Wednesday, April 15, 2009

The New McCarthyists, Part II: Where the Culprits Are

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Everyone wants to blame somebody else for the financial crisis.

Rick Santelli wants to blame the homebuyers. Jon Stewart wants to blame Rick Santelli and Jim Cramer. Jim Cramer wants to blame short-sellers. Short-sellers want to point out that they never loaned a dime to anybody, subprime or not—and, besides, it was bulls like Jim Cramer encouraging innocent investors to stick with stocks like Bear Stearns, not short-sellers.

But nobody listens to short-sellers, because, as one letter-writer reflected the common wisdom in Barron’s this weekend,

“Shorting caused the demise of financial companies that were intentionally targeted by short players.”

That this statement is false doesn’t particularly matter to Jim Cramer—or even Barney Frank or Chris Dodd.

Nor does it matter to the New McCarthyists that thus far nobody has put forth any name of any financial company that was “intentionally targeted” by any short-seller.

Ironic it is, then, that the same weekend Barron’s was reprinting this most comforting New McCarthyism, its sister publication, the Wall Street Journal, was about to publish a detailed look at the where the real culprits behind the “demise of financial companies” are: the mortgage brokers.

In April 14th's “Older Borrowers, Out in the Cold,” reporter Ellen Schultz lays out in cold, hard facts—as opposed to the vague, nameless short-selling conspiracy theories—how mortgage brokers destroyed the banking system along with peoples’ lives:

YUBA CITY, Calif. -- In 2006, Carol Couts, a 66-year-old widow in Yuba City, Calif., was living in her home, payment-free, when a mortgage broker persuaded her to refinance her no-cost mortgage for one that exceeded her monthly income by more than $400.

She can't afford the payments, and unless her lender modifies the loan to make it affordable, she'll lose her home of 25 years. She's given away most of her furniture and her cat, and packed her belongings in cardboard boxes. "We've got nowhere to go," she says, referring to herself and her dachshund, Ollie….

In 2007, she received numerous phone calls from a mortgage broker named Daniel Lewis. According to Mrs. Couts, he told her he was contacting seniors to warn them that banks were canceling reverse mortgages because they were unprofitable. She would have to refinance her home, he told her, or lose it. (This wasn't true; reverse mortgages generally aren't repayable until death.)

Mrs. Couts's first statement showed she had an adjustable-rate mortgage with an initial interest-only monthly payment of $1,333. She soon defaulted, and Wachovia Corp. -- which had acquired World Savings & Loan, the firm Mr. Lewis worked with -- started foreclosure proceedings….

Mr. Lewis couldn't be reached for comment.

—The Wall Street Journal, April 14, 2009

Mrs. Couts, unfortunately, is not the only victim whose loss at the hands of unscrupulous mortgage brokers the article details.

But her experience—and you should read the entire article, from start to finish—is, in microcosm, the true story of where the blame for the financial crisis lies.

Looking for culprits?

Go where the mortgage brokers are.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Anonymous said...

I think blame can be spread far, wide and deep. From a national policy of "homeownership for everyone" to lack of regulatory oversight, rating agencies getting kickbacks, greedy wall street, greedy mortgage brokers, fraudulent buyers, FNMA and FRE policies, repeal of Glass Steagall, enacting CRA, changing the commodities regulations, etc., etc.. The point is that I just don't think there is a single person or organization to blame.

Constance Reader said...

I agree with Jeff that the mortgage brokers bear a substantial portion of the blame, for the simple reason that they are the only person in the process who has direct contact with the homeowner. The homeowner hears the broker's pitch -- not the lender's, not the mortgage-backed security broker's or investor's, not the banker's. Therefore that mortgage broker has a special and critical fiduciary duty to the homeowner, a duty that is violated when they lie to a homeowner (and that's what this was, a lie) in order to snatch a commission/fee.

Could someone explain why these mortgage brokers aren't liable to a charge of fraud?

BlackLab said...

I STILL don't understand why people are hell bent on placing blame.

Someone please explain to me what this achieves.

Anonymous said...

As I said in the first post, there is plenty of blame to go around. It is worth the effort to assign blame if only to preclude this crisis from re-occurring. Hopefully, the SEC and the morons in congress will pay more attention in the future

Nick said...

C'mon Jeff. The mortgage broker is certainly part and parcel to the real estate collapse but let's face a few facts. 1. The homeowners took the money. 2. The money was made available from thousands of "sophisticated" sources. 3. These cats were entirely unregulated and were not held to even simple fiduciary standards.
Think about the mortgage brokers you've known. I've known a sharp few. Most were either naive youngsters w/o impressive grades/resumes or undistinguished 30 and 40somethings who saw some near-term,easy money. If you'd get outside your fat cat, baby boomer crowd you could have witnessed this firsthand.:)
I place no blame on the shorts. None. But I'm not heaping all/majority of the blame on these hapless fools.

Anonymous said...

Mr. Matthews is apparently as misinformed or unable to understand plain written english as the rest of people wanting to begin a boogy man hunt. The excerpt clearly states the actor was an employee of a federal chartered savings and loan. I can find no record that World Savings and Loan held a mortgage broker license in any of the 50 states. Maybe he was making this up to deflect blame from the banks where the pruduct mix and inablility to undwerwrite proper financial products is at the heart of this matter.

Anonymous said...

the story states that the person involved was an employee of a bank. It would seem this is a bad example to begin the witch hunt for brokers.

Lyon Jewett said...

I work for a mortgage broker and take serious offense to your statement.

I have done over a thousand loans in my career and only one could be considered sub prime.

Jeff, what you miss is Wall St. banks were pushing their ever increasing "blow fog on a mirror" guidelines on subprime lenders and brokers. I know people that worked in subprime and the stories they tell go like this...

" I'd send the application to the account rep from (let's say First Franklin or Ownit- both Merrill Lynch Companies by the way) and the rep would fill out the application for them to meet their so called "guidelines."

Yeah, there were some bad apples out there selling and ripping people off, but 99% did and still do an honest job.

I lay this economic disaster at the feet of Wall St and the ratings agencies and fed regulators. What the f%ck were they doing when these new option arm products with features such as no income, no asset, no employment and a 560 credit gets you 100% financing?

Yeah, the "old grandma story" is a real tear jerker but wake up. Everyone from NYC to LA were rolling in the dough they made from this and the best people like you and the banks can do is lay at the feet of mortgage brokers?


Hue said...

I worked as a mortgage broker from 2003 to 2006. Some of my friends are still in the business. The first company I worked for primarily put people in Countrywide subprime loans, 2/28 or 3/27. and these were in southern states like Ala., Fla., Tenn., where the house values were around 70K. The company marketed by sending out mailers, saying people qualified for $50K in cash. We were taught to say that it's not a mortgage early in the process, as well as it's not an ARM in the middle of the process. I'm sure all of the those borrowers are now upside down or in default. Because we got them cash, and they were subprime and the cash didn't go into paying of debt. Once the ARM started to adjust, their credit score didn't improve. I plead innocent on those loans because I had no clue what I was doing. But I never lied about it not being a mortgage or that it's not an ARM. Generally, I tried to put them in FannieMae loans but my manager didn't like that, since the customer will not br a repeat customer (if you put them in an ARM, then they will need to refi.) Anyway, I moved on to another mortgage company, which got leads from LendingTree. This company was started by smart loan officers who left the first company and wanted to keep most of the fees for themselves instead paying the house. I knew much more about the biz, and at first, it was a layup. In 2004, it made sense for people to refi their 30-year fixes in the 7s or 8s to rates below 6, even if they started over for another 30 years. That is one thing borrowers never really considered. They knew it or didn't think about it, each time you refi, you extended your debt for 30 years. Anyway, by early 2005, the math didn't really work anymore. All those 8% 30-year fixes were gone.

Even at the second mortgage company loan officers were mostly unscrupulous. You can lie about the rate, saying it's 5.5%, then come up with reasons to knock up the rate along the way, "your house didn't appraised as high as we thought, we didn't lock the rate because we don't have an appraisal and now rates have moved" ... yada yada yada. Borrowers will sign the papers on closing day for 6% (instead of the 5.5% you first quoted) because they wanted cash or that they don't want to go through the three-week process again and rates may have moved higher since they started.

The reason (Constance Reader) that loan officers are not liable is that they send out RESPA, those 30 pages of documents that no one reads, and the numbers in RESPA, don't have to match up with the final loan docs. Finally, loan officers are on full commission, so they don't care about the Carol Couts of the world. They need the Couts so they can get paid. What happens after the mortgage closes didn't matter. The loans were sold off to Wall Street, who pooled them to sell to investors. It all worked beautifully until housing values stopped going up. And no one in the entire financial daisy chain believed the prices would stop going up, not the Fed, not the rating agencies, not Wall Street, not the investors, not the loan officers, not the borrowers. I did around 2005, so my second mortgage company got rid of me. The managers overheard me telling colleagues that the refi boom can't last forever, therefore I had a bad attitude!