Paul Muolo was on vacation last week. We're running this story in place of his usual column.
Mortgage Scene
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 AcousticHome Loans of California going bust because of something called loan "buybacks." At the time the generalbusiness 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 executivesthat a "perfect storm" was approaching the subprime sector and all was not well. This perfect storm wasa three-legged stool: razor thin profits margins, delinquencies, and buybacks that thinly capitalized non-primelenders could ill afford.
Wall Street loan buyers -- which had been ignoring underwriting quality for years -- began cracking down ontheir 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 losingtheir homes.
So, who's to blame? Let's start with the little guy, the consumer, and then work our way up hill. Yes, thereare plenty of slick, snake oil salesman out there disguised as loan officers and loan brokers. But when a brokertells a subprime customer that they can buy their dream house with a stated income payment option ARM at a startingrate 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 toown 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'tI ask more questions? Did I understand the loan terms and forms? Why did I not know that teaser rate of 2% wouldnot 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 themselvesin the mirror and ask this: how did I not see this coming? When a consumer doesn't provide a VOD shouldn't thatraise eyebrows? Did LOs and brokers rely on the belief that in the event of delinquency the house could be soldand the customer would walk away at break even?
A year ago -- if not longer -- mortgage bankers should have seen this crisis coming and tightened underwritingguidelines. But they did not. I suspect they realized the obvious: once they upped down payment ratios, employmentchecks, and FICOs, they knew (assuredly) that production volumes would fall through the floor. When productionfalls 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. Withreal estate speculators flooding the market in the post tech crash of 2000 shouldn't Realtors have wondered abouthome prices spiking by 25% every six months? And was it a Realtor who first called a mortgage banker and mutteredthese words: "Values are too high but if you come up with some low monthly payment products I'm sure we canget this gravy train rolling."
Rating agencies score subprime backed bonds, don't they? Yes they do. Did any rating agency sound early alarmsabout subprime credit quality and the possibility of escalating delinquencies? I don't recall (which is what theymight say) but keep in mind that if there are no bonds to rate then there's no commission to make. Money talks.
And finally there are our friends who are "Masters of the Universe." That would be the Ivy LeagueMBA waving boys and girls who work in lower Manhattan on a street that housed a stone wall to keep the cows in.I can't really blame Wall Street too much. Street types are hard-wired to make money and damn the consequencesuntil they get caught or start losing money -- or both.
It's sort of like the stray cat my wife took in. I left a sandwich (in a bag) on the counter last weekend. Eventhough the bag was rolled up the cat nosed its way in, searching for meat. It scored. The Street is like that --when it smells blood it pounces. In my case it was a turkey sandwich and given what's occurred in the subprimesector the past 12 months that's the best apt symbolism I can provide right now.
