Wednesday, June 13, 2012

Today's Pity Party - 'Oooh, That Evil Mortgage Industry!'

Today's pity party comes courtesy of the Washington Post. Look at this run up:

'Ex-loan officer claims Wells Fargo targeted black communities for shoddy loans'

For nearly a decade, Beth Jacobson lived inside the vast machinery of subprime mortgages that shook the nation’s economy.

In sworn court testimony, she described watching loan officers comb through heavily African American areas such as Baltimore and Prince George’s County, forging relationships with churches and community groups to sell their members shoddy mortgages. She says she processed loans for homeowners with sterling credit ratings with higher interest rates than they needed to pay. And she says she pumped out millions of dollars in mortgages to people with no paperwork and low incomes, becoming Wells Fargo’s top-producing loan officer.

The machine made her rich — the questions came later. Now, she has recast herself as a crusader for consumers in a battle that has pitted her against the system she once pushed.

The 51-year-old Maryland resident has emerged as a defining character in the ongoing saga of the country’s housing crisis, from the headiest days of the bubble to the current flood of foreclosures. Her scathing affidavit detailing “the stagecoach to hell” at Wells Fargo is a key part of the groundbreaking lawsuit filed by the city of Baltimore against her former employer. The case spawned copycats across the nation, and federal regulators launched investigations mirroring its allegations.

The company flatly denies any wrongdoing, especially when it comes to Jacobson’s claims. It calls her testimony misleading at best and, at worst, outright lies.

Just as it happens, I'm pretty familiar with the Mortgage industry, Well's Fargo's subprime operation, and subprime loans in general.

Speaking of outright lies, you'll find them throughout this article,mostly by omission and misinformation, but still untruths nevertheless.

The subprime market wasn't created by Wall Street or by lenders,but by the Democrats who pushed through the Community Reinvestment Act and leaned heavily on lenders to find a way to get people with low income and poor credit,predominantly black and Latino, into homes. In some cases, the feds even threatened their banking charters to make lenders comply. The key was something called the secondary market, whereby home loans are bundled and resold to investors. A secondary purchaser guarantees a lender in advance that if a home loan is made using certain underwriting criteria, they will purchase it from the lender. That, in essence, is what Fannie and Freddie do. If a home loan is incapable of being sold to an investor, it's considered a poor loan and if it was originated by an outside source like a brokerage, the lender will insist the broker repurchase it.

The feds covered part of this action by loosening up underwriting in Fannie Mae and Freddie Mac to the point of insanity to make more borrowers qualify (including many whose income was 'stated')but it still wasn't enough to satisfy he feds since there were still a lot of what they considered deserving constituents whom were unable to qualify.

Once FICO credit scoring came in that problem was solved, as Wall Street got into what had become a trillion dollar industry and became part of the secondary market. The lenders developed subprime loans with looser underwriting that conformed to what these new investors were willing to buy, and even Fannie and Freddie developed their own subprime products for mortgage lenders that Fane and Freddie would buy back as investors.

These loans were predominantly ( but by no means exclusively) sold in minority areas, because that's where there was a need for them. For people with low credit scores who wanted to refinance or purchase a home, these were the often the only loans available.

Let me show you what these 'predatory' products actually looked like.

The typical subprime loan was referred to in industry jargon as a 2/28. Translated, this was a 30 year loan which was fixed for two years at a rate typically at 1.5% to 2% above a similar loan available to someone with good credit, depending on the subprime borrower's credit and the amount of equity they had in the property or their down payment, a concept known as 'loan to value'.

Many subprime borrowers used these loans to refinance and take cash out to rennovate their homes or to consolidate high interest credit card debt. No reputable lender who valued their banking charter ever funded such a refinance loan without a clear indication of benefit for the borrower in terms of lower overall payments or increased property value.

The loans usually came with a two year prepayment penalty to guarantee the investor's yield for that period of time..after which most of these borrowers refinanced again before the loans became ARMS.

Typically, it takes 24 months of clean credit and on time payments to clean up someone's credit to the point where they can qualify for a home loan available to prime borrowers, and that's exactly what many of these subprime borrowers did...they refinanced into prime 30 year fixed mortgages.

Let's reiterate...a slightly higher than normal rate to reflect increased risk on a fixed loan for two years to allow a credit challenged borrower to become credit worthy while still being able to refinance or buy a home. Simply scandalous, no?

Of course, some people were unable or unwilling to keep their acts together for that 24 month period,and would refinance again into another 2/28,take advantage of their unearned equity caused by the housing boom and repeat the cycle. Some people simply aren't meant to be homeowners.

Now that the politicians in Washington have found a convenient scapegoat in the mortgage industry for their own malfeasance, that avenue of credit has disappeared. And the resulting explosions in credit card debt and foreclosures are one of the results.

Wells Fargo? Yeah, they were one of the players. Their subprime outfight was headquartered in New Orleans, and they had the usual array of subprime products, generally not at the most competitive rates compared with other lenders in the same market.Like a lot of other lenders, they got sucked into the MERS system of electronic recording of mortgage sales and ownership, which has proved less than creditable in many cases when it came to foreclosures.

I find it interesting that this article claims that the loan officer involved became 'rich'. Again, generally speaking retail loan officers who worked directly for lenders as employees may have made a nice income, but didn't get rich..unless they were exploiting their borrowers by selling them deliberately higher rates in order to get an increased commission as a rebate. or taking kickbacks from realtors in order to push dubious loans through the system.

If that was the case, one could hardly blame Wells Fargo.

1 comment:

Tom Henry said...

I find it interesting that this article claims that the loan officer involved became 'rich'.