Tuesday, March 24, 2009

The Circle Of Blame For The Housing Crisis

There are a lot of people who deserve blame for the housing crisis, but who are these people exactly? Dateline recently took it upon themselves to expose the key individuals that they feel are behind the mess. Some are easy to see, while others are a little more abstract in their involvement. Scott Wilson looks closer at the Dateline piece, and adds some of his own input in his blog post below from Your Mortgage or Your Life.

Sunday March 22, 2009, Dateline NBC aired a piece called “Inside the Financial Fiasco,” in which Chris Hanson finally takes a break from exposing sexual predators to take a closer look at the current housing mess.

NBC attempts to assign blame for the mortgage meltdown, and also tries to make it seem like they have finally identified the handful people who were the “only ones who knew” what lay in store for the economy when Wall Street embarked on the derivatives end-run that fueled the crisis.

So let’s go down the list of people that are prime candidates in the vicious circle of blame, and what their role where in the making of this fiasco.

Let’s start at the top. Back in the mid ‘90’s, The Government loosened credit guidelines and required lenders to make mortgages available to more to minority buyers.

By doing this, they gave the lenders an open check book to write questionable loans, all the while knowing that they would be able to sell them on the secondary market (Wall Street).

This was the creation of the infamous “Subprime” loans which later morphed into Alt-A and Expanded Approval loans.

Next, let’s look at the Product Managers who wrote the underwriting guidelines for the toxic loans known as SISA’s and NINA’s, which required little or no documentation of income and assets. The SISA loans are highlighted in the Dateline piece.

Do you think that these product managers had no idea that these types of loans may be misused, or did they only see the underlying profit that was possible from billions of dollars of loan fees collected by creating millions of loans that were virtually just ticking time bombs?

Yes, there are some cases where these loans were appropriate, such as for the business owner who had a lot of write offs, or the borrower whose spouse may not have the best of credit, but will nonetheless contribute towards the monthly mortgage payments.

But the types of borrowers who where actually put into these loans were completely unqualified, as mentioned in the NBC piece.

People like Delores Parker Jackson, who took out multiple loans on four condos totaling over $1.3 million with a negative (-$6000) shown on her tax returns.

Mrs. Jackson, who claims to have run a profitable daycare, and says that she is not to blame, but is actually the victim of predatory lending.

REALLY? She took out multiple mortgages on four different properties totaling over a million dollars with a payment of more than $10k a month, and she claims she had no idea that she could not afford the terms. Now she wants to pretend that she is not culpable, and that the mortgage company committed fraud?

Come on, do seem we that stupid?

Thirdly, let’s look at another “innocent” party: The CEO’s of all the banks and mortgage companies.

These people should have overseen the product managers and acted as the final line of defense by looking out for the company’s long term interests by saying “Hey, stop! These loans may be too risky.”

But the CEO’s saw only a “pot of gold” in the form of billions in loan fees, and where slaves to the corporate bottom line.

Do you think that Angelo Mozilo, the former CEO of Countrywide who earned over $400 million during his last five years at the company, had absolutely no idea that SISA and NINA loans with zero money down would backfire?

Chris Hansen attempts to talk to Mr. Mozilo, but to no avail.

Since he quit Countrywide and the mortgage mess started to blow up, Mozilo has been hiding out at his palatial estate in Southern California, ala Howard Hughes. Chris tried to get the guard at Mr. Mozilo’s gate outside his house to let him in, but was turned away.

Also to blame are the former CEO’s at places like Bear Stern’s and Lehman Brothers, who ended up driving their companies into the ground by buying up these toxic securities. And none of these guys saw the writing on the wall?

I think they did, but also saw big dollar signs in the racket, and choose to ignore the hazards.

Next up for their heaping of blame are The Borrowers. I was an LO for 15 yrs, and used Countrywide as a purchaser for many of my loans.

I knew that some of my borrowers were “less than qualified,” but the underwriting said to “make the loan.”

Like when I would be working for a builder, and a borrower would come to me and asked what loan amount they qualified for, my reply often was, “How much can you afford?”

I told them that I could tell them all day how much they can and cannot get approved for, but only they could tell me how much they really afford.

I could tell them on paper or with calculator that you could qualify to pay, but only the borrower could tell me if they could actually maintain that payment.

I cannot tell you how many times I was told by borrowers, “Don’t worry about me affording it. You just write that mortgage.”

This is where I move on to include the next culprit in this mess, The Loan Officers.

How many LO’s wrote loans for people that they knew would end up in foreclosure?

Many borrowers who I turned down for a mortgage would come back to me later to say, “See, I knew I could get approved. Thanks for nothing.”

At the height of the bubble, there were so countless mortgage brokers who were willing to do anything to write a loan and collect a fee.

They would falsify the numbers to make them work if they had to.

In the Dateline piece, they showcase a woman who was employed as a personal trainer, and who claimed to of told the LO at People’s Choice that she only made $1600/mo.

She was approved for a $259k loan.

Even after she was told that the payment would be over $2100/mo, she figured that she would just have her sister move in and help with the payment.

Do you think that the LO at People’s Choice had any idea that she may NOT be able to make the payment on this house? When Chris Hansen looked at the original paperwork, it stated that she made $7300/mo, which surprised the woman.

She claims she never provided that figure to the LO.

How many LO’s committed fraud because the commissions that they were going to make on each loan they closed could be well into the tens-of-thousands of dollars?

Even though my job was commissioned based, I only made loans if I had some degree of certainty that the borrower had both the ability to pay the mortgage payment and that they completely understood why I was giving them a SISA or NINA loan product.

I did not want a former borrower hunting me down in the parking lot some night after work because I put them in a loan that that left them flat broke.

Next in line is a major player, one who no one seems to put much blame on or even mention much, The Appraiser’s. I believe these guys had a huge impact on the housing explosion, and no one seems to want to bring them up.

As the appraisers continued to inflate the values of the properties, the mortgage companies continued to write mortgages to cover the obscene appraisals.

I knew that if a borrower told me that they were short on funds to close, I could call the appraiser and ask him to “bump up” the value of the property a bit, so that I could give the borrower the money cover closing costs.

This was considered a legitimate practice because real estate only increases in value, remember? But in reality, the value of that house did not go up $5k in the 2-3 weeks since they had done the actual appraisal.

I also found out the hard way how much of an “opinion” an appraisal really was.

Prior to working for the builder, I worked for a short time as a mortgage broker. I only did one loan at the place. , and it was for a gentleman who was doing some renovations on his house, but did not have enough money to finish the project.

Less than a year earlier, the value of the house came in at $85k. When he wanted to do another cash-out refinance a year later, but the new appraisal came in again at $85k. So when I went to my boss and told him that I did not have the value to support the loan, he handed me a business card and said, “Call him.”

Two weeks later, I had an appraisal for $115k, enough to cover the loan.

Was there that much movement in the values of the house? Did it really go up $20k in three weeks, or did the new appraiser just want more business?

What do you think? I know when I worked for one of the big mortgage companies and did a ton of refi’s, every time I had to put an initial value of a home on an application (which typically came from the borrower) nine times out of ten, the appraisal came back with the exact same value.


Another big part of the mess, the people who were supposed to catch any fraud or mistakes, were The Underwriters.

They were the final check points in the mortgage process, and when they were presented with a SISA loan that showed that a “house cleaner” made $12k/mo, they should have sounded the alarm.

Like the appraisers, the underwriters are merely mentioned in the piece on Dateline.

Ilene Lanacano, who worked for “People’s Choice,” says that when she brought up some of these problems with the questionable loans, she was often overruled by the CEO of the company.

She states that she was often offered “incentives” by loan officers (money, jewelry, even a car) to approve loans. Ilene says that she never took any of these incentives.

She also claimed that there was harassment and intimidation if you did not approve loans, such as flattened tires and physical threats.

Ilene finally left “People’s Choice” for a consulting firm whose business was to analyze the loans to be pooled in Mortgage Backed Securities (MBS’s). When she raised some flags, she ended up getting in trouble by management.

Next, let’s look to good old Wall Street. You would think that one of the supposed guru’s of Wall Street could have seen the possibility that at least some of these loans were destine fail. But they too, only saw the bottom line, and they sold these MBS to everyone: investors, pension funds, municipalities and other countries.

And then there is China, who bought up trillions of dollars in MBS in an attempt to control the US. By owning all these MBS, China has a huge stake in our mortgage meltdown.

They were only briefly mentioned in the “Dateline” piece, and no real repsonsibility was levied on them. If China had not been so greedy, there wouldn’t have such a demand for MBS, which would have cut down the toxic loans being written.

And the Chinese are smart, shouldn’t they have seen some of the signs?

Next ones to heap some blame on are the Bond Rating Agencies, such as Standard and Poors, who was also briefly mentioned in NBC’s piece.

As Dateline explained, they were hired to give credit ratings to these MBS, which are supposed to indicate their level of risk to investors. “AAA” was the highest rating that they could give a security, and 80% of MBS received that top stamp of approval.

They suggested that most MBS would perform well, despite the fact that the agencies did not have any historical data to back the ratings up. Richard Gufliota of S&P, stated that they were so over inundated with securities to rate that most were not examined to the extent that they should have been.

It should also be mentioned that they made their money in volume too. More quantity over quality.

Finally, a lesser acknowledged culprit of this financial fiasco is The Media itself.

If it wasn’t for the greed of the media (TV, Radio and Newsprint), rolling out with advertisement after advertisement for these mortgage companies and their products, borrowers would not have been so encouraged to accept some of these toxic loan.

In years leading up to this mess, there wasn’t a commercial break that did not produce a mortgage ad.

Often advertised were the No Closing Cost, Stated Income, No Income Verified, and so forth.

There wasn’t a Radio host in the nation who didn’t have at least one mortgage company in their back pocket paying them to be their spokesperson.

Did any of them look into the products that they were pitching to their listeners? Nope. I think they just laughed all the way to the bank.

And what is strange about the media’s role, is that I have yet to see anyone try to add them into the equation. Now, all you hear out of radio talk show hosts spewed crap about how everyone else is to blame. None have come forward to say, “Hey, I guess I had a hand in it too.”

All in all, it is going to be a vicious circle of blame.

There is plenty of blame to go around, and I think when it comes down to it, we can sum it all up with one little word: “GREED;” the Greed of the Government, the greed of the Product Managers, the greed of the CEO’s, the greed of the borrowers, the greed of the Loan officers, the greed of the Appraisers, the greed of the Underwriters, the greed of Wall Street, the greed of China, the greed of the Bond Raters, and greed of the media.

This post can also be viewed on yourmortgageoryourlife.wordpress.com.


Annemieke said...

As an appraiser I can tell you that lender pressure was/is considerable. However .... it is up to us, the appraiser, to say NO. Sadly, not every appraiser has this ability.

Any appraiser who bends to this kind of pressure and either over or under values a property ought to have his/her license yanked. They are giving the rest of us a bad name.

Anonymous said...

If Dateline was interested in building a serious report, you would have thought their star witness insiders would have been more credible than two former Countrywide employees who were fired and/or recently out of prison for their behavior.

Those borrowers playing the victim card were laughable. You see what the payment is, if you dont even make enough to cover it much less your other living expenses yer an idiot to even entertain it. The government relaxed the restrictions and everybody started lying about how much they made thinking they could refi before it caught up with them. Now they want to blame everyone else and get a free ride.

Mozilo was making bank after 40+ years of sweat equity in the company he founded but the majority of his wealth was still in Countrywide and went down with the ship. If he foresaw the extent of this he would have retired at the end of 2006 as he originally planned and gotten completely out.

Steve Owen said...

Overall, the article is convincing and relatively accurate. However, the author neglected to mention the 10,000+ appraisers who signed a petition to Congress (or anyone else who would listen... no one would) begging for them to do something about the pressure of mortgage brokers. As an appraiser, in 1993 more than three-fourths of my work was secondary market mortgages; by 1997 it was less than half. It started to be a regular thing, the mortgage broker would call and say "can you comp this." The translation to that request is "can you get the amount we need." I developed a fax-back form for them to sign that they were not asking for pre-determined value (illegal). Sometimes they would sign, often they would just move down the line to another appraiser who was hungrier. My only option was to quit the mortgage business... I did my last secondary market appraisal more than five years ago. Today, I am busier than ever doing appraisal work for people who really want to know what the market value is. And, there's a bonus, I get to sleep at night.

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