There is a Turd in the Punch Bowl

On occasion I have been known to watch “South Park”. I love the way they take a current event and then “cross the line” with it. It can be a beautiful thing when the creators are on their game. One episode reminded me of when I first met my co-writer.

The overall theme of the episode revolved around someone not going along with an “agenda”. When this happened the phrase “There is a Turd in the Punch Bowl” was uttered and the person was removed. It was code for we have a “free thinker” and someone who isn’t drinking the “Punch” (or kool-aid if you like). The beauty of this is that my co-writer chose the name Turd Furgeson. Ohh, the cosmic irony.

By now you should know that Turd Furgeson didn’t go along with the Mortgage Devil’s agenda at all. She hadn’t been drinking his Punch in quite awhile. It became a source of displeasure for him and his cohort…who I would like to introduce now. This woman shall be called Cruella Deville from this point forward. She is a middle aged woman who has the most fake laugh…bordering on cackle…that I have ever heard. Her husband is a successful Doctor in the area..so she doesn't need the money. Why does she work in the mortgage industry?....because she is Cruella and she needs to steal puppies to make fur coats?...or to take advantage of mortgage customers to finance her wool sweater and wool skirt habit? I am not sure. She chain smoked cigarettes all day and ran around the office between smoke breaks totally freaking out yelling “I am so SCREWED”…all…day…long. She never met a loan that wasn’t a total crisis. She created more drama than a Broadway production on a daily basis. She would run around screaming, cursing, throwing her hands up…. and then suddenly…the phone would ring. At a quick snap she would transform the rage into a sugary sweet demeanor. It was sickening to watch. It was better not to have eaten any greasy food that could easily come up when you were in her presence. The probability that I would vomit after watching this show was very high.

I recall one evening I am talking to one of the Mortgage Devil’s Minion’s…one that I actually like a little….and here comes Cruella. She is in full on freak out mode:

Cruella: “A. Hole…darling…have you heard that Turd Furgeson is down at the Beach office stealing loans from all of us”.

Me: “uhhh…what?”

Cruella: “Oh yeah, she is down there picking up all of the phones call that could be for any of us…and she is taking the loan applications all for herself”.

Me: “hmmm…Really?”

Cruella: “Yes, the Mortgage Devil is pissed. He said that he explained to her she had to find out who the Loan Officer was that handled the loan and then pass it to them. But she isn’t doing that. He said that wasn’t the deal.”

Me: “Well, I planned to make some stops at the Beach at the end of the week and stop in that office. I guess I will get to meet her.”

Cruella: “Well you need to sit and there and listen to what she is doing and tell the Mortgage Devil. He needs proof. Better yet, tell me and I will tell the Mortgage Devil”.

Me: “Why would I do that? I am not her boss.”

Cruella: “Jesus Christ, don’t you see that she is ripping all us off??!!”

Me: “ I will give you a full report. Happy?”

Apparently, Turd wasn’t going along with the Mortgage Devil’s and Cruella Deville’s plan. So, there was a Turd in the Punch Bowl and I was supposed to help flush it? Not my style. I had no intention of being a spy or tattle-tailing. I just needed a break from Gilligan’s Island and Cruella Deville’s stupid daily shit. I knew none of my clients were being stolen by Turd because I didn’t give out the number to that office to ANYONE. I don’t think I even knew the number for that office. I didn’t even want people calling ANY office for fear the call would be directed elsewhere by the Ever-clear Pickled Bitchy Receptionist. Everyone had my cell phone number and that is how everyone reached me.

I was there for some peace and quiet and to relax a little without the constant stream of people “buzzing” my Island like Crop Dusters. I pull into the parking lot and see what I believe is the Turd’s mode of transportation. A Volvo Station Wagon. That is odd? The Mortgage Devil had a Volvo Station Wagon (and 10 other cars) too. I guess I didn’t get the Corporate Memo about Loan Officers driving Volvo Station Wagons. Oh, well. Boring Car…hopefully she is not as boring as her mode of transportation. When I walk past it I notice a Chicago Bears magnet attached to it. I figured it must be her husbands and he must be from the Mid-West. I roll in and the greeting was less than warm. Great, who pissed in her Cheerios? No worries, I have some chicken and it is quiet…except she talks very loud on the phone. Hopefully, she can stop talking for a few seconds while I check out some Washington Redskins news and plan for my next tailgate. I am at this office for some rest and relaxation not hear her blabber all day with lunatic customers. So, I notice this little window between the offices. Weird? What the hell is that for…passing joints…passing a flask of whiskey back in forth? Who knew?

So, I am doing my usual method of getting to know someone...it involves me sitting and observing…not saying much. What have I observed? She talks loud and is constantly on the phone…and she doesn’t like me. Ok, this is going to be challenge to figure out who she really is…so, I make it my personal mission.

The next several times I stop by the office…she started an annoying habit of running out the back door to talk on her cell phone as soon as I walked through the door. But due to the volume she speaks on the phone…and the thin walls in this office…I could figure out she was inviting her friends to the office. So, her friends would stop by…one that talked as much as her and the other seemed drunk or high or both all the time. After this scenario unfolded the same way several times…I figured this was intentional because she needed a buffer between us. She hated me. Why? Because she thought I was one of Devil’s Minion. She had no idea I was smiling and nodding to the Mortgage Devil while I was planning on how I could take him down. We had the same goal but were stuck in an ultra-competitive environment (created and encouraged by the Mortgage Devil), so we didn’t realize that we should be allies not foes.

I don’t recall the exact conversation, but I think we were talking about our children and she suddenly started not hating me so much. Then we got to know each other a little better and we realized we both had a deep hatred for the Mortgage Devil in common. Then things got really interesting…stay tuned folks.

The Mortgage Devil Does A Loan For Me, Sorta

A few months into my tenure at the Bank of Hell, I put my house on the market. It was my first home and it was a major project, ironically, I had bought it after it went to foreclosure. It was an 80 year old colonial that was in such bad shape that when I stepped foot into it for the first time it had kelly green carpet with dried up dog shit on it. I remember commenting to the realtor, "Perhaps they thought the green carpet would make the dog think it was grass." I was pretty sure they ran some kind of phone sex operation there and made meth in the carriage house but, it was love at first sight for me. The house had great bones. You had to be a visionary to see it through the dog shit, plaster falling off the walls, landscaping growing through the windows, and the hideousness that was carpet over original pine flooring. I saw it for what it was intended: a majestic home in a poor town. It was the mayor's house of Hillbilly Ville and it was perfect for me.



The home was 15 minutes from the ocean and 15 minutes from the nearest city where people actually lived and shopped. I purchased the house for $80,000 in 2002 and got my mortgage through Countrywide, with 10% down. At the time, it never crossed my mind that I would be a loan officer; I was working as a mate on an offshore fishing boat and "writing my dissertation.". When I wasn't fishing for tuna, marlin, and big tips in a leopard print bikin, I was renovating the house and learning things most women never do...and for good reason. I tore up carpet, drywalled, painted, tore up landscaping, and learned to disguise flaws in a home to the naked eye. My husband started calling me, "Contractor Jane". I went to auctions, rummaged dumpsters, and turned old barn doors into charming dining room tables to capture the essence of the home. I was in my element.


I had a few minutes of buyers remorse, not because of the constant work and money that the home needed but, instead it came when I went to the local tavern and met people that scared the crap out of me. There were people using the "N" word and not at all in an ironic fashion. There were huge Nascar fans with less teeth than an infant, no view out of their window, and to make matters worse, they looked at me like I was a city girl. Fortunately, I can adapt to most situations, but I left the bar the night we moved in a little bit drunk and pretty sure I was going to get robbed and raped. At first my friends made fun of the purchase, I had purchased a home in a town where non-residents don't even like to stop for gas. I got the last laugh.


After a few years in the home and countless trips to Home Depot, my mommy mechanism kicked in. I had a boy about to turn three and was thinking that perhaps, we should move somewhere with more people like me. I realize now that there is no neighborhood on earth with people like me, but at the time, I really held out hope that the suburbs and a culdesac would give me moms who cussed like sailors, drank wine, and were worldly when it came to politics and economics. Naive, much?


After searching for the perfect home I decided to build one in a planned urban development (PUD) full of brick homes and large lots. It was right in the middle of a culdesac and I designed it myself to be fabulous. I put our now renovated colonial on the market for $260,000 and got offers immediately. Two and a half years in the home and we got an immediate offer at more than triple what we paid. Because we did so much work on the home in what they call "sweat equity", we made out like bandits.


The new home was to be finished by Christmas, which was perfect because I had moved my parents out from the Midwest to live with us and had designed them an in-law suite attached to our new home. This was in the peak of the housing boom however, and the home was delayed. At first the builder told me it was a six week delay, then two months, and in the end it turned out to be 5 months late. I was now pregnant with my daughter, living with my elderly and often critical parents in a 3 bedroom colonial, and working as a loan officer in a pressure filled situation. I was on the verge of insanity.



The insanity and delays led me to keep upgrading things in my new home, so much so that I came in $75,000 over budget. I wanted to do my loan through the Bank of Hell and because the Mortgage Devil was all about his glory, I had to ask him to do the loan. He responds, "Of course, I do all the employee loans. But you will have to do your own application, send it through underwriting, and get all the documentation." Basically, I was to do his job for my own loan. By the way, this is totally unethical. I was under direct orders to basically be the loan officer on my own loan, of course, the Mortgage Devil didn't have time for his minions. I did as told and moved into Suburbia, earning the Devil a small commission for which he did nothing.


The craziest part of this is that after I moved into my home I started receiving his mass mailings offering to refinance me. Wonderful postcards with his picture telling me, his employee, that it was a great time to refinance. WTF? I went into his office one day and told him, "You could save some money by taking me off your marketing list, I know who you are and I don't need constant reminders." He responded with, "Well, you would be surprised how few loan officers remember to refinance their own homes." Gee, really? I watch interest rates everyday and just closed two months ago on my home and you think I need to be told its time to refinance? The only thing bigger than that man's ego is the national debt.


As though it wasn't bad enough having to deal with the asshole everyday, I now was one of his customers which entitled me to countless newsletters, magnets, and stupid bullshit reminders that he had money to sell. At one point, my now three and a half year old picked up one of the Mortgage Devil's newsletters and without missing a beat said, "Isn't this your asshole boss?" Well put, little man. Well put.


Note: I did correct my son with respect to his language, but I did take the time to compliment him on his amazing insight into people's true personalities. Now you know.

Burn it Like Beckham

My thoughts range from jello salad to lawns in need of care and perhaps, I have lost my mind. I realized today that the global economy is similar to a home in foreclosure with a seriously shitty yard. You have seen those, right? The yards so full of weeds and crap that the best options are to set fire to the whole thing or tear it up; that is our economy. The scary thing is that it isn't just our economy anymore, it belongs to everyone across the globe.

I always found debt fascinating as a student of economics and as a mortgage originator. Debt can do wonders for people, corporations, and as Ross Johnson once said, the sphincter.  I have no intrinsic problem with debt, if you have read this blog then you know that I have at times encouraged people to acquire debt to degrees formerly considered stupid.  But, what scares me now is how many countries are in debt and printing money.  It is all fine and good when we you just have Hitler or Bernanke printing money in solitude, at different points in history....but when all the major players are printing money at the same time with no economic backing, we should be very afraid for the future.  There is no economic growth to base money supply expansion on and this should scare the crap out of people.  For those of you who hate economics, let me make it very simple.  Inflation is inevitable.  It has to be.

In a break with tradition, I have a solution or two.   Here they are, in no particular order of importance:

1.  Burn the whole fucking disaster down.  Get rid of the Fed, Federal regulatory agencies, the FDIC, Fannie Mae, Freddie Mac, and anyone else who has an incentive to make the government bigger and hose the taxpayer.

2.  Replace government regulators with private sector regulators and MAKE THEM BID FOR CONTRACTS ANNUALLY, and maybe make private firms decide who gets the contracts.  As an example, in the oil business you would have smaller companies regulate the larger ones.  Recognizing that this is a collusive industry, you would want to bring in new potential competitors to regulate the long standing firms.  It cannot be BP regulating Exxon.  That would be like fraternity boys policing themselves in a date rape, not cool.

2a.  For all the hits capitalism is taking, it is the best system for improving human welfare, if you don't think so than I have to infer you have not read much about history and I am sad for you.  We need to quit confusing capitalism with cronyism and we need to recognize what it needs to work better.  We need to look at our legal system and government institutions that ruin what is a competitive environment that actually helps consumers.   

2b.  In the banking industry, I could see this as a way to save small banks.  Let smaller banks audit the big banks and serve as an enforcement mechanism for regulations in place.  Give the private banks an incentive not to take bribes or get ahead other than the fact that they could grow and prosper, unlike government regulators, who have no incentive to do right.  The truth is that more regulations solve nothing unless they are enforced and no one is enforcing them.  The banking and financial industry is very much like OPEC, a very close knit oligopoly that can allow oil to go from $14 to $56 a barrel quicker than you could get Jessica Simpson to say something stupid.  This is not capitalism or competitive economics.  Do not be confused.  This is consolidation of economic power that results in a strange form of economic totalitarianism.   

I am just beginning to mull this around.  I want to avoid the inherent problems in government regulations and the crazy game theory dilemmas that these arrangements create.  I want a system where potential competitors police behavior because it reduces barriers to entry and levels the playing field for everyone and at the end of the day, that is good for the consumer. 

If the effing Beckhams can float freely between continents without anyone regulating the transmission of stupidity, surely, we can figure out how to regulate behavior without the government?  Right?

Your thoughts are welcome....unless, you think Congress can fix it.  If that is your suggestion, then please feel free to hang out with Posh Spice in another delusional land.  I am setting fire to this one.

Too Small to Succeed: The Plight of Jello Salad and Small Banks

I spent a good chunk of my weekend contemplating the future extinction of Jello salad. It started at a friend’s birthday party for her daughter when her grandmother made a pineapple Jello salad and the kids couldn’t get enough of it. I don’t make Jello salad, in fact, I don’t even make Jello, unless it is for shooters but I’m even getting too old for that. So this party had me thinking that as grandparents die off so will Jello salad, because it is only loved by the very old and the very young and very few in my generation make the stuff. I find this kind of sad, although the truth is that I don’t even like Jello salad, probably because my mom shoved it in my yapper at every kind of celebration when I was a child. If I fell off my bike I was told, “Here have some Jello salad, you will feel better. It will fix you right up!” You are probably wondering what this has to do with the mortgage and banking industry. Well at first glance, absolutely nothing but, it made me realize that Jello salad is like small banks, neither one will be probably exist in twenty years.

A glance at the FDIC bank failure list shows a number of regional and small community banks shutting their doors. I guess they are too small to succeed, while their larger national counterparts are benefitting from the notion that they are too big to fail. Our government is helping to decide who the winners and losers are and we are footing the bill.

Some of these failures are due to market forces, particularly small community banks in rural places where populations are declining and so are economic prospects. Bad investments by banks can also account for a portion of the closures, particularly those regional banks that put a considerable amount of their resources into financing home builders and commercial developers in places like Nevada, California, and Florida.

What seems odd to me is that smaller banks that didn’t take on the kind of risk that plagued the banking industry during the housing boom are failing at a much higher rate. By all accounts, they were still lending more responsibly than the rest of the industry and since many of them subjected loans to traditional underwriting by committee, they should have been more insulated than the big banks using Fannie Mae products to get nearly anyone a loan. Perhaps, a larger portion of the failures are those banks that in response to the increasing competitiveness of the banking industry and its consolidation, were encouraged to take on more risk than realistic for their asset size and local economic conditions. I still question however, that all these explanations can account for the higher failure rate. I'm sure the rest is explained by the collusion of the large banks to receive bailouts and pass on risk and exposure to the small banks.

This is on my mind because of the proposed financial regulations that will do precious little to insulate us from having another financial meltdown in the future. With the loss of small banks, we are losing tremendous information and relationships that can help foster economic growth and stability in a region. Bankers who know their customers can assess risk better than automated underwriting; tools such as credit reports, which are not always reflective of risk, cannot replace the knowledge found in a more personal banking system. The consolidation of the banking and mortgage industry which has been going on for twenty years is speeding up thanks to the housing crisis, and I’m sure the largest of the banks couldn’t be happier about it. Couple this with the melding of banking and the insurance industry and we are at more risk than ever.

So when small banks go, so does competition in the industry, leading to a cartel of banks…oh yeah, we have that already, it is called the Federal Reserve. The impact on consumers will be profound in terms of fees for everything from overdrafts, wire transfers, stop payments, and on and on. Cartels do not price competitively, they don’t have to. Will customers appreciate the convenience of large banks; of course they will. What I fear customers won’t recognize is that a less competitive banking industry can hamper our future economic growth and lead to greater risk in our financial markets.

If you haven’t read Barbarians at the Gate or Liar’s Poker I recommend you go out and get them right now. What I take from these two books is that particularly in financial markets, the consolidation of power and resources creates greater incentive for rent-seeking and collusion, leaving taxpayers more at risk to anti-competitive and harmful behavior. From junk bonds to mortgage backed securities, a very small group of players are determining behavior in financial markets and where wealth flows. Think of it this way, if you only had to answer to people just like you with the same incentives and goals you would probably behave however you wanted without fear of repercussions, there would be no reinforcement mechanism to check your asshole behavior. Ever go out drinking with a bunch of drunks? Yeah, its like that. