Predatory Lenders

Interesting take on the mortgage and HELOC meltdown is the Los Angeles Chronicle. The article is called Mortgage Crisis - The Crooked Predatory Lender.

"Lenders and brokers didn't fret about a borrower's long-term prospects of maintaining payments because they collected their profits at the closing table; the loans were then resold to investors." Maureen Downey Atlanta Journal Constitution

This quote is not untypical of most articles written on the mortgage crisis. It would appear that columnist feel that it is politically correct to point the finger at smaller brokers branding them "predatory lenders."

They also point this out because it happens to be true. People took the money and ran. The job of a broker is get the mortgage to closing, than they are done - just like the realtor's job is to get the house to closing. Both of these people get paid when the money changes hand. There is nothing wrong with that - it is not like their are proposals to outlaw brokers, however regulations are necessary.

...Here is how the system works for brokers and mom and pop lenders. Brokers primarily work with banks for “A paper” borrowers and some sub-prime borrowers. Almost all of the major banks have or had correspondent sub-prime division as well as their normal operations. This list of banks names such as, Wells Fargo, Chase, Washington Mutual, Indy Mac, Countrywide and countless other large and mid-sized regional banks. These are the institutions that set the guidelines for the type of sub-prime mortgages they would buy. Once the loan is closed these banks buy the "paper" from the brokers to bundle up and sell on Wall Street.

As competition among these banking giants grew their tolerance for sub-prime underwriting standards dropped for specific niche borrowers. Soon we had a dozen banks each having their own sub-prime division and competing for different niches in the sub-prime market. In an attempt to gain more market share these banks would employ account executives to visit the small brokers and lenders to “teach” the loan officers how to get certain borrowers through underwriting in their specific niche's.

And they made the Chase memo seem like it was a big deal. This author makes it sound like standard operating procedure. Tweak the numbers so the loans go through and put through as many as possible.

...America became a nation addicted to refinancing as property values escalated across the nation. Credit cards were charged to the hilt and refinancing saved the day. Borrowers with good and bad credit flocked to mortgage companies in record numbers to convert their revolving debt to lower rates and began the cycle again. When the real estate “bubble” burst and property values plummeted, these people were now unable to refinance their homes to reduce their debt. With huge credit card payments looming and mortgages that were beginning to adjust home owners could no longer cope. Thus the mortgage crisis.

Refinancing does not reduce the amount of debt - it just consolidates it. Changing the debt payment from a credit card to a cash-out refinance does not reduce the debt it just converts it Now you have to pay off your credit card purchases in 30 years with a fixed or variable payment. Like the sub-prime couple from Monday's article this sounds like another clueless insider. Changing your equity to debt does not make you better off - it just changes who and how you are paying. It may reduce the interest but you still owe the money. Look at all the people profiled that bought there homes well before the bubble and are underwater when they sold.

Now that default rates are up on the portfolios (groups of loans) that the banks are holding investors do not want to buy them. This forces the banks' to hold their “paper” which has created a cash-crunch and caused banks to tighten the reins on their lending practices. Through this whole chain of events almost all “reporters” can only find stories to write about the evil “greedy lender” with a prejudicial inference toward the smaller brokers and lenders.

The defaults are part of the problems but the author does not mention the derivative issue - which brings the problems to a much greater magnitude. A great video to check out to understand banking and derivatives is the Money as Debt video - a little long but well worth the time.

... I wonder if any the pundits will report about the 95% of current sub-prime mortgage holders who are making payments on time right now? Do you think they have considered the home owners that have had to file bankruptcy or had a foreclosure as a result of the current circumstances? With the current legislation proposed by congress and championed by reporters these people will NEVER be able to buy a home again. Are we to assume that the "poor" should never buy a home as the bill does? Just today Fannie Mae raised the threshold for borrowers who have had a foreclosure to 5 years!

Once again the derivative issue changes this 5% to a much larger issue. Also, many of the people who bought and sold these mortgages did not know they were sold. Who are the people that will never be able to purchase a home again? Are they the people with perpetually low credit scores, those that will never have any form of down-payment, or those who lied in order to purchase the property they wanted?

... Large banks have facilitated a large portion of this mess America finds herself in. The problem did not start with the small lenders nor will it be fixed by killing them with regulations. After billions of dollars in write-offs, fired CEO’s and hostile takeovers’ the banking industry is not eager to make the same mistakes twice. Throwing the” baby out with the bath water” legislation will only fuel this crisis, not end it.

While this may be the most accurate sentence in the article, first the crisis issues have to be identified. Several of the issues only arose in the last few years - 100 - 110% financing, option only mortgages with teaser rates, ready acceptance of liar loans. Things that were unheard of a decade ago became common-place during the Great Housing Bubble. These are the things that need to be thrown away. Changes have to be made to alleviate the current problems and prevent them from happening again.