) to 'A' from 'A+' and its counterparty credit and financial strength ratings on ORI's core subsidiaries to 'AA-' from 'AA'. The ratings were removed from CreditWatch. The outlook is negative. At the same time, S&P lowered its counterparty credit rating on PMI Group (PMI) to 'BBB+' from 'A' and its counterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. and Europe to 'A+' from 'AA'. The ratings were removed from CreditWatch. The outlook is negative. In addition, S&P lowered its counterparty credit rating on Radian Group (RDN) to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries to 'A' from 'AA-'. These ratings remain on CreditWatch... "The downgrades reflect weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance."
It has certainly been clear that you disagree with transparency being a key to fixing the subprime problem.
I find your formulation absurd. I am not part of some "pro-opacity" lobby.
I am of the opinion that:
Lack of transparency isn't the only or even necessarily the main problem; as long as originator incentives are misaligned with consumers, there will be bad outcomes that disclosures can't keep up with.
Disclosures only make you "accountable" to consumers--who are not experts, not always able to comparison shop, and not an organized bloc. I am more interested in what you might think of as a different kind of "disclosure," namely, detailed reports to regulatory bodies of what your business has been up to. These regulators should have the expertise and sophistication to make sense of this information, and the power to punish. Focussing on consumer disclosures lands us squarely in "caveat emptor" and downplays or even rejects, in some quarters, regulatory transparency.
I actually do not, in theory, object to paying loan originators--those point-of-contact-with-borrower people--a reasonable salary/incentive to explain things, work out scenarios, and walk through the loan process and the choices in depth. In other words, I have not given in to the mindset that says a loan originator has done his duty by finding a wholesaler and a rate for you, and the rest of the "guidance" should be a stack of paperwork that you either have to work your way through yourself or hire an attorney to read for you. The urge to write regulatory disclosures comes from the belief--or recognition--that loan originators aren't doing their work properly, and consumers have to be protected from them. Well, hell with that. If they aren't doing their work properly, they need to lose their licenses.
The "10 years down the road" thing is exactly the problem. New mortgage products develop that escape the ability of the old standardized disclosures to keep up. In that sense, new disclosure regulation has to keep getting re-issued periodically to bring the regs back into line with reality. That is as it should be, and it's clearly a problem when it doesn't happen. But I frankly think of this as just "routine maintenance" of disclosure regulation, not some "special response" to deep-seated problems in the whole mortgage business model. It's like someone replacing an old furnace and claiming that as "home improvement."
So retail lending surely ain't perfect, especially in those outfits where the cops have their hands tied by too-powerful forces on the sales side. Nonetheless, you have at least a fighting chance that someone in the bank itself is trying to rein in the sales force when necessary.
Yes, and the despised Tantas are backed up by examiners who introduce external reinforcement. It's an opportunity for everyone to at least think twice. Some of these sales people really need to be locked in the vault and forced to think for a year, so the system is quite imperfect.
My belief is that the relatively uncircumscribed nature of wholesale brokering was considered an asset rather than a liability by some of those vault-escapee types. However now the utility of Tanta-irritation is becoming self-evident. It's notable that real due diligence went overboard at the same time.
While our system of banking regulation isn't perfect, it does overall tend to enforce a long time horizon where monetary incentives would favor a short time horizon. You can make a profit for 1-4 years doing things that will put you out of business shortly thereafter.
Brokerages can pop up overnight, like mushrooms, and tend to collapse just as quickly when booms end. However the loans persist.
I am going to read this report quite carefully, and I am very thankful to Tanta for posting about it. The basic finding does make sense to me.
Tanta, if you read this, I have wondered in the past if the real effect of all of these "innovative affordability" loans isn't to induce constant refinancing. As you have covered before, the jumbo market refinances quickly anyway on rate differentials. You have a high incentive to get the lowest rate because you will probably get them back in two to three years. It may well be that the wholesale brokerage market operates just to move a lot of mortgages.
The real question is whether the wholesale brokerage environment (as it now exists) has any incentive to sell old-fashioned conforming to prime or near-prime, or FHA loans. The work level on those is more and the returns are less.
I know some brokers who are in the business for life and thrive on return and referred customers. They seem to do an excellent job. But especially in the recent surge, the newbies and the mushroom types seemed to explode. Some of them were truly so dumb that I think they genuinely believed that the lowest payment now was the best mortgage for the customer.
I know it would be difficult to include this info but the study does note:
First, our data does not have any
information on upfront fees paid by borrowers and, as a result, the cost of the loans is measured
exclusively by interest rate.
I'd be a lot more receptive to a recommendation eliminating YSP if I knew that it was not a factor in lowering upfront cost.
Tanta, bravo to you for another excellent post. You really have a knack for getting to the most important points.
I think the model for the mortgage origination industry can be found in the 34 act "know your customer" rule. I agree wholeheartedly that the idea of increasing 'disclosure' just turns the whole mess into a game where no one wins. If you are going to make mortgages so complicated that you need advanced degrees to understand them, then the responsibility has to lie with the originator.
and mama, i think you are exactly right that the originator movement was a full attack to force refinancings and fees forevermore. Prepayment penalties for paying off your mortgage should be illegal. imho
Tanta, if you read this, I have wondered in the past if the real effect of all of these "innovative affordability" loans isn't to induce constant refinancing.
I think so, and it worked in a couple of ways. First, new products were originated that basically required refinance--the famous "exploding ARMs." Second, new products were developed to create artificial "refinance opportunities." In periods in which long rates are fairly stable, a borrower with a decent rate loan may have no particular reason to refinance for years (if they don't want or need cash out, or if the HELOC lenders are there to provide the cash). So things like the Option ARM pop up that "look like" a lower rate to the borrower, when of course it really isn't.
It is true that nearly 100% of broker contracts have "premium recapture" provisions in them that require the broker to pay back premium paid for the loan if it refinances early. These "anti-churning" provisions have failed largely because:
The timeframes have shrunk; I routinely see contracts with only 90 days as the recapture period.
They just aren't enforced often enough. Wholesalers decide it's not cost-effective to try to collect $1000 from some deadbeat broker for an individual churned loan. This is where the "brokered transaction premium" comes in: the wholesalers just worsen the price up-front on the brokered loans to make up for anticipated refi churning, rather than trying to collect back premium on individual loans.
"broker transaction risk" can now be qualified as wholesale bankers are beginning to look to the broker in a litigious effort to recoup costs associated with investor repurchase requests or other impaired loans.
Prepayment penalties for paying off your mortgage should be illegal. imho
I will put in a not-very-strong good word for prepayment penalties, as long as they come with a rate discount. I mean, some people are long-time homeowners with no intention of moving, do not wish to raise cash by hocking the house, and have pretty stable employment and family situations. Why shouldn't they be offered a somewhat lower rate in exchange for a prepayment penalty?
Now, we know that isn't how they're being used: they are being used with premium rate loans (to assure that someone "earns back" the premium paid). I have no trouble with that being illegal.
--Many people who intended to defraud, lie, get a "tricky" loan, would seek out the brokers (my sister in law being one). People didn't think the institutions would let them get away with it. The phrase: "Oh, I have a guy who can do that" could be heard whenever speculators speculated. The added cost was justified by both broker and borrower, (assuming they were aware, and more were aware than will admit), was simply the added cost of having quick money no questions asked. Loan sharks are always more expensive.
--On a macro level, we know that we pulled future earnings forward and this was just another "stimulus package" the market created to put more "later" money in the hands of "now". It's no different than the checks we are getting in the mail from Bush. The idea that once this credit crisis is over when can just get back on the spending wagon is ludicris.
Wholesalers decide it's not cost-effective to try to collect $1000 from some deadbeat broker for an individual churned loan
It's not that anyone has decided it wasn't cost effective. If a relationship wasn't worth keeping the broker either pay or be deactivated. If it's a big producer, you'd have to fight AEs, ASMs, RVPs etc to collect (note that a lot of big producers were serial churners). I don't think that wholesale lenders have developed a mechanism to properly assess the value of broker relationships.
The situation is analogous to the supermarket business. Large markets in middle class areas charge lower prices for staples then smaller independent markets in gettos where large markets wouldn't go.
When a 'large market' does go into a poor area they charge less for the staples then their 'large market' counter parts in the affluent areas.
Of course people who live in the middle of Montana have the same problem as the inner city folks, but its not 'The Man' taking advantage of them, it's economic forces at work, amirite?
*Despite their integral involvement in mortgage transactions, there is scant regulation of mortgage
brokers compared to traditional lenders
*Brokers are generally regulated at the state level, but such regulation is primarily limited to licensure
rather than substantive lending standards
*brokers often market themselves as mentors or advisors to potential borrowers (but have no fiduciary responsibility)
There should be a higher barrier to entry into the market to become a mortgage broker and the broker should a fiduciary responsibility to the borrower (especially since they often market themselves as advisors or consultants).
Racer X, you're right, and I was using "cost-effective" there (in my own mind, at least) in the wider sense of "cost to the relationship," which is the usual bullshit du jour in my experience. That's exactly how it would go down: we can't hit up Favorite Broker X for recapture, because he might take his business elsewhere! And then some other bank would get all the churned loans!
I should say, though, that my experience working for a wholesaler was exclusively prime or near-prime (FHA) and conforming balance; we didn't pay over 102 on anything and usually not nearly that much. So it really was chasing down less than a thousand bucks in most cases. The problem was that it adds up over time, but once you've "waived" the first few, you've set expectations and that's when the AEs blow a gasket as enforcement finally starts.
On these jumbo OAs paying 104.50 or whatever, you'd think wholesalers would find it cost-effective to go after those premia.
Average Joe said: "...The idea that once this credit crisis is over we can just get back on the spending wagon is ludicrous."
It may seem ludicrous to you, but you're fighting against the tide of human nature, and you'll drown before you win.
And that's under the assumption that you're right about how much damage has been done vs. the economy's ability to cope, which, IMO, you've underestimated.
Just as many investors in mortgage-backed securities didn't realize their potential exposure, many people don't have any idea about huge unfunded federal liabilities, Walker said.
"We have $44 trillion-plus in off-balance sheet, unfunded obligations for Social Security and Medicare alone," he said.
"Cleaning up this mess ... is going to be issue number one, two, three and four for the new president," said Alan Blinder, former vice chairman of the Federal Reserve Board and an economics professor at Princeton University.
Blinder, who was in Monterey to kick off the 11th annual series of lectures sponsored by the Panetta Institute, was referring to the financial tremors that began last summer by the meltdown of mortgage-backed securities.
But subprime loans and home foreclosures are just the tip of the iceberg in U.S. economic waters, according to Blinder and David M. Walker, former U.S. comptroller general. They were in Monterey to speak at the Monterey Conference Center.
"Let's Have Another Cup O'Coffee"
by Irving Berlin
(from the 1932 musical "Face the Music")
The song, set in a self-service restaurant modeled on the Horn & Hardart Automat, was sung in the play by a group of once-wealthy citizens who were awaiting better times, as mirrored in the song's opening lyrics:
[Verse:]
Why worry when skies are gray
Why should we complain
Let's laugh at the cloudy day
Let's sing in the rain
Songwriters say the storm quickly passes
That's their philosophy
They see the world through rose-colored glasses
Why shouldn't we?
[Refrain:]
Just around the corner
There's a rainbow in the sky
So let's have another cup o' coffee
And let's have another piece o' pie!
Trouble's just a bubble
And the clouds will soon roll by
So let's have another cup o' coffee
And let's have another piece o' pie
Let a smile be your umbrella
For it's just an April show'r
Even John D. Rockefeller
Is looking for the silver lining
Mister Herbert Hoover
Says that now's the time to buy
So let's have another cup o' coffee
And let's have another piece o' pie!
[Alternate Lines:]
Things that really matter
Are the things that gold can't buy
Junior Bush keeps sayin'
that now's the time to buy
Many people who intended to defraud, lie, get a "tricky" loan, would seek out the brokers (my sister in law being one). People didn't think the institutions would let them get away with it.
This is actually one reason why I want more empirical work and careful analysis with this "brokered transaction premium" idea. One possibility is that the applicant pool is adversely self-selected in some markets (the ones where there is a depository alternative).
The question, of course, becomes not just how brokers got themselves a reputation for putting up with things an institutional lender wouldn't, but insofar as an individual broker is "innocent" in this regard, how or whether it fails to notice that its borrower pool is an adverse selection.
But states see the heavy hand of the federal government in some of the reports proposals.
One plan would establish a federal mortgage commission that would set minimum licensing standards for brokers, although states are already working with Congress to establish such standards. Another proposal would increase federal oversight of state-chartered banks, which make up about 70 percent of all banks. And another recommendation is to create an optional federal insurance charter, which could infringe on state powers to set rates, inspect policies and require coverage for those whom insurance companies would otherwise exclude.
Clark to Tanta It has certainly been clear that you disagree with transparency being a key to fixing the subprime problem. But the only reason I've seen you give in the past is that the horse has already left the barn. Perhaps I've missed it, but I'd be interested in why you don't like transparency as part of the solution to prevent future issues (say 10 years down the road).
This is my response, because I don't think new disclosures will do much to fix the problem created by irresponsible underwriting. Also, I take issue with the "subprime" designation. I think the Alt-A innovation is going to wind up being just as big a problem.
First, I do loan disclosures. For money. Calculations, compliance, et al. Very few would-be borrowers actually read the darned things. If I want them to actually decide on the basis of what I'm putting in the disclosures, I need to separate out important information related to decision steps and make them affirmatively sign to get the product. I swear to you, that is the only way I can get borrowers to make responsible decisions when faced with a complicated menu of choices. They are not able to understand three pages of disclosures about an option-ARM, or the risks involved in a 2/28, or insurance products.
This makes the application process a bit more complicated, I can tell you. But I know from experience that just handing the customer a thingie about relative pay downs on balances between several products doesn't do jack for the majority of the applicants. You have to relate it to the consequences, such as:
"You have indicated that you are interested in a Pick A Pay loan for approximately $_______. If you take this loan and make the lowest payment at current rates, your loan will reset to $_______ monthly payment on __________. Your loan balance will have increased to $_______.
The risks of this type of mortgage include:
-You may owe more than your home is worth on _______.
-Your payment may vary more than shown because of rate adjustments.
-You may not be able to make the new payment.
-Assuming the above, you may lose your home because you will not be able to continue to pay your mortgage and you will not be able to refinance to a lower payment.
-Assuming the above, your credit would be damaged and you may experience other financial losses.
To avoid these risks, you could chose a different type of mortgage with a fixed payment for 30 years that pays principal as well as interest.
Using the same loan balance, your current payment for such a mortgage would be approximately $_______ and it would never change. Your loan balance as of (date given above) would be $_________."
By the way, doing what I describe can create legal risks since this level of disclosure is not required and since these disclosures themselves could be used to argue FTC type complaints. To get the borrowers to understand you are separating out factors relevant to that decision, which necessarily leaves open an avenue for litigation. Also, each additional piece of paper you give them creates new opportunity for errors and new risks.
