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Saturday, December 22, 2007

Barack Obama Rides His White Mortgage Horse

In these same pages, I have pointed out that the narrative of the mortgage crisis pins all of the blame on people like myself, mortgage brokers. The reason for this is simple. We are a sociopathic, scummy, greedy, and thus we are an easy target. I have pointed out what really happened...

The reason that we have a sub prime crisis is because a bunch of dead beats bought homes they couldn't afford from banks that should have never lent them money. The role of the mortgage broker in securing these loans shouldn't be understated and frankly I will never miss any opportunity to take a pot shot at my industry, however blaming this crisis on us frankly gives us too much credit.We have always been a collective group of sociopaths.That didn't start two years ago. That was always so. Thus, there was a new dynamic in play in the last few years.
The truth of the situation is that banks loosened their restrictions so much that irresponsible people were able to get loans. To somehow claim that mortgage brokers pushed people to buy homes they couldn't afford, is well, something only a pandering politician would ever come up with. Yet, this is exactly what Barack Obama (following closely on the Heels of Hillary Clinton) is now saying.

This all started as a good idea – helping people buy homes who previouslycould not afford to. But over time, lenders began pushing low-income buyers into homes they could not possibly afford, abusing the system by lowering theirlending standards, making loans that required no money down and offering low,teaser interest rates that explode after the initial grace period. Someborrowers were also lying to get mortgages or engaging in irresponsiblespeculation.Nearly everyone – from lenders to investors to borrowers –fooled themselves into thinking that what they were doing was low risk when itin fact involved a lot of risk.
Read Obama's statement carefully. In it, he does recognize that the borrower's played at least as big a role in the mess as the evil, evil mortgage broker. Yet, his remedy is only to punish the broker and to use the proceeds of the punishment to help the same borrowers that he himself recognizes were active players involved in fraud.
What is his solution...

That is why I have proposed a Home Score system that would create a simplified,
standardised metric for home mortgages – rather like the annual percentage rate
(APR), the effective interest rate a borrower ends up paying on a loan – allowing prospective home buyers easily to compare various mortgage products so they can find out whether they can afford to make the payments.

I have also introduced a bill in the US Senate called the Stop Fraud Act that would treat those who commit mortgage fraud as the criminals they are.

There are only two problems to his two solutions. The first is that the APR system is simplified. The Annual Percentage Rate takes your interest and combines it with the fees you pay and thus if someone offers you a low rate with a lot of fees that will be reflected in the Annual Percentage Rate. Now, if Obama's system is simpler then I would like to know how, but simply saying it does nothing.

Second, we already have laws on the books against mortgage fraud. Obama seems to think that mortgage brokers, like myself, can commit fraud at will with impugnity. The fact is we can, but the reason is not the lack of laws, but the lack of enforcement. The problem is that it is the banks that need to report fraud. Banks are not going to go through the trouble, usually, of reporting fraud when it has been recognized. Their remedy is normally to simply deny the loan and either put the broker on notice or terminate the relationship entirely. It is simply not cost effective for banks to get into criminal matters everytime they think there is fraud.

The ones that will report fraud are the borrowers. The problem there is that usually it isn't fraud. Usually the borrower acted as though they knew the terms of the loan, signed the paperwork, and when something went haywire then they cried fraud. Several of my friends are facing fraud charges from angry borrowers who claim they weren't told that their mortgage payment would adjust. Never mind the fact that they signed documents that did in fact say this, they are still crying fraud.
Obama knocks off everyone from his short list of demons in his proposal, and no short list of demons would be complete without an attack on lobbyists...

There is a reason why this has happened. Over the past several years, while predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185m lobbying Washington to let them get away with it. So if we really want to make sure this never happens again, we need to end the lobbyist-driven politics that made it possible.

There are several things that bother me about this. First, no one can force anyone to do anything. Obama, like Clinton before, him makes it seem as though evil, evil mortgage brokers forced unaffordable mortgages onto helpless borrowers. Is this really so? Is someone really so helpless that they couldn't simply refuse to take on the loan they were offered? Furthermore, it wasn't lobbyists that created the market for these loans, but rather Wall Street. That's right from 2004-2006 Wall Street had an insatiable appetite for more and more aggressive mortgage backed bonds, and they continued to want more and more aggressive mortgage backed bonds as long as the price of homes were going up. Once the price topped out, Wall Street realized these securities were bad and the money for them dried up, and we are in the mess we are in. This had little to do with lobbyists, but rather as Alan Greenspan once said, "irrational exuberance".

Anyone who has read my work knows my favorite quote, "the nine most dangerous words in the English language are 'I'm from the government and I'm here to help'". Barack Obama, and his convoluted mortgage bailout, is a perfect example of its wisdom.

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