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The B&C Blame Game: Many Victims, Many Culprits

It was roughly a year ago that National Mortgage News broke a story about subprime wholesaler Acoustic Home Loans of California going bust because of something called loan "buybacks." At the time, the general business press didn't pick up the story or knew what it meant.

As the months passed and summer approached, I began hearing an increasing number of stories from industry executives that a "perfect storm" was approaching the subprime sector and all was not well. This perfect storm was a three-legged stool: razor-thin profits margins, delinquencies and buybacks that thinly capitalized nonprime lenders could ill afford.

Wall Street loan buyers - which had been ignoring underwriting quality for years - began cracking down on their warehouse customers who just so happened to be selling billions in loans to them. (Nice arrangement there, Wall Street.)

At first, tales of early payment defaults and buyback requests were few and far between. Then, as fall approached, all hell broke loose and we have left in front of us an industry decimated and subprime consumers losing their homes.

So, who's to blame? Let's start with the little guy, the consumer, and then work our way uphill. Yes, there are plenty of slick, snake oil salesman out there disguised as loan officers and loan brokers. But when a broker tells a subprime customer that they can buy their dream house with a stated-income payment-option ARM at a starting rate of 2%, shouldn't a bell go off in the consumer's head?

Buying a home is an emotional issue. Spouses and kids are involved and who wants to fail them? It's great to own a home, but in "the old days" buying a house always involved a downpayment and income verification. A consumer who was sold a bill of goods on a bad loan needs to ask themselves this: How did I get taken? Why didn't I ask more questions? Did I understand the loan terms and forms? Why did I not know that teaser rate of 2% would not last more than a month?

Mortgage bankers and loan brokers: What the heck were you thinking? Yes, I know it's all about selling, selling, selling and profits, profits, profits. Industry professionals - those who still have jobs - need to look themselves in the mirror and ask this: How did I not see this coming? When a consumer doesn't provide a VOD, shouldn't that raise eyebrows? Did LOs and brokers rely on the belief that in the event of delinquency the house could be sold and the customer would walk away at break even?

A year ago - if not longer - mortgage bankers should have seen this crisis coming and tightened underwriting guidelines. But they did not. I suspect they realized the obvious: once they upped downpayment ratios, employment checks and FICOs, they knew (assuredly) that production volumes would fall through the floor. When production falls, there goes the paycheck.

And now for a word about Realtors. The Realtor is like the LO and broker in that: no sale = no commission. With real estate speculators flooding the market in the post-tech crash of 2000, shouldn't Realtors have wondered about home prices spiking by 25% every six months? And was it a Realtor who first called a mortgage banker and muttered these words: "Values are too high but if you come up with some low monthly payment products I'm sure we can get this gravy train rolling."

Rating agencies score subprime-backed bonds, don't they? Yes they do. Did any rating agency sound early alarms about subprime credit quality and the possibility of escalating delinquencies? I don't recall (which is what they might say) but keep in mind that if there's no bonds to rate, then there's no commission to make. Money talks.

And finally there's our friends who are "Masters of the Universe." That would be the Ivy League MBA-waving boys and girls who work in Lower Manhattan on a street that housed a stone wall built by the Dutch as a defense against attacks from various Indian tribes and the British. I can't really blame Wall Street too much. Street types are hard-wired to make money and damn the consequences until they get caught or start losing money - or both.

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