Tuesday, November 20, 2007

The New York Times Versus Brokers and Banks

The lines are drawn and everyone needs to understand the stakes. The mortgage crisis is crying out for action and everyone wants to pick sides. Congress has picked a narrative and that narrative is politically correct. The problem with a politically correct narrative is that it doesn't address any problems but rather it assigns victims and villains and protects the victims and punishes the villains. If you read any of my work on mortgages and H.R. 3915 you will see my business has complexities that are totally foreign to anyone in Congress. They are making laws about things they can't define like predatory lending.

For instance, with in H.R. 3915, there is something called anti steering. This means that if someone qualifies for prime they can't be steered into sub prime. Unfortunately, prime is a vast universe and it isn't always better than sub prime. For instance, within Fannie Mae (something most of Congress think is a candy company) there can be what we call expanded levels of approval called EA1,2, and 3. The third level is extemely aggressive and thus has a very high rate. Sub prime can very well offer a better deal than EAIII, as we call it. If I steer someone from EAIII to sub prime, can I be sued? No one knows including the representatives of my Congressman's office, Rahm Emanuel (I know because I called and was directed to a confusing website with a one hundred plus page "summary" of the bill)

This matters not to Congress because protecting the homeowners, the victims, and attacking the brokers, the villains is good politics.

The truth matters not to the New York Times either. Yesterday, they published a piece endorsing a bill that would create the "moral hazard" of encouraging bankruptcy. They did it because the bill protected the consumer again, and punished the bank again. Today, we have this piece by Bob Herbert. It tells the story of poor Rosa Dailey who was harrassed and manipulated into taking on a mortgage she couldn't afford. Apparently, she received a plethora of phone calls and the calls wouldn't stop. Apparently, Ms. Dailey never told them to take her off the list or put herself on the do not call list (the time frame is unclear so I don't know if the do not call list was in place yet). Instead, she succombed to the pressure of the phone calls and was put into a loan she couldn't afford.

They knew that the woman who owned the house was old and sick and that her two aging daughters were struggling with illness and poverty as well. That was all to the good as far as the lenders were concerned. The predator’s mission is to home in on the vulnerable.

“The people that wanted to put through the loan called me about a hundred times,” said Rosa Dailey, who is 65 and going blind and needs an oxygen tank at times to help her breathe. “I kept telling them no, because I didn’t think we could afford it. But they kept saying how it was to our advantage. So I finally said: ‘All right, let’s see what we can do.’ ”

That was the beginning of a tragic spiral, with one unaffordable loan following another. As Ms. Dailey put it: “I feel like they led me down a dark alley.”

I have no doubt that this story is essentially true, and I have no doubt that there are plenty of sociopaths that occupy my profession that would perpetrate such a heinous act. What isn't revealed is why Ms. Dailey who apparently had a loan ever agree throughout every part of a month process to take on a loan that was clearly worse for her. What possible motivation would Ms. Dailey have to change what I can only assume was an affordable loan into a loan that wasn't affordable? Despite what Mr. Herbert implies, the rate, monthly payment, and other terms, are all clearly spelled out in the documents. Furthermore, it is something every consumer should ask before signing any of the initial documents. Was Ms. Dailey taking out cash? Was she taking a payment that was initially lower but then grew? We don't know, but for some reason Ms. Dailey moved from a loan she could afford into one she couldn't (or maybe Mr. Herbert conveniently leaves out that the loan she had she couldn't afford either). Unless someone signed documents for her, she must take some responsibility in the process or frankly there is no contract (which is what a mortgage is) anywhere that is worth anything.

I am not excusing the broker or the bank. In fact, I never miss an opportunity to take pot shots at my business. Before doing this I was a stock broker. Stock brokers made fabulously wealthy people less wealthy. While it is no less scummy, it is at least a bit more challenging. Mortgage brokers absolutely prey on little old ladies like Ms. Dailey and take advantage of them. That is because our business is such that we can make just as much money taking advantage of the weak as trying to take advantage of the powerful (who ultimately are not nearly as easy to take advantage) Fraud is fraud and if this case is accurate there was fraud committed and despite what some think this sort of fraud is already illegal. It is just rarely enforced which is the crux of the problem. That said, to say that Ms. Dailey was nothing more than a helpless victim despite signing documents agreeing to pay a loan back and then not paying it back is very well the politically correct thing to say. It is NOT the correct thing to say. There is a reason why there are right to recission laws. If Ms. Dailey felt pressured, that is what the three days after were for.

Again, what Mr. Herbert conveniently left out is why Ms. Dailey initially agreed to refinance a mortgage that apparently she could afford into one that wasn't affordable. For some reason she signed documents changing her terms from those that were affordable into those that weren't. There are scum bags in every business. Mr. Herbert acts as though mine is special because we have those that take advantage of people. We aren't. Just like in any other area, the consumer protects themselves with knowledge. Ms. Dailey was taken advantage of because she was naive. While this maybe harsh, that is the ultimate problem.

My parents once almost walked away from a loan I did for them, their son, because they weren't convinced that I was actually going to pay for all of their costs. I initially tried to convince them by simply saying that I was their son. I eventually convinced them by changing the paperwork and making it accurate since it wasn't initially. My parents were absolutely correct and the whole episode taught me a valuable lesson. My parents would never wind up in the position of Ms. Dailey because they are educated consumers. Ultimately in the case of Ms. Dailey and every other consumer knowledge is power.

I also point out that it was much easier to take advantage of Ms. Dailey because the important documents were buried in a stack of useless ones. There is a stack of useless documents because of the never ending government regulation that Congress and others insist on the mortgage business. Ironically, Mr. Herbert is in favor of more government regulation which would lead to more signed documents for Ms. Dailey.

What is disturbing to me about this article is that it gives nothing besides telling a story that is meant to tug at your heart string. We now have the do not call list. I mentioned the right to recission, and of course, the plethora of paperwork is what the Congress has always done to "protect the consumer against the predator". All Herbert does is say this,

In some cases, corporate con artists have deliberately targeted and seized the equity of financially strapped and unsophisticated owners. In some cases, homes have been stolen outright.

This is an issue crying out for a thorough federal investigation.

This is nothing but nonsense. The idea that banks would ever do a loan where the goal is foreclosure is one made up by those that have it in for banks. I think banks are an evil creature: drunk on power and unwilling to do anything anyway but their way. That doesn't mean they think that creating a loan that would ultimately lead to foreclosure is something that would ever be in their best interest. Herbert provides no specifics of such. In the case of Dailey, it was NOT a bank creating a loan that they wanted to end up in foreclosure. These loans along with many others were created in what I refer to as irrational exuberance. Banks got caught up in the wave of the hot real estate market and ended up creating loans that were far too lenient and allowed for unverified income that was way out of line. They did this because of stupidity and irrationality not malice. Yes, the mortgage broker certainly manipulated the loose system of the bank and the naive client, however, we the sociopathic mortgage brokers, were taking advantage of a system set up by forces around us.

What is important is that the market, THE MARKET, has put an end to this. You need not worry about the likes of Ms. Dailey ever being taken advantage of because there are no longer any such loans. If he wants to investigate, he can, but he doesn't say what he wants to investigate. He gives no solutions. All he does is give a story that is meant to do nothing else but portray him as a populist and attack the easy targets, banks and brokers. This is dangerous because policy is decided based on this narrative.

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