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Sunday, December 23, 2007

A Sad Story About a Mortgage Broker

Here is how my August went. I started out with ten loans that I thought I was going to close. Five of them were with one borrower which is one reason why things unraveled the way they did. My borrower has an excellent credit profile. He holds onto nine mortgages, a car loan, a couple student loans, and several credit cards and never in his life has he been late on anything. Now, because he has so much outstanding credit his score is good not great. Also, he is in sales and owns multiple properties so it is virtually impossible to ever show any documentation to verify his income. Still between his strong credit and the fact that he has money in the bank, his loans were always difficult but doable.

Right around my thirty third birthday, his loans started dropping one at a time. The worst thing about it is that they were dropping for newly made up reasons. While he had money in the bank, it wasn't "congruent" to the amount of money I claimed he made. In other words, he didn't have enough money in the bank for the amount of money I claimed he made in income. While this is a reasonable way of judging things, it was NOT any of the bank's guidelines when I submitted the loan.I kept trying to find new banks for his loan. I found one and the next day they announced they were shutting down operations. I found another and they changed guidelines right after I found them. I finally found one that I thought would work. They fumbled around with it for five days. Then, while I was driving to a wedding in Minnesota, I got the news on Blackberry that they too were denying the loan, and also because his so called liquid assets weren't congruent to his income.

By the end of the month, the ten loans I thought I was going to close wound up being zero and this is a story that most mortgage brokers will tell you about the month of August and even into September. In those two months, banks were looking for reasons to deny loans. It was near impossible to close anything, and thus, it was near impossible to do what I had dedicated the last six years of my life to. The industry was in turmoil and there was confusion and fear everywhere. Almost no one was sure they would even stay in the business and no one knew what would happen next.

I bet I know your reaction. Who cares? You are a scummy mortgage broker and your excess brought this upon yourself. I have no sympathy for you and I hope that your next year is like August. If you think this way, then ask yourself why you sympathize with the people in this article.

This is an article about people about to face foreclosure. There stories are no less heartwrenching, but frankly no more. If you think it is tough facing the reality that you can't afford to pay for your house, try facing the reality that your industry is in such a state of chaos that you can probably no longer afford to be in it. Losing a house is bad, however losing a career is much worse.

Yet, there is NOT one article about any mortgage broker and the difficulties we have faced in these months. That is despite the fact that our stories are no less poignant. That's because unlike homeowners we aren't sympathetic.Thus, newspapers like Chicago's Daily Herald, and this one from the New York Times, print stories in which borrowers are portrayed as empathetic victims. Their stories are heartwrenching and we are supposed to feel sorry for them. No one feels sorry for the mortgage broker, even though it is no less heart wrenching to watch your career go up in smoke.

That is frankly not the point. I don't much care if anyone has sympathy for me or my industry and I certainly could care less if any newspaper ever wrote a sympathetic piece about us. Unlike the borrowers, most of my industry could care less if the world has any sympathy for us and we don't seek attention at these times. The reason for this piece is that policy is being determined based on the misleading narrative that borrowers are sympathetic and mortgage brokers and banks are bad. Policy can't be determined based on this principle. Yet, newspapers are hammering this theme home.

The politicians are responding. They have responded with H.R. 3915, which attacks predatory lending, and provides even more protection for borrowers in case they go bad on the loan. In other words, based on the narrative that borrowers are good victims and brokers are evil predators, the pols will design a bill that protects the borrower and punishes the broker.While this may be good politics, especially when it is egged on by the media, it is terrible policy. Borrowers signed paperwork and they agreed to certain conditions. They aren't meeting those conditions, and now the legislature wants to provide extra protection in case they won't meet those conditions. That is called a moral hazard.

It is hard to know exactly how the final version of H.R. 3915 or its equivalents and cousins will look like, however there have already been several scary things being floated. For instance, Senator Dick Durbin wants to allow for bankruptcy courts to be able to renegotiate the terms of mortgages. In other words, if you go into bankruptcy, you will be rewarded with a better mortgage.The borrower is actually able to sue the securitizer, Wall Street, if their loan goes bad, and the borrower is afforded all sorts of new protections if they go bad on a loan. Here is the language vis a vis securitizers...

Assignee/Securitizer Liability (does not extend to trusts and investors): Subject to exemptions below, for loans that violate the minimum standards (reasonable ability to repay and net tangible benefits), a consumer has an individual cause of action against assignees and securitizers for rescission of the loan and the consumer’s costs for rescission.

Here is the language vis a vis foreclosures...

When the holder of a mortgage loan or anyone acting on behalf of the holder initiates a judicial or non-judicial foreclosure, (1) the consumer who has a rescission right under this bill may assert such right as a defense to foreclosure against the holder to forestall foreclosure, or (2) if the rescission right has expired, the consumer may seek actual damages (plus costs) against the creditor, assignee, or securitizer.

This is a moral hazard and it is dangerous. If you give people an incentive to go bad, that is exactly what they will do. This is happening because newspapers are perpetuating a narrative. It is a narrative that gives politicians a political angle. None of the narrative is rooted in reality mind you. The reality is significantly more complicated. The reality is something that politicians and their partners in the media have no desire of discovering. Instead, they will pass laws that fit the narrative and perpetuate the very problems they claim to be attacking.

Here is the problem. They create vague concepts that fit their narrative. They are concepts like "predatory lending". Here is the problem with that concept.There is no specific definition about what exactly predatory lending entails, though most observers believe that the description applies when lenders take advantage of borrowers by charging high interest rates and consider only the value of a borrower’s assets, as opposed to what the borrower can afford to pay.In other words, politicians have created a concept they can't define. It is there solely to make them feel good and also so they can tell the masses they attacked the bad guys. The problem is that in my business there is only one practical effect of vague and undefinable concepts,

That's right. The practical effect of all of the legislation that is currently on the books is even more paperwork to sign during the process. Anyone who has closed a loan knows how much attention you pay to the paperwork you already sign, and now you will sign even more.Why does this happen? That's because politicians are responding to political not policy opening, and that opening is created by one sided heart wrenching pieces in which certain groups are painted as victims and others as villains.

Imagine how much different the legislation would be if every newspaper published stories like the one that started this piece. They would of course be no less dangerous, but they would be different.

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