Unsophisticated borrowers do not understand their loans, they do not understand the credit underwriting process, they do not understand the relative risk of getting in a loan that they will have to refinance in a couple of years, they do not understand the risk that their property value might decrease, they do not really understand amortization, etc.
The less the borrower understands, the more the obvious factors (such as a low initial payment) will weigh in their decisions, and the more weight what their buddy, the realtor or the broker SAID will have.
From what I've seen, there is little correlation between FICO and ability to understand the risks and benefits of these loans except at the extremes. Of course someone with limited English is at an extreme disadvantage. It's worth noting that many mortgage brokers are losing their own homes due to such creative financing. If the mortgage broker didn't understand the risk, what chance is there that they explained it to the customer?
The number of mortgage broker licenses in Minnesota has declined from more than 4,000 a few years ago to fewer than 1,200 this year, according to Minnesota Department of Commerce Commissioner Glenn Wilson.
Before the subprime mortgage meltdown, it was possible to get a mortgage broker license in Minnesota for $850 and a bit of continuing education.
he lesson?
"Is it any different than going from one car dealership to another, and somebody charging you $5,000 more for a car at another place?" Beatty said.
In other words, even with new rules and regulations which attempt to rein in mortgage lending abuses, borrowers must still be smart shoppers.
--"It may seem ludicrous to you, but you're fighting against the tide of human nature, and you'll drown before you win.:)"
Well if it's human nature explain the behavior of Japanese who presumably are human. If it's human nature, and as far as I know we've been human as long as we have had economies, why then would any economy suffer a spending recession or depression? It's not like I am arguing something that humans have never experienced you know.
"And that's under the assumption that you're right about how much damage has been done vs. the economy's ability to cope, which, IMO, you've underestimated."
I am saying that the economy you think we have had, we in fact don't and haven't had (which was the point of CR's prior post). Much of the income we spent over the last 5 years wasn't earned, meaning the profits from selling to or working for these spenders won't be "earned" in the near future. Meaning even the spending by those who have "earned" their money over the last 5 years will be impacted.
Chanhassen broker pleads guilty to racketeering in $2.5 million mortgage fraud case
Eight charges each still are pending against Scott R. Rosenlund of Chaska, president of 10Spring Homes, a home-building and development company, and Shinon Lindberg of Greenwood, who allegedly recruited straw buyers for the properties.
Uniontown councilman who said he was unwittingly caught up in a mortgage scheme with his daughter pleaded guilty in federal court Thursday to conspiracy to commit mortgage fraud.
Marlin Sprouts Jr., 52, of Uniontown formally entered the change of plea before U.S. District Judge Terrance F. McVerry. The plea is a departure from Sprouts' initial plea of not guilty to the single count of conspiracy that includes elements of mail fraud, wire fraud, bank fraud and money laundering.
Gerald Small engaged with others in a massive Kiting and Mortgage Fraud scheme in Colorado resulting in the conviction of six individuals, the seizure of almost $20 million in cash and assets, the restitution of two private jet aircraft, and losses to federally insured financial institutions of approximately $35 million.
Interthinx, the leading provider of mortgage fraud detection products, announced at the Mortgage Bankers Association's National Fraud Issues Conference that company analysts have uncovered more than 42,000 mortgage applications, totaling nearly $11 billion, containing significant misrepresentations of the borrowers' income. These applications were all originated and submitted for Interthinx review in the last six months of 2007.
I think the reputation was a natural knowingly created through market forces. The brokers would push questionable paper through since they were seperated from the institution that would eventually say yes. This distance meant they were the biggest risk takers.."well, let's send it through, the worst they can do is say no!".
This distance also allowed the lenders to accept the higher risk. The broker added a layer of plausible deniability, i.e. a buffer between the lender and the knowingly lying cheating borrower. The lender could say..."I didn't even talk to the borrower...I just went off what the broker sent me."
I don't know enough about the lending business to know the details, but I do know putting buffers between parties allows everyone share the benefits but lay off the blame.
I have not given in to the mindset that says a loan originator has done his duty by finding a wholesaler and a rate for you, and the rest of the "guidance" should be a stack of paperwork that you either have to work your way through yourself or hire an attorney to read for you. -- Tanta
But especially in the recent surge, the newbies and the mushroom types seemed to explode. Some of them were truly so dumb that I think they genuinely believed that the lowest payment now was the best mortgage for the customer.-- MaxedOutMama
I question how many of these people were too stupid and needed an attorney to read their documents. Clearly there are some people so mentally impaired they can't sign contracts. How many people are in the gray area where they are not legally mentally disabled but they are not smart enough to check the rate and terms on a loan agreement they're signing?
It seems more likely that many of them were taking a speculative risk that didn't play out in their favor. That's easy to understand. It's hard to understand that they were too stupid to know what they were doing.
I agree with Tanta's suggestions because when these risk-takers get into trouble, they claim ignorance, and gov't money that could have been used to help the truly needed goes to bail out risk takers.
"Internet" is a proper noun. Just sayin'. Also, you owe bd a hat tip.
No doubt a lot of people will be troubled by the implication I am making that more than a few "good" borrowers got better rates than they probably should have
/raises hand. Yes, that troubles me all right. Sorry to be a born-and-bred dope here, but I do believe that at least some of the prime spread widening we've seen lately is driven by fear, not fundamentals. Subprime was overwhelmingly isolated, all the way through conduits and securitizations; which is why I have a hard time believing that these subprime loans were "offseting" prime borrowing costs when their funding wasn't commingled from an investment capital standpoint. It's just a matter of charging what the market will bear in both cases.
Member & Specialist/Public short sale ratios trending down; is the daytrader tapped out and low on cash yet? Maybe house flipping will make a come back?
I can't believe you remember Moe, that dude wasn't here that long! I'm just trying to stimulate the blog now and then and perk things up. I'm trying to behave, but...
I'm not trying to start a fight or call attention to something stupid, but I just did a search on Moe; that guy had vision!
Re: Moe showers writes:
Say it aint so!
Moody's said that it does not expect WaMu's profitability to recover until 2010.
Credit losses from WaMu's mortgage operations "will be noticeably higher than previously estimated," Moody's said in a statement.
"Of particular concern is WaMu's approximately $43 billion second-lien-home-equity portfolio," Moody's said. "Higher provisions are likely to lead to poor reported results throughout 2008 and 2009."
Moody's cut WaMu's rating two notches to "Baa2," the second-lowest investment grade, from "A3." The outlook is stable, indicating an additional cut is not anticipated over the next 12-to-18 months.
moe showers | 12.10.07 - 6:39 pm | #
"I question how many of these people were too stupid and needed an attorney to read their documents."
It isn't that people are stupid, necessarily. But I'm willing to bet that, outside of self-selected populations such as the readers of this blog, the ability to do things like construct an amortization table for a loan is a fairly rare skill. We do not teach basic fiscal numeracy in this country, as it does not show up anywhere on a standardized test. But the fact that most people are unskilled in these areas does not make them stupid.
Sorry if I missed you, bd. I didn't get a minute to look at comments for nearly two whole days. I'll spare you all the details of my life recently, but "water pouring out of my ceiling from upstairs' plumbing problem" sums it up, plus having the carpet cleaner in and a drywall repairer. "Drink to the bird!" (Bonus joke for English majors.)
Subprime was overwhelmingly isolated, all the way through conduits and securitizations; which is why I have a hard time believing that these subprime loans were "offseting" prime borrowing costs when their funding wasn't commingled from an investment capital standpoint.
Well, no, but it was all "commingled" from an individual brokerage's revenue standpoint. That's why I brought up the "point bank" thing. That wasn't a matter of how investors priced loans; it was a matter of how individual originators "sold" overages to some borrowers in order to be able to offer concessions to others. The "house" didn't care as long as the total "bank balance" hit zero.
It didn't have to be "overage on subprime, underage on prime." It could be and was "overage on unsophisticated borrowers/small loans and underage on people who know better." The fact that in very recent years it kind of aligns down the prime/subprime divide is what makes you skeptical, since from the investor standpoint those loans are priced very differently. But if you look in the details of the CRL paper, you see differences within prime and subprime, not just between them.
I appreciate your view, and have enjoyed reading this post. While I do not condone subprime lending, I beg to differ.
However, I rather adhere to the views enumerated under the paper by Anshasy and Elliehausen, entitled "The Pricing of Subprime Mortgages by Mortgage Brokers and Lenders", published by George Washington U and OSU.
Their views are more objective, bilaterally founded, and discover that mortgage brokers, in fact, have charged less than the average bank on subprime loans.
I'm not trying to start a fight or call attention to something stupid
ONE MORE off-topic paste job from you on this thread, and I delete THEM ALL.
I'm no longer interested in trying to explain to you why your constant interrupting of a complex conversation is so rude and disruptive and ego-driven. You are incapable of either understanding that or caring about it. Therefore, if you are going to change your name freely to evade our readers' filters, I am going to change my rules with you whenever I feel like it.
And by "ONE MORE" I mean one more, including the comment where you try to argue with this one.
To clarify further, Shnaps, what isn't clear to me is that everybody got the "required price" for their rate on these deals.
Say the wholesaler's rate sheet offers 8% at 99 and 8.25% at 100. You don't have "overage" if your borrower with the 8% rate pays one point and your borrower with the 8.25% rate pays no points. But you do have "overage" if the borrower with the 8.25% rate pays a point. You could "use" that excess income from the loan (which the broker keeps, since the wholesaler does not require it as a discount point) to offer your "best" customer 8% with no points.
That the borrower who paid overage might well be "subprime" could simply be coincidental, in the sense that such a borrower might be so uncertain of his ability to get a loan at all that he simply takes the first offer he gets.
It seems to me brokers were steering marginal-quality loans into high-rate high-mi products that with some coaching could have been placed with FHA or a State Housing Finance Agency simply become the broker did not offer either of these products.
Realtors would steer marginal-quality purchasers to brokers who wouldn't put the cabosh on purchasing a home the consumer couldn't comfortably afford. Realtors will steer their tiffany borrowers to tiffany shops. Even if the borrower had been counseled appropriately, the borrower may not have had the patience or discipline to wait 9 months to bring credit scores up or to raise the necessary cash and would have sought out a broker that had no qualms.
I haven't had time to read the 54 page study but I'm assuming they were comparing loans of the same size. At times, the effort and aggravation it takes to originate a $60,000 loan is far greater than to originate a $460,000 loan. Human nature being what it is, a 100% commissioned originator will have a floor rate they'll work for in dollars, not percentage. Honorable originators will pass on the $60,000 loan rather than charge them up the ying yan. The borrower will often be referred to the credit union for a home equity. And, a loan officer at bank paid on a base salary and small commission, isn't as pressed to reach a floor rate.
Is it truly pricing discrimination to price a loan in dollars rather than percentage?
Is it truly pricing discrimination to price a loan in dollars rather than percentage?
This is what the regulators call "disparate impact" policies. The 100% commission practice wasn't "intended" to be discriminatory, but in impact it is. It means that borrowers in lower-priced areas, starter-home borrowers, and (often) elderly borrowers who are refinancing a very small remaining loan balance, get denied access to high-quality mortgage originators and left to the tender mercy of sharks who will load them up with fees or premium rates in order to make the dollars work.
We just need to get rid of 100% commission. That structure originated in the last bust, when you really had to motivate loan officers to go find and compete for borrowers. It doesn't do much for me in a boom when the borrowers are beating your door down. Those originators you mention could "afford" to turn away small loans because they had tons of large loans falling into their laps.
Paying a loan officer commission for business that was brought in by a commissioned RE agent? Jeeze, how many people have to be paid a commission here? If the RE agent is doing the "selling," have a salaried loan officer doing the loan, who has no motivation to overprice or turn away small-balance business.
Another factor working here is broker specific pricing. High volume..ahem..high quality brokers were often given pricing better than the published rate sheet. One of the components of big broker/preferred pricing was product mix. A broker with a mix of high margin product (subprime, Alt A, POAs) could get a better price than a ref shop with low margin conf product.
There used to be a rule of thumb many moons ago that the rate had to go down 2% to make a refi make sense. Other than loan size expanding which tends to make that break even percentage get smaller because you are spreading mostly fixed costs over a bigger value, and barring a need to cash out equity - what is a reasonable rule of thumb these days in Tanta's mind. I suspect the value if followed would not support the current enormous mortgage industry. In other words I think consumers have fallen for a lot of marketing hype in the past 15 years.
If I don't need to cash out and I do have a few thousand in my pocket to pay the closing costs on a refinance I think I'm better off just to put it against principle unless the rate difference is A LOT.
I see your point. I just don't know if such occurances are prevalent enough to amount to a systemic sort of effect as you suggest.
Also, I would suspect that such a 'best' customer is actually getting a 'buddy deal' in that case. Which I know happens, I just don't know how often. I forget how certain corners of the 'broker universe' are rife with nepotism and all forms of back-scratchery.
I just don't know if such occurances are prevalent enough to amount to a systemic sort of effect as you suggest.
I don't know that either, which is why I'm asking for more empirical work on the problem. I do know that it can happen.
I just think we focus on how wholesalers price risk sometimes to the exclusion of how an independent broker's revenue model seems able--almost magically--to achieve "cost savings" that a big institutional lender can't achieve. Doesn't it seem to need more explanation that the big lenders with the "economies of scale" don't seem able to offer the kind of "super prime" rates that these little brokers can?
(OT) Average Joe said: "...I am saying that the economy you think we have had, we in fact don't and haven't had (which was the point of CR's prior post). Much of the income we spent over the last 5 years wasn't earned, meaning the profits from selling to or working for these spenders won't be "earned" in the near future. Meaning even the spending by those who have "earned" their money over the last 5 years will be impacted."
I would agree that this is true in the housing sector, for a minority of homeowners.
Where I disagree is with the idea that the health of our economy hinges on housing. Within the past 7 years we've had to contend with 9/11, the Afghan War, the Iraq War, Katrina during the Iraq War, the housing "bust," and the credit "crunch."
Yet the economy still can't seem to find a recession with both hands and a flashlight. The worst we've seen after all this is a loss of -232,000 jobs from non-farm payrolls and it took 3 months to accumulate it, when during a recession that would be on the low side for a 1-month loss.
For all the talk that the problems we've seen so far in housing/credit/mortgage derivatives are just the tip of a much-larger iceberg below the surface, it's empirically clear that there's considerable unrecognized economic strength and resilience below the surface.
Charles J Gervasi - I spent a lot of time looking at broker antics on various boards, and that included a bunch of discussions in 2007 about getting foreclosed on themselves.
Forget the customers. Some of the brokers didn't understand what they were doing! I have had numerous discussions with quite experienced mortgage bankers who didn't grasp all the ins and outs at first.
With these innovative loans, it's not simply a matter of checking rate and term. That is the entire point! What used to be relatively simple becomes a lot more complex with more complex risks.
I'm not stupid because I don't know how to fix a truck engine and those who don't understand these products aren't stupid either. We are all ignorant outside our respective fields. A customer who doesn't understand the true risk involved in a 2/28 or OA doesn't have to be stupid. They just don't think in those terms.
There wasn't evolved CW on these types of mortgages because they were completely new in the mass market. It appears to never have occurred to some brokers that prices wouldn't escalate forever, and that refinances of many of these loans with initial "affordability" terms would be hard to come by.
I remember one broker who had written only one OA over the past few years writing about making a new employee who was selling them like hotcakes go to a closing. He commented that the kid came back white and shaken and stopped selling them. A lot of this was just plain unthinking behavior.
re.."My suggestion is that we ask whether brokered mortgage lending is, in practice, running on the old "point bank" model that retail lenders largely abandoned, in which "strong" borrowers are basically subsidized by "weak borrowers."
There is absolutely zero evidence of this. Brokers do not have a pricing mechanism to "bank" overages; each deal stands on it's own.
What you don't seem to want to admit is that even this study, by no means biased in favor of brokers, found objective evidence that brokers do deliver measurable value to well qualified borrowers.
I am also struck by your comment supporting lender use of prepayment penalties, a truly disgusting anti-consumer practice that should be outlawed. I guess your views all depend on your point of view, doesn't it? Lenders can hedge prepayment risk without screwing borrowers whose plans and situations change through no intention of their own. It's hard for me not to see a double standard here.
Here's the reality. There are very few barriers to entering the mortgage brokerage business in most states. Lenders need to design policies, procedures and programs to reflect that reality. For most of this decade, the lenders decided instead to race each other to the bottom, promoting to their brokers ever easier ways to defraud themselves, their stockholders and their borrower customers.
Now I am not denying for a moment that many, probably even majority of brokers took advantage of these opportunities, but what else should anyone have expected? If a bank advertises that they put a paper bag of cash outside their doors at night, should they be surprised to see it gone in the morning?
Doesn't it seem to need more explanation that the big lenders with the "economies of scale" don't seem able to offer the kind of "super prime" rates that these little brokers can?
Economies of scale? While that can be hugely important to servicing, but it doesn't make for quite such a competitive edge when it comes to originating.
ScalABILITY matters, as does the biggie - OVERHEAD expenses. In these considerations, brokers have the advantage.
Yes, this would pretty much do it. I do think that required mortage counseling from a non-profit or government funded program would help as well. I don't have the evidence to back this up, but organizations like ACORN and NACA seem to have strong following, as they are non-profit and educate their members thorougly about the realities of home-ownership, mortgage lending, and the purchase process in general. Will some home-owners still fall into the emotional trap of falling for a bad mortgage just for the sake of getting their "dream home"? Sure. But I do think outside counseling would cut those numbers substantially, especially within the low and moderate income ranged households. Along with cutting out the commission based broker, that would probably be pretty effective to protect new home-owners.
I am also struck by your comment supporting lender use of prepayment penalties, a truly disgusting anti-consumer practice that should be outlawed.
There's a vast difference between borrowing money for a fixed period of time and borrowing money with the caveat that, should interest rates rise, you'll be borrowing it for a long time, but if they fall you'll be returning it right away (leaving the lender with money to reinvest at a lower rate environment). Anyone who doesn't understand that that flexibility comes at a price should probably be doing more asking and less fulminating.
There may be a case to be made that some prepayment penalties were egregious, but your suggestion that consumers should get a free put belies the fact that they'll pay for that put, one way or another. Like the Fram guy said.
disparate impact pricing ... isn't it similar to the arguments taking place with respect to the pricing of health insurance premiums, community ratings along with mandates have driven up the price for everyone but a truly free market pricing structure would mean the elderly or the chronically ill will pay more in premiums than the young and totally fit. The drive to level the playing field can actually reduce options.
I too would love to see the 100% commission loan officer be phased out; I just don't see it happening.
And yes Realtors are doing the selling often to their very own affiliated in-house lender who funnel marketing dollars back to the agency.
Brokers do not have a pricing mechanism to "bank" overages; each deal stands on it's own.
Whatever can you possibly mean by that?
You are telling me that no broker can make such a significant profit on loan A that it is willing to cut into its margin on loan B? That they're so intellectually challenged that they don't understand the concept of "profit and loss" for their whole business? They only understand it on an individual transaction?
And I get accused of thinking some of them are complete idiots.
I'm one of those "little brokers" you so like to dismiss. Any time you want to contact me, I will be very glad to prove to you exactly how we "little guys" can offer rates so much better that the vast majority of larger firms. Of course, then you will have to stop pretending that we are all liars, unlike the saints working for direct lenders.
This kind of cheap condescension from someone whose industry had to be bailed out once in the 80's, and is well on it's way to yet another systemic failure due to widespread fraud, greed and incompetence just amazes me.
How much would it help to make mortgage brokers (and realtors ideally but that might be politically difficult) fiduciaires of their borrowers? It seems that this mess will not get better until the massive conflicts of interest are brought under control and this would be a good way to do it since criminal and regulatory methods seem to need a backstop given the political clout of the FIRE sector in general. My only concern would be whether these brokers are sufficently capitalized that they would worry about losing their money but I wanted to know what everyone here thought before I submit to my Democratic club.
MOM,
Many times when I'm on an audit support engagement, I initially start thinking that there's something nefarious going on. I reason that the CFO must know something or other is going on, etc. Then through conversations and discovery, nearly every time we find out that management either didnt have the tools (structural and/or mental) to know anything was going wrong.
I am also struck by your comment supporting lender use of prepayment penalties, a truly disgusting anti-consumer practice that should be outlawed.
I am totally struck by your inability to read.
I put in a lukewarm word for prepayment penalty options that are given in exchange for a rate discount. If I know, or rather confidently believe, that I have no intention of refinancing again in three years--possibly because I believe rates won't get signficantly lower than they are today--why shouldn't I be able to negotiate a deal with my lender wherein I give up my right to prepay for three years in return for a lower rate than I would otherwise get? Of course it would have to be an option. But if I took that option, and then did for some unforseen reason need to move in the three years of the penalty period, at least I got the lower rate to compensate. How's that so unfair?
I was precisely contrasting that to the practice of giving prepayment penalties with a higher than market rate, which is in my view toxic and abusive.
It really doesn't behoove someone who argues that the bank left the cash unsecured--and therefore who can blame those who took it?--to argue that I'm the one defending anti-consumer practices. Maybe the banks did offer brokers money they "couldn't refuse," but it came at the expense of their customers. Now is not a good time to accuse someone like me of not caring about the consumer.
Your post talked about BRANCHES that could BANK overages as a whole. Retail mortgage brokers price and are paid on each deal individually, on a commission basis, and many states like California require DRE licensed brokers like myself to fully disclose all compensation we earn on each deal.
While an individual deal may be priced at a higher or lower markup for marketing or competitive reasons, there is no mechanism in place at any wholesale lender I have ever heard of that would allow individual brokers to use overcharges on borrower "A" to subsidize borrower "B", nor do I think such a mechanism wold comply with RESPA or California law.
My point was that you were proposing a possible reason for the study's conclusion that brokers did offer value in certain situations that had no basis in fact.
Do some borrowers get better deals? Sure. I can do a 760 FICO no cash out conforming refi in about 1/5 the time I can do a marginal case that has to be more thoroughly documented and may have to be tried at two or three lenders, so why shouldn't I give the quality borrower a better deal? If I don't someone else will. That doesn't mean the more difficult borrower borrower is subsidizing the easy one, each deal stands on it's own.
How much would it help to make mortgage brokers (and realtors ideally but that might be politically difficult) fiduciaires of their borrowers?
I think that, IF (note to some of our other readers: this is a hypothetical construction) we see the interests of borrowers and lenders (real lenders, that is, which includes investors) as irretrievably opposed, THEN basically putting the broker on the borrower's "side" by making them fiduciaries would (theoretically) level the playing field a little. The broker then becomes the Loan Counselor, whose interest is really just to get the best deal for the consumer out of the (by hypothesis) lender who will always try to get the most money out of the borrowers' pocket.
I do think that underlying assumption needs to be challenged and complicated a bit. It was not always clear to me that borrower and lender interests were opposed. Take appraisals: I always believed that borrowers wanted to pay the lowest price they could get away with for houses. Lenders always wanted to avoid inflated values because that means their loans aren't sufficiently secured. So why did we get borrowers convinced that lenders were "against them" in this case? I think this is a good example of where borrowers' understanding of their own best interests got distorted, and it was often the sales force--brokers or commissioned loan officers and RE agents--who did that "distorting." Putting these folks "on the side of the consumer" fills me with the fear that even more distortion will go on, unless the broker's compensation is fully flat-fee and not dependent on loan amount.
The same kind of analysis can be made of interest rates. Lender/investors don't necessarily want the highest rate the borrower can be brought to pay; in the absence of prepayment penalties the things prepay too fast. Borrowers clearly want to pay the lowest rate they can, but they have been convinced that they are getting these "closing cost credits" that reduce their upfront cash costs, and that this is an unmitigated blessing. It isn't always perfectly clear to me that borrower and lender interests are wildly opposed here; it seems to me that the "no closing cost" thing arose mostly to drive reliable refi business for brokers. Take that out of the equation, and borrowers might not need to pay a broker fee for a "consultant."
So I'm not against fiduciary requirements, but I've worked for a lender long enough to know that that still means I, the lender, have to have a "fiduciary" in the deal, too. So at some point if the broker is the borrower's fiduciary, the wholesaler has to beef up on processing/underwriting staff to "protect" its own interests here. That can, theoretically at least, drive up credit costs for everyone, as each side "fiduciaries up" in a kind of consultant-arms race.
Again, I'm just trying to complicate matters a little. It's like the disclosure issue: it just isn't simple to me.
Last time I checked, my reading skills were up to the challenge even of your posts. I have been around long enough to se just what kind of "rate reduction" lenders gave for prepays, and how deceptively lenders marketed them.
I think the residential lending process has to be made as simple and transparent as possible. There is no place for lenders to add a huge potential penalty that most borrowers will only dimly understand at the time they get a loan.
I just don't think you appreciate how things are in a retail environment. You have to keep things very very very simple or huge percentages of the population will simply be taken advantage of by lenders AND brokers. Prepayment penalties fall strongly in the category of things where the potential for abuse far outweighs the possible consumer benefit. It's just that this particular abuse only benefits lenders.
While an individual deal may be priced at a higher or lower markup for marketing or competitive reasons
That's what I'm talking about, Tom.
The concepts of "overage" and "underage" are relative to the required price or "house price." (I don't know what y'all call it; we called it the "house price." It is basically the corporate minimum profit margin on a loan.) The whole idea of the point bank grew out of the recognizition that what matters to the company--not just a branch or an individual--is the total margin on the total pipeline, not this or that loan. So, for example, as long as "on average" a branch brought in 50 bps, it didn't matter to corporate whether that was a profit of 100 bps on loan A and a loss of 50 bps on loan B.
Wholesaler rate sheets only provide the required price to the wholesaler. What law prohibits you from working one deal for free, knowing you'll make it up on some other deal?
BTW, I'm in total agreement with you on the futility of beefing up disclosure forms. Last I checked, Canadians still smoked, despite having some of the most alarming warning labels anywhere (e.g. TOBACCO SMOKE HURTS BABIES)
As a 25 year veteran of the mortgage and banking industries, I have always wondered why loan officer and broker compensation was not paid as an annuity. This would align the interests of the LO/broker with the customer and mortgage investor. I was told that the first companies to do this would be put out of business due to the ultracompetitive nature of the mortgage origination business, but I'm wondering if the current environment creates a unique opportunity for this kind of change.
Ralph-
Thats why I said Lenders have other ways of hedging. Perhaps you should be doing a little more careful reading and a little less fulminating, yourself, eh? MBS pricing already reflects the hedging risk, doesnt it?
Jalrin-
In CA at least, for brokers licensed by the Department of Real Estate, we are already fiduciaries of the borrower. I have never had a problems working that way.
Tanta-
How about if we agree that there is enough blame to go around that we both stop throwing mud at each other. Lenders created this system; brokers (and lenders) took advantage of it.
Borrower and lender interests are always opposed on the price level, just like any other market transaction. That does to mean they are in opposition in all other areas, and in fact it is clearly in each others larger interests that mortgage lenders continue to exist and offer relatively stable loan programs.
Acting as a borrowers agent is not difficult for me; just try to get the best deal I can while not lying to anyone and fully disclosing all relevant information (including pricing and my markup).
On the issue of What law prohibits you from working one deal for free, knowing you'll make it up on some other deal? I can only reply by wondering who is going to pay me more on deal #2? If they were willing to pay me more, why wouldnt I charge them more no matter how much I charged the first guy? I think you are used to dealing with things on a larger scale than individual brokers doing individual deals in an environment of intense price competition. On this level, each deal stands on its own.
Joy-
You would think so, wouldnt you? It just often doesnt work out that way when you are a first time home buyer confronted with a stack of sixty pages to sign at closing. Thats the real world.
Yes but we must not forget that rich and poor borrow as much as they can and that if you give a poor person a higher interest rate then they end up paying a relatively lower price for their home. Then when they default, which it was expected they would, the bank loses less while the investors lose more as the poor guy might have paid $200k for his house if he had an 8% loan, while he would have paid maybe $250 for the same home if he had been able to get a $% loan.
I can only reply by wondering who is going to pay me more on deal #2? If they were willing to pay me more, why wouldnt I charge them more no matter how much I charged the first guy?
Well, as far as I can tell there are plenty of brokers who will charge whatever they can talk unsophisticated borrowers into paying (or rather, what they can slide past them in terms of rate and costs, focussing only on monthly payment).
The question becomes--this would be the one I asked in the post--whether that does not possibly allow these very same brokers to cut into their margins on the loans to sophisticated borrowers who read the documents and negotiate and generally demand "the best."
If that is so, then it might account for at least part of the fact that for prime loans, brokered deals get slightly--not very, just slightly--better pricing than retail prime loans. The idea is that the retail shops are basically prohibited by their regulators from charging whatever some naive customer will pay; they have to charge no more than what the rate sheet requires. This gives them no "profit cookie jar" to subsidize prime sophisticated customers with.
There are, you know, one or two of us who are actually horrified by the idea that you would overcharge borrowers just because they're gullible or docile or uninformed enough to pay it. Many of us believe that's pure and simple exploitation.
I can't help anyone who thinks that looking at aggregated data is somehow misleading, whereas limiting one's attention to "each deal individually" gives you a truer picture. We'll leave that up to Dr. Piaget or someone else. It's like the thread we had the other day with people who simply refuse to take any sociological perspective: I don't know what to say to them. If you cannot conceive of the analytic usefulness of studying groups and large datasets rather than focusing on single actions in discrete transactions, then you will always think I am making "unfair generalizations."
As a 25 year veteran of the mortgage and banking industries, I have always wondered why loan officer and broker compensation was not paid as an annuity.
Well, you know, there was a time, back when my wrinkled reptilian snout was fresh and snotty, when we were all paid on an "annuity." It was called "salary," and it was expected that if the loans we all collectively produced--both front-room and back-room "us"--were profitable and sound, the company would prosper and those salaries would rise faster than inflation.
I know. Bizzaro-world concept, there. But I just have to laugh over the occasional proposals I see to "compensate loan officers on profitability and safety over time." Hell's bell's, what are the rest of us compensated based on?
Lama ...through conversations and discovery, nearly every time we find out that management either didnt have the tools (structural and/or mental) to know anything was going wrong.
Yes. It can happen in any business. It's just that if you let it happen in financial businesses, the trauma gets widespread very quickly.
I still maintain that one effective measure of risk is whether the average borrower can understand the practical effects of what the borrower may be doing. If not, it seems to me that some serious questions must be asked.
Certainly in banking, it appears that innovation just leapt from one institution to another on competitive grounds without serious examination of resulting risks. Maybe the first company was doing a good job, but the second and third weren't. The "new blue chip" obviously didn't.
I'm reading this article about Goldman's Level 3 assets, and wondering about the determination that the sale of distressed assets shouldn't be used to mark to market.... It seems to me that a whole lot more is coming down the pike.
Thats why I said Lenders have other ways of hedging.
Sounds kinda handwave-y to me. Perhaps if you'd said "Lenders could just enter into a swap to hedge and pass the costs on to the borrowers."
Lenders can't magically offload their prepayment risk onto somebody else. Like any insurance, they have to pay a risk premium, which includes a profit to the counterparty.
And yeah, prepayment penalties are higher on higher rate loans. For obvious reasons.
Being a mtg broker I know the reality of this situation.
Reality is there is a concept that I have not seen mentioned. COMPETITION.
Here is how I use premium pricing: Quote borrower rate as "no point" loan vs "paying a point to get a lower rate". I then run a comparison for them to see when their break even point (no pun intended) is. Is it worthwhile to buy down rate? Many choose a "no point" loan as the recapture period doesn't make sense often enough. Either way, the company makes a point to a point and a half on these loans. I get a commission split on that figure.
If I get piggy and want more? Well that would mean my quote is going to be higher than my competition and I may lose the deal to a COMPETITOR.
I quote reasonable deals and I have a very high repeat client ratio. Almost all of them return to me or refer a friend or family member.
I accomplish this by putting the customer first and really listening to them and what they are trying to do. I never sell them something that they don't need or something that would be harmful or even overly risky (risk is part of life but unnecessary risk is, well... unnecessary).
I really don't care who pays. Either borrower or wholesaler. Makes no difference to me. If premium pricing is outlawed, it is just fewer choices for the consumer. Many wholesalers have a cap on what a broker can charge so this "problem" is easily remedied if that is what people really want. Just regulate the wholesaler to not pay premiums.
Are there brokers who abuse premium pricing and pig out on 2 - 3 points? Yes, but not all do. Something should be done to regulate brokers as I have yet to meet with a regulator in all of my 15 years in this business.
I think the issue is exaggerated but I understand why a consumer would feel duped if they learn that the broker earned money that was not part of the disclosed fee(s). But it is really more complex than that. I must work on a pretty thin margin and protect my clients from rate risk to get them the best execution in the marketplace in regard to rates. This requires skills that used to be a bond traders concern, as the fluctuations in the bond market are never mentioned, nor are rate extension costs mentioned due to circumstances outside the mtg brokers control. There are many.
Like I've said before. It's not as easy as it looks folks....
What do you want? This is long enough without a 6000 word post on hedging strategies. My point is that lenders can and do hedge this risk, and it is better (in my opinion, at least) for this absolutely real and necessary cost to be spread over the entire universe of loans rather than be concentrated on the few borrowers gullible enough to take a prepayment penalty and unlucky enough to have to pay it.
The entire thrust both of the original study and Tantas response is that less knowledgeable borrowers are taken advantage of. Thats exactly what will happen in a great many cases if we encourage prepays on any loan.
Tanta-
I cant help but think we are talking past each other.
In practice, brokers who do subprime are generally not the people that will be working with A quality borrowers. Brokers clients are a reflection of their own personality and style, and subprime guys generally lack the skills, knowledge and polish necessary to work successfully with "A quality borrowers.
Beyond that, you dont seem to grasp that the fundamental unit in a brokerage is an individual, not a branch or firm. We are all little companies. The idea that we would give A a great deal BECAUSE we can make extra money on B just isnt real. A is getting a better deal because the competition for good quality borrowers is cutthroat, everyones margins are lower and you spend less time on the transaction. You give them a good deal or you lose the loan, period.
Frankly, I suspect the difference between subprime costs between brokers versus direct lenders could largely be explained by differing levels of fraud. People who are turned down by lenders find a broker who is more willing to commit some form of fraud to get them a loan, but in turn charge a higher fee. It would be interesting to look at foreclosure rates for the study data, since the things they used to norm the comparisons may in fact be illusory.
I quote 30 or so times a day on the Zillow system, where I compete head to head with lenders both large and small in an environment of almost perfect price transparency. For A quality deals on fixed rate loans, brokers like me provide the vast majority of lowest price offers. This is the reality mentioned in the original report.
And not to be rude about this, but please spare me the vapors about nasty overcharging loan brokers. First off, I personally have not done a single subprime deal, cant remember the time when I made more than a point on a deal and have disclosed every dime I make to my clients for at least the last 10 years.
Second, your complaints would have a great deal more merit if I had not had a daily parade of clownish lender reps coming through my office all through the boom years trying to get me to sell their toxic products at whatever the market would bear. You are absolutely right about the exploitation, but take a look at what your own industrys house is made of before you start throwing stones.
The brokers need a stream of prime deals to mix in with the subprime transactions, on a substantial portion of which they are being paid to facilitate fraud. The fees being paid by the subprime borrowers thus cover both the broker's services and in effect a certain quantity of camouflage, which hides from the lender (who is often often complicit) the weaknesses in the subprime borrower's application.
Without the prime deals the broker's default stats would start to look wrong, which would quickly become unsustainable for them. It's naive to think the brokers don't actively manage these numbers.
Re how people do or don't know what a prepayment penalty is...
You would think so, wouldnt you? It just often doesnt work out that way when you are a first time home buyer confronted with a stack of sixty pages to sign at closing. Thats the real world.
Is it typical to find out important features of one's loan at CLOSING? We certainly knew well ahead of time the salient features of our loan. How else can a consumer reject an inappropriate loan? Closing is not the time.
There is a huge amount of self selection in these numbers.
Banks will not tolerate some of the behavior I do.
They will not work at odd times for the borrowers convenience.
They will not spend 8 months to a year working with some one to help them get their act together.
A bank loan officer has never gotten under the crawl space of a house to insulate for USDA inspections. Or parged a basement wall. Or painted the window frames.
A bank officer would freak if a customer brought in five hefty bags of trash and dumped them out on the conference room table to find some docs. Let alone go out to the borrowers car to pick through door pockets full of french fries to get some paystubs.
Banker boy ain't gonna drive to North Jersey at 5 in the morning to pick up docs and drive them to Bowie for a 10 am settlement.
He hasn't been to over 1500 settlements. Let alone done one in a prison or a hospital or rehab. Or seen bloodshed at a settlement.
He hasn't laid eyes on every single piece of collateral he's lent on.
And he damn sure hasn't taken an app while iguanas skitter around in the semi-dark.
And I know he hasn't done an app on East Eager St. How do I know? Because these are the bastards that invented redlining and East Eager isn't even on their map!
As far as education goes I'll stack mine against anyone here and this is an educated crew.
The loan dude in the bank where I have my checking has an associates from the local community college proudly hanging on the wall. He wears a flannel shirt with the sleeves cut off. At work!
I'd further like to add that there is a lot of confusion here and elsewhere as to who is a broker and who is a bank and the various shades of grey in between. Some brokers are bankers, most wholesalers are banks (some are even depository institutions), some banks act as brokers for product they don't have. And don't even get me started on the little dirtbags at the net branches.
Things got all slippery and there were in fact brokers screaming to reel things in. I publicly humiliated the secretary of banking in my state over some of this stuff in 2004 and was sure my license would be yanked. He didn't care. I was too small a bug to even squish.
There are plenty of crappy brokers, Los, banks, AEs, borrowers, etc. Its a culture that celebrates incompetence, apathy and greed, so this is what we get.
First the dishwasher, now the pipes: this is the year of the plumber.
Well, into each life a little rain must fall and it rains on saints and sinners alike,... just didn't think it was going to be indoors, heh? April is national poetry month, so:
Ye fearful saints, fresh courage take,
The clouds ye so much dread
are big with mercy, and shall break
In blessings on your head.
There's one little problem with this 'study'... for the most part, retail banks were non-existent when it came to subprime originations.
The majority of them them were originated by TPOs or by wholesale entities with retails ops (CWide, Novastar, etc).
Basically, for comparison, the study was looking at two 'identical' full doc borrowers. Both with 580 indicator scores and both 'full doc'. What the study doesn't take into account is that the 580 at the retail bank is a true indicator score and the full doc is 2 years W2's and a full VOE. At the broker, the 580 is the primary wage earner's score and the 'full doc' is actually 12 months bank statements to prove income.
In short, without knowing how deeply the study really looked, it would appear that they are comparing apples to a Toyota.
I could not agree more, but what I have described is how things really work for a surprisingly large number of cases. That's why I strongly believe you need to limit the scope of possible abuses, prepayment penalties being one of the most egregious.
Thank you, Potsy. I, personally, have 3 loans in the pipeline for borrowers that I sent to BofA for the better deal, but they came back. Putting their own loan packages together and trying to explain or interpret the details of their current situation is too much.
Thirst?
Slaked by the snouty Tanta> Thanks, ma cher.
This supports the idea that the driving force behind these loans was the capture of fees - not the overall, long-term value potential of the loan. Thus, we are screwed.
While I agree more study would be nice, I think it is safe (and prudent) to assume the worst regarding brokers in the current environment.
I sat in a broker's office not too long ago before I decided there was no way in hell I was buying in this market. When the broker told me my credit score, the guy in the next cubicle popped up and asked if I was interested in investment properties.
At one point during the conversation he was mentioning how our market didn't have many investors. Later in the conversation he slipped and bragged about how many clients he has from California. We are not in California.
The profession is a joke.
I am going directly to the lenders and shopping around myself.
did u guys see des-moines' fhlb rating outlook was cut to negative. USA AAA, getting closer
I get accused from time to time of claiming that retail loan officers can do no wrong, which I confess cracks me up to the extent I often fall off my desk chair. I have spent more miserable hours of my life in often white-hot contention with retail loan officers than I or anyone else would care to think about.
That is the point. They do, mostly, have Tantas and MaxedOutMamas and Compliance Officers and Quality Control Managers and other beat-cops of the business breathing down their little necks in a depository environment. It's a long war, and the good guys don't win every battle. So retail lending surely ain't perfect, especially in those outfits where the cops have their hands tied by too-powerful forces on the sales side. Nonetheless, you have at least a fighting chance that someone in the bank itself is trying to rein in the sales force when necessary.
Wholesale lenders just don't ride herd on brokers. They could, but they tend to think that's the kind of hassle you're supposed to be saving yourself by being a wholesaler. There's this thing about treating them as "independent clients" instead of your own employees, whom you can escort to the woodshed when they need it.
Frankly, the world is littered with a lot of ex-retail loan officers who went out to establish brokerages precisely to get away from people like me.
And you are supprised? why?
The situation is analogous to the supermarket business. Large markets in middle class areas charge lower prices for staples then smaller independent markets in gettos where large markets wouldn't go.
Studies like this put sense back into the equation and take out the marketing and self promotion nonsense. All future lending should be done retail banks who are forced to keep a portion of the loan so they have a stake in making sure it doesn't go bad. Everyone else should be out of the loan business. PERIOD.
rent_to_own | 04.09.08 - 11:43 am
Coot old, or geezer old? Alzheimers is becoming more prevalent.
Marcus Aurelius?
Why the hell were loan officers even making more than $10/hr?
It is like submitting a job application and pushing around some paper. No skill was needed except to fleece the uneducated consumer.
Gee, those nasty, untrustworthy mortgage brokers...again! I wonder where they got the idea that they could make 3% - 4% in overages on subprime loans and still charge points upfront??? It couldn't be from the emails & flyers the lenders and AEs kept bombarded them with could it? Nah. ("MAKE 4 POINTS YSP ON OUR OPTION ARMS" or WAMU LIMITS YSP TO ONLY 3 POINTS)
Tanta, there's no question that the subprime business took on the philosophy that it was okay to kick people while they were down, by burdening them with extra-high rates and fees, but the lenders (and presumably the securitizers on Wall St) encouraged this behavior. Brokers were just better at atapting than the 2-faced lenders offering these products.
I never had the stomach for the subprime business, but you know, FHA is the same way. There's some inherent belief that by offering fha loans, the lenders and originators should get double the compensation of prime business. Maybe you should point out the SRP business with FHA, now that FHA is being marketed as the saviour of the purchase market. -- Now, how do you blame brokers for ripping off the public when lenders are the ones masking compensation as an SRP which historically was not disclosed to the consumer (nor to many LOs) as compensation?
Does this tie into why WaMu is only doing retail mortgages now and not wholesale? I was trying to figure out yesterday what the advantage was in doing that.
Alan, I seriously doubt Tanta is "surprised." My educated guess is that she just likes to see actual data to support what she thinks is true . . .
Large markets in middle class areas charge lower prices for staples then smaller independent markets in gettos where large markets wouldn't go.
Well, but my point is that even if we used to be like grocery stores, we aren't any longer. Brick & mortar just doesn't matter as much as it used to. It's hard to buy groceries on the internet, or out of a tiny cheap storefront whose equipment needs are phone, fax, PC, and a couple of chairs. But you can "buy" mortgages that way. You don't have to drive out to the suburbs to find the cheaper ones any more.
So something's really wrong if the pricing patters of the "grocery" model persist in the mortgage model.
My educated guess is that she just likes to see actual data to support what she thinks is true . . .
Guilty as charged.
Tanta - A question about "What I find most refreshing about the approach is that it mostly dismisses the issue of "better disclosures" as a regulatory side-track. That's a long-time hobbyhorse of mine, too."
It has certainly been clear that you disagree with transparency being a key to fixing the subprime problem. But the only reason I've seen you give in the past is that the horse has already left the barn. Perhaps I've missed it, but I'd be interested in why you don't like transparency as part of the solution to prevent future issues (say 10 years down the road). I would certainly agree is will not have a major effect on the discontinuity between what a broker charges and what a lender charges. But I would suggest that it should have at least a modest effect on people getting into mortgages that they can't afford after the intro period is over.
TIA
Clark
Another example how the financially disadvantaged subsidize the the advantaged (like Alan's example of supermarkets) has to be the credit card industry. 'Dead beats' like myself pay off our balances and never pay interest or extra fees. Others pay through the nose. If it wasn't for those others, I'm sure the CC companies would have to find a way to make me pay.
The results are no doubt stunning as well as surprising to a certain reliably-stunned-and-surprised contingent of the regulatory and securitization enclaves.
Ah, classic Tanta. Didn't even need to see the length to know the author.
There's some inherent belief that by offering fha loans, the lenders and originators should get double the compensation of prime business. Maybe you should point out the SRP business with FHA, now that FHA is being marketed as the saviour of the purchase market.
So typical of the broker response: "They made us do it and . . . and . . . FHA! Look over there!"
FHA was actually on top of the "low balance loan pricing problem" waaaay before anyone else. FHA knows that its average loan balance, throughout its history until just recently, was substantially lower than conventional loans, and its borrowers had weaker credit profiles and less experience as homeowners, making them expensive to service. For that reason, FHA loans have always paid a higher servicing fee than conforming prime loans: when prime servicing fees were 25 bps for fixed rate and 37.5 bps for ARMs, FHA paid 44 bps.
That increased the servicing value of FHA loans: they were lower-balance and more work, but the fee percentage was increased accordingly, so servicers became interested in servicing them.
"SRP" or Servicing Released Premium is just a calculation of the present value of servicing income on a loan, less a profit margin for the party buying the servicing rights. In correspondent transactions, it is paid to the originator of the loan as compensation for release of the servicing rights. (It isn't paid to brokers since they don't close the loans and do not therefore own the servicing rights; the wholesaler does.) In some correspondent transactions, an "all in" price is paid for the loan that reflects the note asset as well as the servicing rights. In some cases, a base price for the note asset has a separate SRP added, to get the total price paid fo the loan.
Brokers, who for the most part fail to understand what SRP is, love to keep bringing it up as evidence that their "yield spread premiums" aren't the only kind of price-gouging. But of course, the prices they use to get sufficient overage to pay YSP have a servicing component already in them; it simply isn't visible to the broker as an SRP because the broker isn't compensated specifically for servicing rights.
"Drdebt," I don't know where you get your "dr" part.
here's a link to that Jackson and Burlingame paper mentioned, for those interested:
http://www.law.harvard.edu/faculty/hjackson/pdfs/january_draft.pdf
This reminds me of my days as a boiler-room stockbroker.
The secret to being a successful rogue stockbroker was to follow the 10 pikers(small investor) for every whale(large investor) business model.
Cold call find more pikers.. feed your whale... Cold call find more pikers... feed your whale.(repeat)
It's no small wonder that many of my former co-workers found greener pastures of lax regulation in the mortgage lending arena.
No SEC, no NASD, no broker background checks(U-10s), no series 7,24 and other continual testing.
Dear Tanta, are there any requirements on what credit rating mortgage insurer must have in order to be eligible for GSE business?
7:19AM Four U.S. mortgage insurers downgraded to reflect greater-than-expected housing slump at S&P : S&P lowered its counterparty credit rating on MGIC Investment (MTG) to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on the mortgage insurance subsidiaries to 'A' from 'AA-'. The ratings were removed from CreditWatch. The outlook is negative. S&P also said that it lowered its counterparty credit rating on Old Republic International (ORI) to 'A' from 'A+' and its counterparty credit and financial strength ratings on ORI's core subsidiaries to 'AA-' from 'AA'. The ratings were removed from CreditWatch. The outlook is negative. At the same time, S&P lowered its counterparty credit rating on PMI Group (PMI) to 'BBB+' from 'A' and its counterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. and Europe to 'A+' from 'AA'. The ratings were removed from CreditWatch. The outlook is negative. In addition, S&P lowered its counterparty credit rating on Radian Group (RDN) to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries to 'A' from 'AA-'. These ratings remain on CreditWatch... "The downgrades reflect weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance."
It has certainly been clear that you disagree with transparency being a key to fixing the subprime problem.
I find your formulation absurd. I am not part of some "pro-opacity" lobby.
I am of the opinion that:
@chegewara - where did you see that about the Des Moines bank? Can't find on cnbc or Bloomberg, and google is useless for new information.
Thanks.
I love the phrase "some pro-opacity lobby!"
Dear Tanta, are there any requirements on what credit rating mortgage insurer must have in order to be eligible for GSE business?
Yes, there is, and I posted a while back on a Freddie announcement on that subject.
It is important to bear in mind that the GSE requirements are mostly a matter of claims-paying ability, not investment ratings directly.
Calculated Risk: Freddie Mac: Project MI Lifeline?
Suggestion - Executive summary at the top for those of us with the attention span of a hummingbird.
So retail lending surely ain't perfect, especially in those outfits where the cops have their hands tied by too-powerful forces on the sales side. Nonetheless, you have at least a fighting chance that someone in the bank itself is trying to rein in the sales force when necessary.
Yes, and the despised Tantas are backed up by examiners who introduce external reinforcement. It's an opportunity for everyone to at least think twice. Some of these sales people really need to be locked in the vault and forced to think for a year, so the system is quite imperfect.
My belief is that the relatively uncircumscribed nature of wholesale brokering was considered an asset rather than a liability by some of those vault-escapee types. However now the utility of Tanta-irritation is becoming self-evident. It's notable that real due diligence went overboard at the same time.
While our system of banking regulation isn't perfect, it does overall tend to enforce a long time horizon where monetary incentives would favor a short time horizon. You can make a profit for 1-4 years doing things that will put you out of business shortly thereafter.
Brokerages can pop up overnight, like mushrooms, and tend to collapse just as quickly when booms end. However the loans persist.
I am going to read this report quite carefully, and I am very thankful to Tanta for posting about it. The basic finding does make sense to me.
Tanta, if you read this, I have wondered in the past if the real effect of all of these "innovative affordability" loans isn't to induce constant refinancing. As you have covered before, the jumbo market refinances quickly anyway on rate differentials. You have a high incentive to get the lowest rate because you will probably get them back in two to three years. It may well be that the wholesale brokerage market operates just to move a lot of mortgages.
The real question is whether the wholesale brokerage environment (as it now exists) has any incentive to sell old-fashioned conforming to prime or near-prime, or FHA loans. The work level on those is more and the returns are less.
I know some brokers who are in the business for life and thrive on return and referred customers. They seem to do an excellent job. But especially in the recent surge, the newbies and the mushroom types seemed to explode. Some of them were truly so dumb that I think they genuinely believed that the lowest payment now was the best mortgage for the customer.
upon review that link appears to be an earlier version of the paper (2002). oops.
I know it would be difficult to include this info but the study does note:
First, our data does not have any
information on upfront fees paid by borrowers and, as a result, the cost of the loans is measured
exclusively by interest rate.
I'd be a lot more receptive to a recommendation eliminating YSP if I knew that it was not a factor in lowering upfront cost.
PPT asleep at the switch. They gave it a good effort last night with the futures, so they get a C+.
barley-
it has to "appear" free.
It should be alot lower today based on UPS' affirmation of what reality truly is.
I suspect it will be no further down than 30 or so a the close...unless another rescue rumor floats..in that case who knows.
Ciao
MS
Tanta,
Some of us here can't read, can you make your little stories shorter and use smaller words?
Tanta, bravo to you for another excellent post. You really have a knack for getting to the most important points.
I think the model for the mortgage origination industry can be found in the 34 act "know your customer" rule. I agree wholeheartedly that the idea of increasing 'disclosure' just turns the whole mess into a game where no one wins. If you are going to make mortgages so complicated that you need advanced degrees to understand them, then the responsibility has to lie with the originator.
and mama, i think you are exactly right that the originator movement was a full attack to force refinancings and fees forevermore. Prepayment penalties for paying off your mortgage should be illegal. imho
Tanta, if you read this, I have wondered in the past if the real effect of all of these "innovative affordability" loans isn't to induce constant refinancing.
I think so, and it worked in a couple of ways. First, new products were originated that basically required refinance--the famous "exploding ARMs." Second, new products were developed to create artificial "refinance opportunities." In periods in which long rates are fairly stable, a borrower with a decent rate loan may have no particular reason to refinance for years (if they don't want or need cash out, or if the HELOC lenders are there to provide the cash). So things like the Option ARM pop up that "look like" a lower rate to the borrower, when of course it really isn't.
It is true that nearly 100% of broker contracts have "premium recapture" provisions in them that require the broker to pay back premium paid for the loan if it refinances early. These "anti-churning" provisions have failed largely because:
"broker transaction risk" can now be qualified as wholesale bankers are beginning to look to the broker in a litigious effort to recoup costs associated with investor repurchase requests or other impaired loans.
Prepayment penalties for paying off your mortgage should be illegal. imho
I will put in a not-very-strong good word for prepayment penalties, as long as they come with a rate discount. I mean, some people are long-time homeowners with no intention of moving, do not wish to raise cash by hocking the house, and have pretty stable employment and family situations. Why shouldn't they be offered a somewhat lower rate in exchange for a prepayment penalty?
Now, we know that isn't how they're being used: they are being used with premium rate loans (to assure that someone "earns back" the premium paid). I have no trouble with that being illegal.
Two points:
--Many people who intended to defraud, lie, get a "tricky" loan, would seek out the brokers (my sister in law being one). People didn't think the institutions would let them get away with it. The phrase: "Oh, I have a guy who can do that" could be heard whenever speculators speculated. The added cost was justified by both broker and borrower, (assuming they were aware, and more were aware than will admit), was simply the added cost of having quick money no questions asked. Loan sharks are always more expensive.
--On a macro level, we know that we pulled future earnings forward and this was just another "stimulus package" the market created to put more "later" money in the hands of "now". It's no different than the checks we are getting in the mail from Bush. The idea that once this credit crisis is over when can just get back on the spending wagon is ludicris.
Nice post Tanta,
Thanks.
Wanna buy a muni ?
Wholesalers decide it's not cost-effective to try to collect $1000 from some deadbeat broker for an individual churned loan
It's not that anyone has decided it wasn't cost effective. If a relationship wasn't worth keeping the broker either pay or be deactivated. If it's a big producer, you'd have to fight AEs, ASMs, RVPs etc to collect (note that a lot of big producers were serial churners). I don't think that wholesale lenders have developed a mechanism to properly assess the value of broker relationships.
Alan writes:
And you are supprised? why?
The situation is analogous to the supermarket business. Large markets in middle class areas charge lower prices for staples then smaller independent markets in gettos where large markets wouldn't go.
When a 'large market' does go into a poor area they charge less for the staples then their 'large market' counter parts in the affluent areas.
Of course people who live in the middle of Montana have the same problem as the inner city folks, but its not 'The Man' taking advantage of them, it's economic forces at work, amirite?
Some key points that the article points out:
*Despite their integral involvement in mortgage transactions, there is scant regulation of mortgage
brokers compared to traditional lenders
*Brokers are generally regulated at the state level, but such regulation is primarily limited to licensure
rather than substantive lending standards
*brokers often market themselves as mentors or advisors to potential borrowers (but have no fiduciary responsibility)
There should be a higher barrier to entry into the market to become a mortgage broker and the broker should a fiduciary responsibility to the borrower (especially since they often market themselves as advisors or consultants).
Racer X, you're right, and I was using "cost-effective" there (in my own mind, at least) in the wider sense of "cost to the relationship," which is the usual bullshit du jour in my experience. That's exactly how it would go down: we can't hit up Favorite Broker X for recapture, because he might take his business elsewhere! And then some other bank would get all the churned loans!
I should say, though, that my experience working for a wholesaler was exclusively prime or near-prime (FHA) and conforming balance; we didn't pay over 102 on anything and usually not nearly that much. So it really was chasing down less than a thousand bucks in most cases. The problem was that it adds up over time, but once you've "waived" the first few, you've set expectations and that's when the AEs blow a gasket as enforcement finally starts.
On these jumbo OAs paying 104.50 or whatever, you'd think wholesalers would find it cost-effective to go after those premia.
Average Joe said: "...The idea that once this credit crisis is over we can just get back on the spending wagon is ludicrous."
It may seem ludicrous to you, but you're fighting against the tide of human nature, and you'll drown before you win.
And that's under the assumption that you're right about how much damage has been done vs. the economy's ability to cope, which, IMO, you've underestimated.
Sebastia
Just as many investors in mortgage-backed securities didn't realize their potential exposure, many people don't have any idea about huge unfunded federal liabilities, Walker said.
"We have $44 trillion-plus in off-balance sheet, unfunded obligations for Social Security and Medicare alone," he said.
Money meltdown - MontereyHerald.com :
"Cleaning up this mess ... is going to be issue number one, two, three and four for the new president," said Alan Blinder, former vice chairman of the Federal Reserve Board and an economics professor at Princeton University.
Blinder, who was in Monterey to kick off the 11th annual series of lectures sponsored by the Panetta Institute, was referring to the financial tremors that began last summer by the meltdown of mortgage-backed securities.
But subprime loans and home foreclosures are just the tip of the iceberg in U.S. economic waters, according to Blinder and David M. Walker, former U.S. comptroller general. They were in Monterey to speak at the Monterey Conference Center.
"Let's Have Another Cup O'Coffee"
by Irving Berlin
(from the 1932 musical "Face the Music")
The song, set in a self-service restaurant modeled on the Horn & Hardart Automat, was sung in the play by a group of once-wealthy citizens who were awaiting better times, as mirrored in the song's opening lyrics:
[Verse:]
Why worry when skies are gray
Why should we complain
Let's laugh at the cloudy day
Let's sing in the rain
Songwriters say the storm quickly passes
That's their philosophy
They see the world through rose-colored glasses
Why shouldn't we?
[Refrain:]
Just around the corner
There's a rainbow in the sky
So let's have another cup o' coffee
And let's have another piece o' pie!
Trouble's just a bubble
And the clouds will soon roll by
So let's have another cup o' coffee
And let's have another piece o' pie
Let a smile be your umbrella
For it's just an April show'r
Even John D. Rockefeller
Is looking for the silver lining
Mister Herbert Hoover
Says that now's the time to buy
So let's have another cup o' coffee
And let's have another piece o' pie!
[Alternate Lines:]
Things that really matter
Are the things that gold can't buy
Junior Bush keeps sayin'
that now's the time to buy
#
Marcus Aurelius. Have you no life at all? You post day and night, even when you have nothing to say. Which, by the way, is most of your posts.
Help me out here. How do I put Marcus Aurelius on ignore using Greasemonkey. TIA
Many people who intended to defraud, lie, get a "tricky" loan, would seek out the brokers (my sister in law being one). People didn't think the institutions would let them get away with it.
This is actually one reason why I want more empirical work and careful analysis with this "brokered transaction premium" idea. One possibility is that the applicant pool is adversely self-selected in some markets (the ones where there is a depository alternative).
The question, of course, becomes not just how brokers got themselves a reputation for putting up with things an institutional lender wouldn't, but insofar as an individual broker is "innocent" in this regard, how or whether it fails to notice that its borrower pool is an adverse selection.
But states see the heavy hand of the federal government in some of the reports proposals.
One plan would establish a federal mortgage commission that would set minimum licensing standards for brokers, although states are already working with Congress to establish such standards. Another proposal would increase federal oversight of state-chartered banks, which make up about 70 percent of all banks. And another recommendation is to create an optional federal insurance charter, which could infringe on state powers to set rates, inspect policies and require coverage for those whom insurance companies would otherwise exclude.
Fed plan would shrink states' powers
Fed plan would shrink states' powers
Clark to Tanta It has certainly been clear that you disagree with transparency being a key to fixing the subprime problem. But the only reason I've seen you give in the past is that the horse has already left the barn. Perhaps I've missed it, but I'd be interested in why you don't like transparency as part of the solution to prevent future issues (say 10 years down the road).
This is my response, because I don't think new disclosures will do much to fix the problem created by irresponsible underwriting. Also, I take issue with the "subprime" designation. I think the Alt-A innovation is going to wind up being just as big a problem.
First, I do loan disclosures. For money. Calculations, compliance, et al. Very few would-be borrowers actually read the darned things. If I want them to actually decide on the basis of what I'm putting in the disclosures, I need to separate out important information related to decision steps and make them affirmatively sign to get the product. I swear to you, that is the only way I can get borrowers to make responsible decisions when faced with a complicated menu of choices. They are not able to understand three pages of disclosures about an option-ARM, or the risks involved in a 2/28, or insurance products.
This makes the application process a bit more complicated, I can tell you. But I know from experience that just handing the customer a thingie about relative pay downs on balances between several products doesn't do jack for the majority of the applicants. You have to relate it to the consequences, such as:
"You have indicated that you are interested in a Pick A Pay loan for approximately $_______. If you take this loan and make the lowest payment at current rates, your loan will reset to $_______ monthly payment on __________. Your loan balance will have increased to $_______.
The risks of this type of mortgage include:
-You may owe more than your home is worth on _______.
-Your payment may vary more than shown because of rate adjustments.
-You may not be able to make the new payment.
-Assuming the above, you may lose your home because you will not be able to continue to pay your mortgage and you will not be able to refinance to a lower payment.
-Assuming the above, your credit would be damaged and you may experience other financial losses.
To avoid these risks, you could chose a different type of mortgage with a fixed payment for 30 years that pays principal as well as interest.
Using the same loan balance, your current payment for such a mortgage would be approximately $_______ and it would never change. Your loan balance as of (date given above) would be $_________."
By the way, doing what I describe can create legal risks since this level of disclosure is not required and since these disclosures themselves could be used to argue FTC type complaints. To get the borrowers to understand you are separating out factors relevant to that decision, which necessarily leaves open an avenue for litigation. Also, each additional piece of paper you give them creates new opportunity for errors and new risks.
Unsophisticated borrowers do not understand their loans, they do not understand the credit underwriting process, they do not understand the relative risk of getting in a loan that they will have to refinance in a couple of years, they do not understand the risk that their property value might decrease, they do not really understand amortization, etc.
The less the borrower understands, the more the obvious factors (such as a low initial payment) will weigh in their decisions, and the more weight what their buddy, the realtor or the broker SAID will have.
From what I've seen, there is little correlation between FICO and ability to understand the risks and benefits of these loans except at the extremes. Of course someone with limited English is at an extreme disadvantage. It's worth noting that many mortgage brokers are losing their own homes due to such creative financing. If the mortgage broker didn't understand the risk, what chance is there that they explained it to the customer?
Tough economy, crackdowns lead to drop in mortgage brokers
Page Not Found | Minnesota Public Radio
The number of mortgage broker licenses in Minnesota has declined from more than 4,000 a few years ago to fewer than 1,200 this year, according to Minnesota Department of Commerce Commissioner Glenn Wilson.
Before the subprime mortgage meltdown, it was possible to get a mortgage broker license in Minnesota for $850 and a bit of continuing education.
he lesson?
"Is it any different than going from one car dealership to another, and somebody charging you $5,000 more for a car at another place?" Beatty said.
In other words, even with new rules and regulations which attempt to rein in mortgage lending abuses, borrowers must still be smart shoppers.
Wow, so purchasing through unlicensed middlemen with virtually no regulation or oversight might result in higher costs to the consumer?
Hoocouldaknowd?
Ok, Ill bite your obvious baiting Sebastian,
--"It may seem ludicrous to you, but you're fighting against the tide of human nature, and you'll drown before you win.:)"
Well if it's human nature explain the behavior of Japanese who presumably are human. If it's human nature, and as far as I know we've been human as long as we have had economies, why then would any economy suffer a spending recession or depression? It's not like I am arguing something that humans have never experienced you know.
"And that's under the assumption that you're right about how much damage has been done vs. the economy's ability to cope, which, IMO, you've underestimated."
I am saying that the economy you think we have had, we in fact don't and haven't had (which was the point of CR's prior post). Much of the income we spent over the last 5 years wasn't earned, meaning the profits from selling to or working for these spenders won't be "earned" in the near future. Meaning even the spending by those who have "earned" their money over the last 5 years will be impacted.
Chanhassen broker pleads guilty to racketeering in $2.5 million mortgage fraud case
Eight charges each still are pending against Scott R. Rosenlund of Chaska, president of 10Spring Homes, a home-building and development company, and Shinon Lindberg of Greenwood, who allegedly recruited straw buyers for the properties.
Uniontown councilman who said he was unwittingly caught up in a mortgage scheme with his daughter pleaded guilty in federal court Thursday to conspiracy to commit mortgage fraud.
Marlin Sprouts Jr., 52, of Uniontown formally entered the change of plea before U.S. District Judge Terrance F. McVerry. The plea is a departure from Sprouts' initial plea of not guilty to the single count of conspiracy that includes elements of mail fraud, wire fraud, bank fraud and money laundering.
Gerald Small engaged with others in a massive Kiting and Mortgage Fraud scheme in Colorado resulting in the conviction of six individuals, the seizure of almost $20 million in cash and assets, the restitution of two private jet aircraft, and losses to federally insured financial institutions of approximately $35 million.
Interthinx, the leading provider of mortgage fraud detection products, announced at the Mortgage Bankers Association's National Fraud Issues Conference that company analysts have uncovered more than 42,000 mortgage applications, totaling nearly $11 billion, containing significant misrepresentations of the borrowers' income. These applications were all originated and submitted for Interthinx review in the last six months of 2007.
Wow. Somebody mentions killfile, and lo and behold, our resident cut & paster gets a new name.
And we knew him back when he was Moe Showers.
how does subprime work?
crony capitalism
po'folk screwed agai
Tanta,
I think the reputation was a natural knowingly created through market forces. The brokers would push questionable paper through since they were seperated from the institution that would eventually say yes. This distance meant they were the biggest risk takers.."well, let's send it through, the worst they can do is say no!".
This distance also allowed the lenders to accept the higher risk. The broker added a layer of plausible deniability, i.e. a buffer between the lender and the knowingly lying cheating borrower. The lender could say..."I didn't even talk to the borrower...I just went off what the broker sent me."
I don't know enough about the lending business to know the details, but I do know putting buffers between parties allows everyone share the benefits but lay off the blame.
I have not given in to the mindset that says a loan originator has done his duty by finding a wholesaler and a rate for you, and the rest of the "guidance" should be a stack of paperwork that you either have to work your way through yourself or hire an attorney to read for you. -- Tanta
But especially in the recent surge, the newbies and the mushroom types seemed to explode. Some of them were truly so dumb that I think they genuinely believed that the lowest payment now was the best mortgage for the customer.-- MaxedOutMama
I question how many of these people were too stupid and needed an attorney to read their documents. Clearly there are some people so mentally impaired they can't sign contracts. How many people are in the gray area where they are not legally mentally disabled but they are not smart enough to check the rate and terms on a loan agreement they're signing?
It seems more likely that many of them were taking a speculative risk that didn't play out in their favor. That's easy to understand. It's hard to understand that they were too stupid to know what they were doing.
I agree with Tanta's suggestions because when these risk-takers get into trouble, they claim ignorance, and gov't money that could have been used to help the truly needed goes to bail out risk takers.
Tanta,
Long post.
Good post.
Thank you for the details. The devil is always in the details. Without the details, understanding the whole is less complete.
Norka West
P.S. To those who cannot handle reading long posts, buy yourselves some Chapsticks so your lips don't get chapped while reading.
"Internet" is a proper noun. Just sayin'. Also, you owe bd a hat tip.
No doubt a lot of people will be troubled by the implication I am making that more than a few "good" borrowers got better rates than they probably should have
/raises hand. Yes, that troubles me all right. Sorry to be a born-and-bred dope here, but I do believe that at least some of the prime spread widening we've seen lately is driven by fear, not fundamentals. Subprime was overwhelmingly isolated, all the way through conduits and securitizations; which is why I have a hard time believing that these subprime loans were "offseting" prime borrowing costs when their funding wasn't commingled from an investment capital standpoint. It's just a matter of charging what the market will bear in both cases.
Member & Specialist/Public short sale ratios trending down; is the daytrader tapped out and low on cash yet? Maybe house flipping will make a come back?
403 Forbidden
Tanta,
I can't believe you remember Moe, that dude wasn't here that long! I'm just trying to stimulate the blog now and then and perk things up. I'm trying to behave, but...
Tanta,
I'm not trying to start a fight or call attention to something stupid, but I just did a search on Moe; that guy had vision!
Re: Moe showers writes:
Say it aint so!
Moody's said that it does not expect WaMu's profitability to recover until 2010.
Credit losses from WaMu's mortgage operations "will be noticeably higher than previously estimated," Moody's said in a statement.
"Of particular concern is WaMu's approximately $43 billion second-lien-home-equity portfolio," Moody's said. "Higher provisions are likely to lead to poor reported results throughout 2008 and 2009."
Moody's cut WaMu's rating two notches to "Baa2," the second-lowest investment grade, from "A3." The outlook is stable, indicating an additional cut is not anticipated over the next 12-to-18 months.
moe showers | 12.10.07 - 6:39 pm | #
"I question how many of these people were too stupid and needed an attorney to read their documents."
It isn't that people are stupid, necessarily. But I'm willing to bet that, outside of self-selected populations such as the readers of this blog, the ability to do things like construct an amortization table for a loan is a fairly rare skill. We do not teach basic fiscal numeracy in this country, as it does not show up anywhere on a standardized test. But the fact that most people are unskilled in these areas does not make them stupid.
Also, you owe bd a hat tip.
Sorry if I missed you, bd. I didn't get a minute to look at comments for nearly two whole days. I'll spare you all the details of my life recently, but "water pouring out of my ceiling from upstairs' plumbing problem" sums it up, plus having the carpet cleaner in and a drywall repairer. "Drink to the bird!" (Bonus joke for English majors.)
Subprime was overwhelmingly isolated, all the way through conduits and securitizations; which is why I have a hard time believing that these subprime loans were "offseting" prime borrowing costs when their funding wasn't commingled from an investment capital standpoint.
Well, no, but it was all "commingled" from an individual brokerage's revenue standpoint. That's why I brought up the "point bank" thing. That wasn't a matter of how investors priced loans; it was a matter of how individual originators "sold" overages to some borrowers in order to be able to offer concessions to others. The "house" didn't care as long as the total "bank balance" hit zero.
It didn't have to be "overage on subprime, underage on prime." It could be and was "overage on unsophisticated borrowers/small loans and underage on people who know better." The fact that in very recent years it kind of aligns down the prime/subprime divide is what makes you skeptical, since from the investor standpoint those loans are priced very differently. But if you look in the details of the CRL paper, you see differences within prime and subprime, not just between them.
I question how many of these people were too stupid and needed an attorney to read their documents.
Many people have only a sketchy understanding how lending at interest works.
I appreciate your view, and have enjoyed reading this post. While I do not condone subprime lending, I beg to differ.
However, I rather adhere to the views enumerated under the paper by Anshasy and Elliehausen, entitled "The Pricing of Subprime Mortgages by Mortgage Brokers and Lenders", published by George Washington U and OSU.
Their views are more objective, bilaterally founded, and discover that mortgage brokers, in fact, have charged less than the average bank on subprime loans.
Kindly and respectfully,
-David Young
I'm not trying to start a fight or call attention to something stupid
ONE MORE off-topic paste job from you on this thread, and I delete THEM ALL.
I'm no longer interested in trying to explain to you why your constant interrupting of a complex conversation is so rude and disruptive and ego-driven. You are incapable of either understanding that or caring about it. Therefore, if you are going to change your name freely to evade our readers' filters, I am going to change my rules with you whenever I feel like it.
And by "ONE MORE" I mean one more, including the comment where you try to argue with this one.
David Young, while I don't condone referencing something without including a link, I still reserve the right to complain about it.
To clarify further, Shnaps, what isn't clear to me is that everybody got the "required price" for their rate on these deals.
Say the wholesaler's rate sheet offers 8% at 99 and 8.25% at 100. You don't have "overage" if your borrower with the 8% rate pays one point and your borrower with the 8.25% rate pays no points. But you do have "overage" if the borrower with the 8.25% rate pays a point. You could "use" that excess income from the loan (which the broker keeps, since the wholesaler does not require it as a discount point) to offer your "best" customer 8% with no points.
That the borrower who paid overage might well be "subprime" could simply be coincidental, in the sense that such a borrower might be so uncertain of his ability to get a loan at all that he simply takes the first offer he gets.
It seems to me brokers were steering marginal-quality loans into high-rate high-mi products that with some coaching could have been placed with FHA or a State Housing Finance Agency simply become the broker did not offer either of these products.
Realtors would steer marginal-quality purchasers to brokers who wouldn't put the cabosh on purchasing a home the consumer couldn't comfortably afford. Realtors will steer their tiffany borrowers to tiffany shops. Even if the borrower had been counseled appropriately, the borrower may not have had the patience or discipline to wait 9 months to bring credit scores up or to raise the necessary cash and would have sought out a broker that had no qualms.
I haven't had time to read the 54 page study but I'm assuming they were comparing loans of the same size. At times, the effort and aggravation it takes to originate a $60,000 loan is far greater than to originate a $460,000 loan. Human nature being what it is, a 100% commissioned originator will have a floor rate they'll work for in dollars, not percentage. Honorable originators will pass on the $60,000 loan rather than charge them up the ying yan. The borrower will often be referred to the credit union for a home equity. And, a loan officer at bank paid on a base salary and small commission, isn't as pressed to reach a floor rate.
Is it truly pricing discrimination to price a loan in dollars rather than percentage?
Shnaps, in fact the CRL paper addresses the inconsistency of their results with the Anshasy et al paper; there's a footnote to the full reference.
See page 31 of the CRL paper, where they discuss other research consistent with theirs, included a subsequent paper of Elliehausen's.
Is it truly pricing discrimination to price a loan in dollars rather than percentage?
This is what the regulators call "disparate impact" policies. The 100% commission practice wasn't "intended" to be discriminatory, but in impact it is. It means that borrowers in lower-priced areas, starter-home borrowers, and (often) elderly borrowers who are refinancing a very small remaining loan balance, get denied access to high-quality mortgage originators and left to the tender mercy of sharks who will load them up with fees or premium rates in order to make the dollars work.
We just need to get rid of 100% commission. That structure originated in the last bust, when you really had to motivate loan officers to go find and compete for borrowers. It doesn't do much for me in a boom when the borrowers are beating your door down. Those originators you mention could "afford" to turn away small loans because they had tons of large loans falling into their laps.
Paying a loan officer commission for business that was brought in by a commissioned RE agent? Jeeze, how many people have to be paid a commission here? If the RE agent is doing the "selling," have a salaried loan officer doing the loan, who has no motivation to overprice or turn away small-balance business.
Another factor working here is broker specific pricing. High volume..ahem..high quality brokers were often given pricing better than the published rate sheet. One of the components of big broker/preferred pricing was product mix. A broker with a mix of high margin product (subprime, Alt A, POAs) could get a better price than a ref shop with low margin conf product.
Tanta,
What's cutting and pasting??, I love this place but I have nothing else to add.
What's wrong with random noise?
There used to be a rule of thumb many moons ago that the rate had to go down 2% to make a refi make sense. Other than loan size expanding which tends to make that break even percentage get smaller because you are spreading mostly fixed costs over a bigger value, and barring a need to cash out equity - what is a reasonable rule of thumb these days in Tanta's mind. I suspect the value if followed would not support the current enormous mortgage industry. In other words I think consumers have fallen for a lot of marketing hype in the past 15 years.
If I don't need to cash out and I do have a few thousand in my pocket to pay the closing costs on a refinance I think I'm better off just to put it against principle unless the rate difference is A LOT.
to offer your "best" customer 8% with no points.
I see your point. I just don't know if such occurances are prevalent enough to amount to a systemic sort of effect as you suggest.
Also, I would suspect that such a 'best' customer is actually getting a 'buddy deal' in that case. Which I know happens, I just don't know how often. I forget how certain corners of the 'broker universe' are rife with nepotism and all forms of back-scratchery.
I just don't know if such occurances are prevalent enough to amount to a systemic sort of effect as you suggest.
I don't know that either, which is why I'm asking for more empirical work on the problem. I do know that it can happen.
I just think we focus on how wholesalers price risk sometimes to the exclusion of how an independent broker's revenue model seems able--almost magically--to achieve "cost savings" that a big institutional lender can't achieve. Doesn't it seem to need more explanation that the big lenders with the "economies of scale" don't seem able to offer the kind of "super prime" rates that these little brokers can?
(OT) Average Joe said: "...I am saying that the economy you think we have had, we in fact don't and haven't had (which was the point of CR's prior post). Much of the income we spent over the last 5 years wasn't earned, meaning the profits from selling to or working for these spenders won't be "earned" in the near future. Meaning even the spending by those who have "earned" their money over the last 5 years will be impacted."
I would agree that this is true in the housing sector, for a minority of homeowners.
Where I disagree is with the idea that the health of our economy hinges on housing. Within the past 7 years we've had to contend with 9/11, the Afghan War, the Iraq War, Katrina during the Iraq War, the housing "bust," and the credit "crunch."
Yet the economy still can't seem to find a recession with both hands and a flashlight.
The worst we've seen after all this is a loss of -232,000 jobs from non-farm payrolls and it took 3 months to accumulate it, when during a recession that would be on the low side for a 1-month loss.
For all the talk that the problems we've seen so far in housing/credit/mortgage derivatives are just the tip of a much-larger iceberg below the surface, it's empirically clear that there's considerable unrecognized economic strength and resilience below the surface.
Sebastia
Charles J Gervasi - I spent a lot of time looking at broker antics on various boards, and that included a bunch of discussions in 2007 about getting foreclosed on themselves.
Forget the customers. Some of the brokers didn't understand what they were doing! I have had numerous discussions with quite experienced mortgage bankers who didn't grasp all the ins and outs at first.
With these innovative loans, it's not simply a matter of checking rate and term. That is the entire point! What used to be relatively simple becomes a lot more complex with more complex risks.
I'm not stupid because I don't know how to fix a truck engine and those who don't understand these products aren't stupid either. We are all ignorant outside our respective fields. A customer who doesn't understand the true risk involved in a 2/28 or OA doesn't have to be stupid. They just don't think in those terms.
There wasn't evolved CW on these types of mortgages because they were completely new in the mass market. It appears to never have occurred to some brokers that prices wouldn't escalate forever, and that refinances of many of these loans with initial "affordability" terms would be hard to come by.
I remember one broker who had written only one OA over the past few years writing about making a new employee who was selling them like hotcakes go to a closing. He commented that the kid came back white and shaken and stopped selling them. A lot of this was just plain unthinking behavior.
Jim Douglas Morrison | 04.09.08 - 1:08 pm
And you, sir? What value have you added?
Don't like it? Skip it.
To answer your question: 2 computers, 2 monitors, and plenty of time between tasks.
I see you got plenty of help with your request. LOL in your face.
Regarding understanding lending terms:
One thread down, a couple of posters had great difficulty with "median" (including Sebastian!! to my surprise).
So I doubt most folks understand amortization...
Disclosures or no, poorly regulated complex financial products = world of hurt for lotsa folks...
(just saying the obvious, I know)
re.."My suggestion is that we ask whether brokered mortgage lending is, in practice, running on the old "point bank" model that retail lenders largely abandoned, in which "strong" borrowers are basically subsidized by "weak borrowers."
There is absolutely zero evidence of this. Brokers do not have a pricing mechanism to "bank" overages; each deal stands on it's own.
What you don't seem to want to admit is that even this study, by no means biased in favor of brokers, found objective evidence that brokers do deliver measurable value to well qualified borrowers.
I am also struck by your comment supporting lender use of prepayment penalties, a truly disgusting anti-consumer practice that should be outlawed. I guess your views all depend on your point of view, doesn't it? Lenders can hedge prepayment risk without screwing borrowers whose plans and situations change through no intention of their own. It's hard for me not to see a double standard here.
Here's the reality. There are very few barriers to entering the mortgage brokerage business in most states. Lenders need to design policies, procedures and programs to reflect that reality. For most of this decade, the lenders decided instead to race each other to the bottom, promoting to their brokers ever easier ways to defraud themselves, their stockholders and their borrower customers.
Now I am not denying for a moment that many, probably even majority of brokers took advantage of these opportunities, but what else should anyone have expected? If a bank advertises that they put a paper bag of cash outside their doors at night, should they be surprised to see it gone in the morning?
Doesn't it seem to need more explanation that the big lenders with the "economies of scale" don't seem able to offer the kind of "super prime" rates that these little brokers can?
Economies of scale? While that can be hugely important to servicing, but it doesn't make for quite such a competitive edge when it comes to originating.
ScalABILITY matters, as does the biggie - OVERHEAD expenses. In these considerations, brokers have the advantage.
We just need to get rid of 100% commission.
Yes, this would pretty much do it. I do think that required mortage counseling from a non-profit or government funded program would help as well. I don't have the evidence to back this up, but organizations like ACORN and NACA seem to have strong following, as they are non-profit and educate their members thorougly about the realities of home-ownership, mortgage lending, and the purchase process in general. Will some home-owners still fall into the emotional trap of falling for a bad mortgage just for the sake of getting their "dream home"? Sure. But I do think outside counseling would cut those numbers substantially, especially within the low and moderate income ranged households. Along with cutting out the commission based broker, that would probably be pretty effective to protect new home-owners.
I am also struck by your comment supporting lender use of prepayment penalties, a truly disgusting anti-consumer practice that should be outlawed.
There's a vast difference between borrowing money for a fixed period of time and borrowing money with the caveat that, should interest rates rise, you'll be borrowing it for a long time, but if they fall you'll be returning it right away (leaving the lender with money to reinvest at a lower rate environment). Anyone who doesn't understand that that flexibility comes at a price should probably be doing more asking and less fulminating.
There may be a case to be made that some prepayment penalties were egregious, but your suggestion that consumers should get a free put belies the fact that they'll pay for that put, one way or another. Like the Fram guy said.
disparate impact pricing ... isn't it similar to the arguments taking place with respect to the pricing of health insurance premiums, community ratings along with mandates have driven up the price for everyone but a truly free market pricing structure would mean the elderly or the chronically ill will pay more in premiums than the young and totally fit. The drive to level the playing field can actually reduce options.
I too would love to see the 100% commission loan officer be phased out; I just don't see it happening.
And yes Realtors are doing the selling often to their very own affiliated in-house lender who funnel marketing dollars back to the agency.
Brokers do not have a pricing mechanism to "bank" overages; each deal stands on it's own.
Whatever can you possibly mean by that?
You are telling me that no broker can make such a significant profit on loan A that it is willing to cut into its margin on loan B? That they're so intellectually challenged that they don't understand the concept of "profit and loss" for their whole business? They only understand it on an individual transaction?
And I get accused of thinking some of them are complete idiots.
Tanta-
I'm one of those "little brokers" you so like to dismiss. Any time you want to contact me, I will be very glad to prove to you exactly how we "little guys" can offer rates so much better that the vast majority of larger firms. Of course, then you will have to stop pretending that we are all liars, unlike the saints working for direct lenders.
This kind of cheap condescension from someone whose industry had to be bailed out once in the 80's, and is well on it's way to yet another systemic failure due to widespread fraud, greed and incompetence just amazes me.
Tanta,
How much would it help to make mortgage brokers (and realtors ideally but that might be politically difficult) fiduciaires of their borrowers? It seems that this mess will not get better until the massive conflicts of interest are brought under control and this would be a good way to do it since criminal and regulatory methods seem to need a backstop given the political clout of the FIRE sector in general. My only concern would be whether these brokers are sufficently capitalized that they would worry about losing their money but I wanted to know what everyone here thought before I submit to my Democratic club.
MOM,
Many times when I'm on an audit support engagement, I initially start thinking that there's something nefarious going on. I reason that the CFO must know something or other is going on, etc. Then through conversations and discovery, nearly every time we find out that management either didnt have the tools (structural and/or mental) to know anything was going wrong.
I am also struck by your comment supporting lender use of prepayment penalties, a truly disgusting anti-consumer practice that should be outlawed.
I am totally struck by your inability to read.
I put in a lukewarm word for prepayment penalty options that are given in exchange for a rate discount. If I know, or rather confidently believe, that I have no intention of refinancing again in three years--possibly because I believe rates won't get signficantly lower than they are today--why shouldn't I be able to negotiate a deal with my lender wherein I give up my right to prepay for three years in return for a lower rate than I would otherwise get? Of course it would have to be an option. But if I took that option, and then did for some unforseen reason need to move in the three years of the penalty period, at least I got the lower rate to compensate. How's that so unfair?
I was precisely contrasting that to the practice of giving prepayment penalties with a higher than market rate, which is in my view toxic and abusive.
It really doesn't behoove someone who argues that the bank left the cash unsecured--and therefore who can blame those who took it?--to argue that I'm the one defending anti-consumer practices. Maybe the banks did offer brokers money they "couldn't refuse," but it came at the expense of their customers. Now is not a good time to accuse someone like me of not caring about the consumer.
Cliff Notes version, please
They only understand it on an individual transaction?
Tom O might be onto something there, I'd say mortgage brokers are some remarkably id-driven critters.
Calm down, Tanta.
Your post talked about BRANCHES that could BANK overages as a whole. Retail mortgage brokers price and are paid on each deal individually, on a commission basis, and many states like California require DRE licensed brokers like myself to fully disclose all compensation we earn on each deal.
While an individual deal may be priced at a higher or lower markup for marketing or competitive reasons, there is no mechanism in place at any wholesale lender I have ever heard of that would allow individual brokers to use overcharges on borrower "A" to subsidize borrower "B", nor do I think such a mechanism wold comply with RESPA or California law.
My point was that you were proposing a possible reason for the study's conclusion that brokers did offer value in certain situations that had no basis in fact.
Do some borrowers get better deals? Sure. I can do a 760 FICO no cash out conforming refi in about 1/5 the time I can do a marginal case that has to be more thoroughly documented and may have to be tried at two or three lenders, so why shouldn't I give the quality borrower a better deal? If I don't someone else will. That doesn't mean the more difficult borrower borrower is subsidizing the easy one, each deal stands on it's own.
How much would it help to make mortgage brokers (and realtors ideally but that might be politically difficult) fiduciaires of their borrowers?
I think that, IF (note to some of our other readers: this is a hypothetical construction) we see the interests of borrowers and lenders (real lenders, that is, which includes investors) as irretrievably opposed, THEN basically putting the broker on the borrower's "side" by making them fiduciaries would (theoretically) level the playing field a little. The broker then becomes the Loan Counselor, whose interest is really just to get the best deal for the consumer out of the (by hypothesis) lender who will always try to get the most money out of the borrowers' pocket.
I do think that underlying assumption needs to be challenged and complicated a bit. It was not always clear to me that borrower and lender interests were opposed. Take appraisals: I always believed that borrowers wanted to pay the lowest price they could get away with for houses. Lenders always wanted to avoid inflated values because that means their loans aren't sufficiently secured. So why did we get borrowers convinced that lenders were "against them" in this case? I think this is a good example of where borrowers' understanding of their own best interests got distorted, and it was often the sales force--brokers or commissioned loan officers and RE agents--who did that "distorting." Putting these folks "on the side of the consumer" fills me with the fear that even more distortion will go on, unless the broker's compensation is fully flat-fee and not dependent on loan amount.
The same kind of analysis can be made of interest rates. Lender/investors don't necessarily want the highest rate the borrower can be brought to pay; in the absence of prepayment penalties the things prepay too fast. Borrowers clearly want to pay the lowest rate they can, but they have been convinced that they are getting these "closing cost credits" that reduce their upfront cash costs, and that this is an unmitigated blessing. It isn't always perfectly clear to me that borrower and lender interests are wildly opposed here; it seems to me that the "no closing cost" thing arose mostly to drive reliable refi business for brokers. Take that out of the equation, and borrowers might not need to pay a broker fee for a "consultant."
So I'm not against fiduciary requirements, but I've worked for a lender long enough to know that that still means I, the lender, have to have a "fiduciary" in the deal, too. So at some point if the broker is the borrower's fiduciary, the wholesaler has to beef up on processing/underwriting staff to "protect" its own interests here. That can, theoretically at least, drive up credit costs for everyone, as each side "fiduciaries up" in a kind of consultant-arms race.
Again, I'm just trying to complicate matters a little. It's like the disclosure issue: it just isn't simple to me.
On prepayment penalties..
Last time I checked, my reading skills were up to the challenge even of your posts. I have been around long enough to se just what kind of "rate reduction" lenders gave for prepays, and how deceptively lenders marketed them.
I think the residential lending process has to be made as simple and transparent as possible. There is no place for lenders to add a huge potential penalty that most borrowers will only dimly understand at the time they get a loan.
I just don't think you appreciate how things are in a retail environment. You have to keep things very very very simple or huge percentages of the population will simply be taken advantage of by lenders AND brokers. Prepayment penalties fall strongly in the category of things where the potential for abuse far outweighs the possible consumer benefit. It's just that this particular abuse only benefits lenders.
Tom,
You say, "I'm one of those 'little brokers' you so like to dismiss."
Well met!
I recommend, although you may have already, allying yourself with strong portfolio lenders (i.e. ING, Astoria FSB, and other local banks).
A broker with a well-thought-out business plan will do quite well in this market environment.
Banks will always be there, but if Jack be nimble and Jack be quick, he'll jump over their lit candlestick...
While an individual deal may be priced at a higher or lower markup for marketing or competitive reasons
That's what I'm talking about, Tom.
