Wednesday, April 09, 2008

My Perspective on The Mortgage Crisis

I was employed in the mortgage industry from 1997 to 2001. I was a loan processor. The funny thing was that I was never supposed to be there.

I was an out-of-work road construction laborer, waiting way too long for a new gig. That spring, I signed up at a Temp agency to get some kind of money in my pocket. One day, about 11 am, they called to see if I could go answer phones at Paradigm Financial Services that same afternoon. Reluctantly, I went. It was already 11--I wouldn't get there until 12--for only a few hours work. I still had to go for the money.

Anyway, I got there, got asked to come back the next day, and wound up staying with the company for two years, before moving out to Washington in the summer of '99. I started out at reception and filing, moved to loan processing, and ended up in charge of the entire closing department. I created all the final loan papers that people had to sign. That's right, all those documents, sometimes 50 pages worth. For years, I created docs. I know what they have to sign inside and out because I would have to create the disclosures, especially applicable to individual loan programs in accordance with the lenders that Paradigm sold the loans to. I know the docs.

I also was there at the beginning of the internet effect on mortgages. Fannie Mae and Freddie Mac had their individual loan programs that you could run a borrower through. If you could get an approval, you packaged up the paperwork and sent it in for underwriter approval. And if you could prove what was run through the loan program, they couldn't deny it or change their minds. You just had to prove what was being run through. Sometimes, I could brag about getting people approved at an almost 50% back-end ratio. That's debt-to-income. That's before groceries, insurance, gas, etc. I know what it takes to get a borrower approved past this system.

That's why I have no patience for this current mortgage "crisis."

These borrowers all know what they are getting into. Every single borrower on the loan reads and signs the paperwork that explains in detail exactly what happens.

Some loan programs had borrowers receive grant money for the downpayment. Some loans seriously had Zero down, with no savings. Some loans were ARMs. That's where it gets really messy. They don't have to approve it at the worst possible scenario.

I know what the loan officers say to these clients. I have heard it hundreds of times. They tell these borrowers who, like voters, sometimes have no idea what they are doing, that the initial interest rate is great. "You can refinance it out in just a couple of years." "Yeah, that's the interest rate cap, but that's just worst case scenario. The rates will never get that high."

These are salesmen remember. They sell stuff. In this case, they are selling a loan package. They get their money for it. I knew a guy that could make about 5% of the loan in commissions because of certain deals and programs. And if they can put the borrower into a certain program, they get bonuses. They quote higher rates above the par price to make extra. What really gets me about all of this is that individual loan officers are not licensed.

Let me repeat that: individual loan officers are not licensed.

The mortgage company is licensed, but not the individuals. My wife Amy had to be licensed by the state to be a hairdresser, and loan officers, who handle hundreds of thousands of dollars, are not licensed.

So rate-hiking loan officers put ignorant borrowers into programs that they shouldn't be in. They can't refinance an ARM less than two years later because there is no equity in a house when you don't put any money down. Rates go up. They get stuck.

But the borrowers knew full well the ramifications of the loan. Do not let any of them tell you differently. They just didn't think that the rates would go up, just like I didn't think that gas prices would ever reach $3.30.

Quite possibly, the worst of these new loan programs was the interest only loan. Some lenders offered the option of letting the borrower choose to pay only the interest each month. Theoretically, it is a great idea. For instance, a construction worker can pay only the interest in December, January, and February when he isn't working and make double payments in June and July when the money is really good. Theoretically. But you know what happens when July comes only choose to make the regular payment. Then next month. You have to make so many regular payments a year. If you push it off, you get behind real fast.

Some people can do this with their money. Some can't. That's why for some borrowers I was still setting up an escrow account even though they didn't have to have one. Theoretically, you can make some money in interest for yourself if you put that money away each month. But if you forget, twice a year you have to pay a huge bill for property taxes you haven't saved for. Escrow accounts will save it for you.

Borrowers are to blame. There were some bad loan officers too. Programs were developed that probably never should have been offered. Ultimately, the borrower signed the paperwork. That's why there are 50 pages at a mortgage closing, most of them repeating the same thing over and over. They signed it several times.

Just another practial application of why reading is important.

No comments: