Tuesday, October 2, 2007

Liars into Victims: The Continuing Misleading Mortgage Narrative

In these very pages, a while back I said this about the continuing narrative of the mortgage crisis.

I have been disappointed if not surprised by the media coverage of the sub prime
crisis. It has been filled with political correctness, condescending nebulous terms that even mortgage brokers don't understand, and very short on any analysis that let's the people know what happened.
the mainstream media would have you believe that evil mortgage brokers committed fraud on unsuspecting banks while innocent poor people stood by helplessly and put themselves in an untenable position that they had no control over.

Well, two new articles have done nothing to change this narrative. Let's look first at this from
ABC News

"Donna Pearce is one of those homeowners struggling to keep her life from
unraveling. She is already four months behind on her high-interest loans from
New Century Financial.
She says New Century, now bankrupt, got her the loans
by lying about her income.

"After all of this blew up in my face, I realized that they falsified my
income," said Pearce, a 53-year-old nanny who earns $2,100 a month in
Connecticut. "It stated that I made way more than I actually make."

How much more? Pearce showed ABC News loan application documents that
listed her income as $5,500 a month.

"You cannot write a loan like this without knowing that absolutely this
person is going to fall behind," said Pearce.

This story is about those dreaded STATED LOANS. The story makes it seem as though the borrower was helplessly looking on unable to do anything while loans were created that they couldn't afford. How could someone get into a loan where the income stated is $5100 when they really made $2100 a month? Could this really done without their approval? Here is what I said about the situation.

The borrower is not without fault by a long shot. While the bank may think the
janitor makes sixty thousand a year, the janitor knows what he makes. He knows
if the mortgage payment is eating up to sixty percent of his monthly income. If
this person goes ahead and accepts the loan anyway, is it really the fault of
the mortgage broker when they go bad on it.

While Ms. Pearce makes it seem as though she was just an innocent victim, she actually signed several pieces of documentation attesting that the income reported on the application was in fact real. Furthermore, initial disclosures and final disclosures clearly laid out the payment involved. Why would she agree to the loan if she couldn't afford it? Most likely it is because the house she bought she just had to have and she convinced herself that she could. When it went bad, she blamed the evil, evil mortgage broker even though she was an active and willing participant in the fraud.

Then there is this,

Chanting, “Sharks bite, ACORN fights – predatory lenders, you’re not
right,” dozens of ACORN members on Sept. 26 stormed the offices of Ocwen Financial, demanding that one of the nation’s largest servicers of subprime mortgages modify those loans to keep families from losing their homes. Ocwen CEO William Erbey had ignored a July letter from Florida ACORN requesting a meeting, so members paid him a visit at work. Among the ACORN members were Olga and Paul Gant of Broward County, who told the Palm Beach Post they are facing foreclosure after their monthly mortgage payments jumped from $2,200 to $3,000 per month. ACORN is demanding that Ocwen enact a moratorium on foreclosures, modify loans according to borrowers’ ability to repay and lock in interest rates at pre-adjustment levels.

Similar demands were made in San Jose, Calif., at the offices of
Countrywide Financial, where scores of ACORN members gathered to protest that
company’s failure to work out loan modifications with homeowners. ACORN
estimates 1.8 million adjustable rate mortgages worth $900 billion will reset at
higher, unaffordable interest rates over the next two years. As many as 2
million families nationwide are in danger of losing their homes.

Let's state some obvious things. Mortgages closing documents are contracts. The term of the contract is laid out within the closing documents. ACORN would like the bank to disregard the contract simply because the people who agreed to make the payment now can't make the payment. Even though the fact that these mortgage are adjustable, meaning they can change, was laid out in the closing documents, ACORN wants the bank to just disregard that little tidbit now that it has come back to bite consumers who went ahead and signed anyway.

Isn't that nice? Let's sign a contract, and if we can't live up to the terms, we will just get the other party to agree to new terms. If the other party doesn't agree, then there will be all sorts of populist groups and media right there to make sure to demonize them.