The concepts of "overage" and "underage" are relative to the required price or "house price." (I don't know what y'all call it; we called it the "house price." It is basically the corporate minimum profit margin on a loan.) The whole idea of the point bank grew out of the recognizition that what matters to the company--not just a branch or an individual--is the total margin on the total pipeline, not this or that loan. So, for example, as long as "on average" a branch brought in 50 bps, it didn't matter to corporate whether that was a profit of 100 bps on loan A and a loss of 50 bps on loan B.
Wholesaler rate sheets only provide the required price to the wholesaler. What law prohibits you from working one deal for free, knowing you'll make it up on some other deal?
"it's empirically clear that there's considerable unrecognized economic strength and resilience below the surface."
That's right. The destinguishing characteristic of empirical evidence is that it's below the surface where you can't see it.
There is no place for lenders to add a huge potential penalty that most borrowers will only dimly understand at the time they get a loan
People might have no idea how to amortize, but they know what a prepayment penalty is. If they're told about it.
Cliff Notes version, please
Here, I'm a former abstractor:
Subprime borrowers pay more to use a mortgage broker than a retail lender. It's possible they are subsidizing the prime loans at the broker level.
BTW, I'm in total agreement with you on the futility of beefing up disclosure forms. Last I checked, Canadians still smoked, despite having some of the most alarming warning labels anywhere (e.g. TOBACCO SMOKE HURTS BABIES)
In the UK, mortgage disclosure notices are far more straightforward and prominent(e.g. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.) but guess what? - (see CR's post after this one) the UK is having similar problems in the housing market anyway.
As a 25 year veteran of the mortgage and banking industries, I have always wondered why loan officer and broker compensation was not paid as an annuity. This would align the interests of the LO/broker with the customer and mortgage investor. I was told that the first companies to do this would be put out of business due to the ultracompetitive nature of the mortgage origination business, but I'm wondering if the current environment creates a unique opportunity for this kind of change.
Thoughts?
Ralph-
Thats why I said Lenders have other ways of hedging. Perhaps you should be doing a little more careful reading and a little less fulminating, yourself, eh? MBS pricing already reflects the hedging risk, doesnt it?
Jalrin-
In CA at least, for brokers licensed by the Department of Real Estate, we are already fiduciaries of the borrower. I have never had a problems working that way.
Tanta-
How about if we agree that there is enough blame to go around that we both stop throwing mud at each other. Lenders created this system; brokers (and lenders) took advantage of it.
Borrower and lender interests are always opposed on the price level, just like any other market transaction. That does to mean they are in opposition in all other areas, and in fact it is clearly in each others larger interests that mortgage lenders continue to exist and offer relatively stable loan programs.
Acting as a borrowers agent is not difficult for me; just try to get the best deal I can while not lying to anyone and fully disclosing all relevant information (including pricing and my markup).
On the issue of What law prohibits you from working one deal for free, knowing you'll make it up on some other deal? I can only reply by wondering who is going to pay me more on deal #2? If they were willing to pay me more, why wouldnt I charge them more no matter how much I charged the first guy? I think you are used to dealing with things on a larger scale than individual brokers doing individual deals in an environment of intense price competition. On this level, each deal stands on its own.
Joy-
You would think so, wouldnt you? It just often doesnt work out that way when you are a first time home buyer confronted with a stack of sixty pages to sign at closing. Thats the real world.
Yes but we must not forget that rich and poor borrow as much as they can and that if you give a poor person a higher interest rate then they end up paying a relatively lower price for their home. Then when they default, which it was expected they would, the bank loses less while the investors lose more as the poor guy might have paid $200k for his house if he had an 8% loan, while he would have paid maybe $250 for the same home if he had been able to get a $% loan.
I can only reply by wondering who is going to pay me more on deal #2? If they were willing to pay me more, why wouldnt I charge them more no matter how much I charged the first guy?
Well, as far as I can tell there are plenty of brokers who will charge whatever they can talk unsophisticated borrowers into paying (or rather, what they can slide past them in terms of rate and costs, focussing only on monthly payment).
The question becomes--this would be the one I asked in the post--whether that does not possibly allow these very same brokers to cut into their margins on the loans to sophisticated borrowers who read the documents and negotiate and generally demand "the best."
If that is so, then it might account for at least part of the fact that for prime loans, brokered deals get slightly--not very, just slightly--better pricing than retail prime loans. The idea is that the retail shops are basically prohibited by their regulators from charging whatever some naive customer will pay; they have to charge no more than what the rate sheet requires. This gives them no "profit cookie jar" to subsidize prime sophisticated customers with.
There are, you know, one or two of us who are actually horrified by the idea that you would overcharge borrowers just because they're gullible or docile or uninformed enough to pay it. Many of us believe that's pure and simple exploitation.
I can't help anyone who thinks that looking at aggregated data is somehow misleading, whereas limiting one's attention to "each deal individually" gives you a truer picture. We'll leave that up to Dr. Piaget or someone else. It's like the thread we had the other day with people who simply refuse to take any sociological perspective: I don't know what to say to them. If you cannot conceive of the analytic usefulness of studying groups and large datasets rather than focusing on single actions in discrete transactions, then you will always think I am making "unfair generalizations."
As a 25 year veteran of the mortgage and banking industries, I have always wondered why loan officer and broker compensation was not paid as an annuity.
Well, you know, there was a time, back when my wrinkled reptilian snout was fresh and snotty, when we were all paid on an "annuity." It was called "salary," and it was expected that if the loans we all collectively produced--both front-room and back-room "us"--were profitable and sound, the company would prosper and those salaries would rise faster than inflation.
I know. Bizzaro-world concept, there. But I just have to laugh over the occasional proposals I see to "compensate loan officers on profitability and safety over time." Hell's bell's, what are the rest of us compensated based on?
Lama ...through conversations and discovery, nearly every time we find out that management either didnt have the tools (structural and/or mental) to know anything was going wrong.
Yes. It can happen in any business. It's just that if you let it happen in financial businesses, the trauma gets widespread very quickly.
I still maintain that one effective measure of risk is whether the average borrower can understand the practical effects of what the borrower may be doing. If not, it seems to me that some serious questions must be asked.
Certainly in banking, it appears that innovation just leapt from one institution to another on competitive grounds without serious examination of resulting risks. Maybe the first company was doing a good job, but the second and third weren't. The "new blue chip" obviously didn't.
I'm reading this article about Goldman's Level 3 assets, and wondering about the determination that the sale of distressed assets shouldn't be used to mark to market.... It seems to me that a whole lot more is coming down the pike.
Thats why I said Lenders have other ways of hedging.
Sounds kinda handwave-y to me. Perhaps if you'd said "Lenders could just enter into a swap to hedge and pass the costs on to the borrowers."
Lenders can't magically offload their prepayment risk onto somebody else. Like any insurance, they have to pay a risk premium, which includes a profit to the counterparty.
And yeah, prepayment penalties are higher on higher rate loans. For obvious reasons.
Being a mtg broker I know the reality of this situation.
Reality is there is a concept that I have not seen mentioned. COMPETITION.
Here is how I use premium pricing: Quote borrower rate as "no point" loan vs "paying a point to get a lower rate". I then run a comparison for them to see when their break even point (no pun intended) is. Is it worthwhile to buy down rate? Many choose a "no point" loan as the recapture period doesn't make sense often enough. Either way, the company makes a point to a point and a half on these loans. I get a commission split on that figure.
If I get piggy and want more? Well that would mean my quote is going to be higher than my competition and I may lose the deal to a COMPETITOR.
I quote reasonable deals and I have a very high repeat client ratio. Almost all of them return to me or refer a friend or family member.
I accomplish this by putting the customer first and really listening to them and what they are trying to do. I never sell them something that they don't need or something that would be harmful or even overly risky (risk is part of life but unnecessary risk is, well... unnecessary).
I really don't care who pays. Either borrower or wholesaler. Makes no difference to me. If premium pricing is outlawed, it is just fewer choices for the consumer. Many wholesalers have a cap on what a broker can charge so this "problem" is easily remedied if that is what people really want. Just regulate the wholesaler to not pay premiums.
Are there brokers who abuse premium pricing and pig out on 2 - 3 points? Yes, but not all do. Something should be done to regulate brokers as I have yet to meet with a regulator in all of my 15 years in this business.
I think the issue is exaggerated but I understand why a consumer would feel duped if they learn that the broker earned money that was not part of the disclosed fee(s). But it is really more complex than that. I must work on a pretty thin margin and protect my clients from rate risk to get them the best execution in the marketplace in regard to rates. This requires skills that used to be a bond traders concern, as the fluctuations in the bond market are never mentioned, nor are rate extension costs mentioned due to circumstances outside the mtg brokers control. There are many.
Like I've said before. It's not as easy as it looks folks....
Ralph-
What do you want? This is long enough without a 6000 word post on hedging strategies. My point is that lenders can and do hedge this risk, and it is better (in my opinion, at least) for this absolutely real and necessary cost to be spread over the entire universe of loans rather than be concentrated on the few borrowers gullible enough to take a prepayment penalty and unlucky enough to have to pay it.
The entire thrust both of the original study and Tantas response is that less knowledgeable borrowers are taken advantage of. Thats exactly what will happen in a great many cases if we encourage prepays on any loan.
Tanta-
I cant help but think we are talking past each other.
In practice, brokers who do subprime are generally not the people that will be working with A quality borrowers. Brokers clients are a reflection of their own personality and style, and subprime guys generally lack the skills, knowledge and polish necessary to work successfully with "A quality borrowers.
Beyond that, you dont seem to grasp that the fundamental unit in a brokerage is an individual, not a branch or firm. We are all little companies. The idea that we would give A a great deal BECAUSE we can make extra money on B just isnt real. A is getting a better deal because the competition for good quality borrowers is cutthroat, everyones margins are lower and you spend less time on the transaction. You give them a good deal or you lose the loan, period.
Frankly, I suspect the difference between subprime costs between brokers versus direct lenders could largely be explained by differing levels of fraud. People who are turned down by lenders find a broker who is more willing to commit some form of fraud to get them a loan, but in turn charge a higher fee. It would be interesting to look at foreclosure rates for the study data, since the things they used to norm the comparisons may in fact be illusory.
I quote 30 or so times a day on the Zillow system, where I compete head to head with lenders both large and small in an environment of almost perfect price transparency. For A quality deals on fixed rate loans, brokers like me provide the vast majority of lowest price offers. This is the reality mentioned in the original report.
And not to be rude about this, but please spare me the vapors about nasty overcharging loan brokers. First off, I personally have not done a single subprime deal, cant remember the time when I made more than a point on a deal and have disclosed every dime I make to my clients for at least the last 10 years.
Second, your complaints would have a great deal more merit if I had not had a daily parade of clownish lender reps coming through my office all through the boom years trying to get me to sell their toxic products at whatever the market would bear. You are absolutely right about the exploitation, but take a look at what your own industrys house is made of before you start throwing stones.
You miss one critical factor.
The brokers need a stream of prime deals to mix in with the subprime transactions, on a substantial portion of which they are being paid to facilitate fraud. The fees being paid by the subprime borrowers thus cover both the broker's services and in effect a certain quantity of camouflage, which hides from the lender (who is often often complicit) the weaknesses in the subprime borrower's application.
Without the prime deals the broker's default stats would start to look wrong, which would quickly become unsustainable for them. It's naive to think the brokers don't actively manage these numbers.
ZF,
The sky is falling, eh Chicken Little?
Just reporting what I saw.
Re how people do or don't know what a prepayment penalty is...
You would think so, wouldnt you? It just often doesnt work out that way when you are a first time home buyer confronted with a stack of sixty pages to sign at closing. Thats the real world.
Is it typical to find out important features of one's loan at CLOSING? We certainly knew well ahead of time the salient features of our loan. How else can a consumer reject an inappropriate loan? Closing is not the time.
There is a huge amount of self selection in these numbers.
Banks will not tolerate some of the behavior I do.
They will not work at odd times for the borrowers convenience.
They will not spend 8 months to a year working with some one to help them get their act together.
A bank loan officer has never gotten under the crawl space of a house to insulate for USDA inspections. Or parged a basement wall. Or painted the window frames.
A bank officer would freak if a customer brought in five hefty bags of trash and dumped them out on the conference room table to find some docs. Let alone go out to the borrowers car to pick through door pockets full of french fries to get some paystubs.
Banker boy ain't gonna drive to North Jersey at 5 in the morning to pick up docs and drive them to Bowie for a 10 am settlement.
He hasn't been to over 1500 settlements. Let alone done one in a prison or a hospital or rehab. Or seen bloodshed at a settlement.
He hasn't laid eyes on every single piece of collateral he's lent on.
And he damn sure hasn't taken an app while iguanas skitter around in the semi-dark.
And I know he hasn't done an app on East Eager St. How do I know? Because these are the bastards that invented redlining and East Eager isn't even on their map!
As far as education goes I'll stack mine against anyone here and this is an educated crew.
The loan dude in the bank where I have my checking has an associates from the local community college proudly hanging on the wall. He wears a flannel shirt with the sleeves cut off. At work!
I'd further like to add that there is a lot of confusion here and elsewhere as to who is a broker and who is a bank and the various shades of grey in between. Some brokers are bankers, most wholesalers are banks (some are even depository institutions), some banks act as brokers for product they don't have. And don't even get me started on the little dirtbags at the net branches.
Things got all slippery and there were in fact brokers screaming to reel things in. I publicly humiliated the secretary of banking in my state over some of this stuff in 2004 and was sure my license would be yanked. He didn't care. I was too small a bug to even squish.
There are plenty of crappy brokers, Los, banks, AEs, borrowers, etc. Its a culture that celebrates incompetence, apathy and greed, so this is what we get.
First the dishwasher, now the pipes: this is the year of the plumber.
Well, into each life a little rain must fall and it rains on saints and sinners alike,... just didn't think it was going to be indoors, heh? April is national poetry month, so:
Ye fearful saints, fresh courage take,
The clouds ye so much dread
are big with mercy, and shall break
In blessings on your head.
There's one little problem with this 'study'... for the most part, retail banks were non-existent when it came to subprime originations.
The majority of them them were originated by TPOs or by wholesale entities with retails ops (CWide, Novastar, etc).
Basically, for comparison, the study was looking at two 'identical' full doc borrowers. Both with 580 indicator scores and both 'full doc'. What the study doesn't take into account is that the 580 at the retail bank is a true indicator score and the full doc is 2 years W2's and a full VOE. At the broker, the 580 is the primary wage earner's score and the 'full doc' is actually 12 months bank statements to prove income.
In short, without knowing how deeply the study really looked, it would appear that they are comparing apples to a Toyota.
Joy-
I could not agree more, but what I have described is how things really work for a surprisingly large number of cases. That's why I strongly believe you need to limit the scope of possible abuses, prepayment penalties being one of the most egregious.
Thank you, Potsy. I, personally, have 3 loans in the pipeline for borrowers that I sent to BofA for the better deal, but they came back. Putting their own loan packages together and trying to explain or interpret the details of their current situation is too much.
Yo Kelly!!!
Reality bites back!!! I've always said what we do is harder than it looks.
I sense that the Spring is approaching for us that have survived the Winter.
We are needed but there got to be too many of us and now that the herd has been thinned, we survivors shall do alright.