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I Was Right!
By JLP | June 22, 2009
If you want to read a short book that will give you a pretty good idea of what went on with subprime mortgages, check out David Faber’s And Then the Roof Caved In
As my regular readers know, I have blogged a lot about the subprime mortgage crisis. In one of my posts, I mentioned that brokers were incentivized to put prime borrowers into subprime products. One of my commenters (mortgage broker I believe) argued that brokers were not given incentives to promote one type of mortgage over another. Well, unless David Faber is lying, on page 71 he writes that some brokers WERE given incentives (emphasis mine):
The higher the rate on the mortgage, the more money the originator would be paid in that rebate** by Wall Street. “If you could sell the loan for a highter rate and sell a lot of them at a higher rate, the Wall Street was in love with you. They would bend over backwards for you. They would buy anything you’d give ‘em, just about,” gushed [Lou] Pacific. Subprime loans carried a low initial rate, but over the life of the loan a very high rate. It proved to be the perfect product for Wall Street. It also proved tempting for many of the subprime firms to convince consumers to take a subprime loan even if they qualified for a much lower-priced prime loan. “We used to get an awful lot of them [prime borrowers],” say Pacific unapologetically. “They were more concerned with the pseed of getting a loan. And plust the average person doesn’t understand where their credit ranking is, some don’t think they can qualify for a good loan, but they can. So0 they’ll call and if you sell a loan with a higher FICO score, you’re going to make more money on it.” Pacific claims that when he encountered such a person he would refuse his business and tell him to go to his local bank.
Yeah, right. I’m sure Mr. Pacific turned the business away. He may have, I don’t know. Let’s just say I’m skeptical.
Of course, the AFM commenter may not have been given incentives if he worked for a smaller firm that didn’t have a direct relationship with Wall Street. I suppose that is possible.
I encourage you to pick up a copy of David Faber’s And Then the Roof Caved In
*Affilitate Link
**Also known as a yield spread premium.
Topics: Credit Crisis, Mortgages | 7 Comments »
June 22nd, 2009 at 8:42 pm
JLP: Have you seen the CNBC documentary called "House of Cards"? Faber does a great job explaining how the boom and bust of this housing bubble:
http://www.cnbc.com/id/15840232?video=1145392808&…
June 22nd, 2009 at 11:05 pm
Despite, the subprime mess, another culprit may be at root cause as well: medical expenses. According to a recent study from the American Journal of Medicine, 62.1% of bankruptcies in 2007 were due to health expenses, up 50% of what it was back in 2001 when the same study had been conducted. (Himmelstein, et al, 2009)
75% of these individuals claiming bankruptcy had health insurance and came from well-educated backgrounds where they owned their homes and had middle class jobs (Himmelstein, et al, 2009).
Some 1.5 million families lose their homes due to medical related expenses each year (NCHC, 2009).
Health expenses will cost $8,160 per person paid either directly through health expenses and health insurance premiums or in others ways such through taxes and inflated prices (Associated Press, 2009).
Not saying people aren't at fault for taking on bad mortgages, they're the same people at fault for not taking control of their health, who will pay $65 to get their hair done but are suddenly broke when it comes to paying their bills.
References:
Associated Press. (2009). Healthcare costs to top $8000 per person. Retrieved June 22, 2009 from MSNBC Web site http://www.msnbc.msn.com/id/29355231/
Himmelstein, D. U., Thorne, D., Warren E, Woolhandler S. (2009). Medical bankruptcy in the United States, 2007: results of a national study. Am J Med, XX, XXX. (not yet published)
National Coalition on Health Care (NCHC). (2009). Facts about healthcare costs. Retrieved June 22, 2009 from NCHC Web site http://www.nchc.org/documents/Cost%20Fact%20Sheet…
June 23rd, 2009 at 3:06 am
JLP, for a broader sense of the crisis, I recommend reading this Morningstar article: http://news.morningstar.com/articlenet/article.as…
June 23rd, 2009 at 4:12 am
Mortgage Broker here… JP, generally subprime did not pay as much as conventional or FHA loans at the loan officer level. In fact, FHA pays one of the highest commissions (yield spread premiums) for any loan product pound for pound. The only loan products that generally paid more than FHA is the Option ARM and that was only if you slapped a three year prepay on the loan.
This isn't to say that some firms weren't making more on subprime at the company level selling direct to the street, but I assure you, those profits hardly ever made it down to the LOs. No LO, unless they were working for one of the boilerrooms, would ever have an incentive to put a borrower in a subprime loan over a conventional or FHA. The only reasons to are the borrower doesn't qualify or that particular brokerage couldn't originate FHA loans.
Many of these companies had limited product offerings, so often times their LOs would just hardsell whatever they had. It wasn't so much they were trying to make more money. If all you can offer is a 2/28 subprime loan then that is what you are going to sell, not unlike all businesses.
June 23rd, 2009 at 4:18 am
In addition, even if some boileroom monkey was trying to put a borrower in a subprime loan, ONE PHONE CALL to a competing broker would have uncovered it. The mortgage broker business is a dog eat dog world and there is nothing easier to sell against than when a competitor is trying to shoehorn a prime borrower into a subprime loan. Any borrower who got put in a subprime loan that truly qualified for a conventional loan or FHA did so because they didnt' take the time to get a second opinion or shop around just even a little bit.
June 23rd, 2009 at 2:13 pm
Alex R: I tend to agree with you on the medical costs — probably why Obama is on the Health-Insurance for everyone crusade, though I doubt his plan will fix the real problem:
The middle class is under a massive squeeze: they can't afford medical care, college for kids, housing, etc. The only reason we have not been in recession since 2000 is due to availability of cheap debt to absorb the rising costs — while at the same time, having a reduction in wages and offshoring of their jobs.
My crystal ball tells me that we will not have a sustained economic recovery without a middle-class, and the best way to bring the middle-class back is to drastically reduce taxes on them, and increase the taxes on the rich to rates that are at least equal, if not above, the middle-class tax rates.
This means: remove the income cap on Social Security and Medicare taxes, and eliminate the 15% dividend tax. The rich get the majority of their income through dividends, yet they are taxed at the 15% poverty level.
June 23rd, 2009 at 2:15 pm
Just to clarify — when I said to eliminate the 15% dividend tax — I mean that the dividend payments should be taxed at the normal income tax rates.