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Learning Something

MAR 2, 2011 10:18am ET
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Do you have any idea where the term “correspondent lending” came from? How about “amortization?” You will if you read a new book from an unusual author, a mortgage banker who has been in the trenches for many years.

Even after 27 years of traveling on the mortgage beat, I enjoy learning new things. That’s why I brought “The Story Behind the Mortgage and Housing Meltdown” by Kenneth Clark with me when I traveled recently to Dallas for the Mortgage Bankers Association’s annual servicing conference and started to read it on the plane.

I was planning to meet with the author in Dallas, but it turned out to be one of those things that never happened. Still, I was intrigued by what I was reading.

I didn’t know where the term “correspondent lender” came from, for instance (although I know a lot about correspondent lending!). Clark, founder and chair of First Guaranty Mortgage Corp., explains that back in the 19th century, the big lenders on real estate were not commercial banks but the insurance companies clustered in Hartford, Conn. And, there was a lot of energy directed at land deals out in the newly-opened American West.

The local agents of those big insurers, who acted like early mortgage bankers, were a long way from the home office. How did they do their business? By mail. Hence, correspondent lenders.

Similarly, I didn’t know the origin of the term amortization. It comes from “mort,” or death (post-mortem, e.g.). It’s kind of poetic, actually—an amortizing loan is one that dies off a little each time you make a payment. (Let’s hope that in these latter days, when so many are not making their payments, amortization doesn’t wind up being a historical term!)

Clark writes in his preface that while not a writer, (he had the capable assistance of Jim Hennessy in producing this book) he felt compelled to do the book (available from AuthorHouse) because “so many things happened that were foolish and unnecessary.” Having been in the mortgage business for more than thirty years, specializing in “guvvies” like Federal Housing Administration mortgages, he felt something wasn’t right with the flood of alternative new products, and the fizzy increase in home values.

Everyone was making tons of money, but “after a while, I became more and more worried that a great many of the loans out there were like a magician’s trick, all smoke and mirrors,” Clark writes.

He actually had his shop switch back to FHA lending and abandon alternative products because of his intuition. He is especially scathing about indiscriminate use of FICO scores as a substitute for underwriting. That number was developed for use in buying washers and dryers,” he says.

The chapters of the book detail the history of mortgage lending in America and the crisis that reared up in the first decade of this century. Greed was the motivating factor, he maintains (in fact the subtitle of the book is “The Legacy of Greed”).

This part of the story is pretty recognizable- the meltdown in the housing and mortgage industries, and the foreclosure epidemic that followed and still holds sway.

Now, “common sense” needs to prevail, Clark feels, including lessening the grip of technology-driven decisions. And, a return to the era of “personal responsibility and shared risk” is needed in order for the business to move forward. Government, though trying wildly to put out the mortgage/housing fires, is actually not helping any by “helping ruin the credit scores of those it is trying to help with several of its programs.”

An interesting read. In the sequel, I’m hoping Clark helps to define other terms I’m in the dark about, like “credit default swaps” and “collateralized debt obligations.”

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