What is the practical effect of all of this? Well, if Ocwen et al goes ahead and redoes all of these loans so that they become affordable, then they will lose more money on those loans. If Ocwen thought that redoing the loans rather than taking the property was the most cost effective, they would have already done it. If they lose even more money, then of course, they will need to make it up with all of their other loans, and thus, it will be the next batch of hopefully good borrowers that will have to pay with higher rates. Of course, no one will see it and no one will report it, so no one will know. It seems that ACORN thinks that contracts can be broken when one side can't live up to them with absolutely no negative consequences. Too bad reality doesn't actually work that way.


Anonymous said...

My son was caught up in one of these sub-prime loans by a builder / lender combination that in my opinion committed fraud. My son is a well educated person (with a PhD), but inexperienced in financial matters. I had cautioned him about taking an ARM in a rising interest rate environment, but he ended up signing what essentially turned out to be an ARM anyway. How could this happen to a well educated person? After talking exstensively to my son I believe he was set-up for this by a saavy, but deceptive builder and lender combination. This was his first home and the builder recommended he use a lender that he personally did a lot of business with. When my son said he preferred to use a lender of his choice the builder said that would increase the price of the home because he had negotiated a deal with this lender that allowed him to discount the price, but it was only good if he used this particular lender. The lender then presented my son with a loan he called a "2 for 1 buy-down". He showed him the prevailing interest rate and told him that he would give him a rate that was 2% lower than that for the first year and then it would rise to the prevailing rate and stay there for the term of the loan. Needless to say, that's not what happened. His payments actually increased 50% over the next 2 years due to interest rate increases. Luckily he took a job with a Fortune 500 company in another city and the new company's moving policy helped him get out of the loan without much damage. I'm sure there were a lot less educated people living in his subdivision that took the same deal, just to get into the market. There are a number of foreclosures in that neighborhood due to people walking away from their loans. I believe in buyer beware, but it appears to me that a slick duo took advantage of a lot of unsuspecting first time buyers and made a killing.

mike volpe said...

I know these buydown loans and frankly, I myself, don't understand them, which is why I have never done any. I don't know if this guy made a killing so to speak. The amount of money that a broker makes is not related to the type of loan he offers. It is possible that your son was able to buy a bigger house as a result of this loan.

Your son's story is different than most because I agree with you in this case one of the sociopaths that regularly infects my industry did do a huge number on him. Again, I have no use for almost anyone in my business and if you read much of any of my other work on the crisis I am not shy in saying it. All I can say is you are right, caveat emptor. If your son didn't understand the loan, he would have done himself a favor getting the simple fixed loan you offered. There is a sense of greed here too, and I am not trying to pile on, but your son looked at the payment of this loan, and then looked at the payment of a fixed loan and was seduced.

Unfortunately, the responsibility rests with him. If he was flat out lied to, that is an unfortunate but not uncommon occurrence. Like I said, my industry is infested with scum and sociopaths. One of my first posts is about one such co worker and the number he did on me.

Your son's story is not the usual. Most of the problems come with people who stated their incomes in order to buy property they frankly couldn't afford. In the macro, if the problems were only those like your son's we wouldn't have a crisis.

In the micro, I hope your son takes with him the lesson that you never get involved in something you cannot understand completely. There is another class of loans called Option Arms which people also don't understand and far too many are involved in those as well and also headed for similar peril.

I am sorry to hear about what happened but it sounds like he got out of it only a valuable lesson.

The other lesson is that if something is too good to be true it is. Your son was lead to believe that a loan would start 2 full percentage points below the market and gradually rise to the "prevailing" market rate. In fact, your son wasn't lied to at all. What happened was that in the interim, the "prevailing" market rate shot up. He obviously assumed or didn't think about what could happen to the prevailing market rate, but he basically got in on a low payment without understanding the ramifications.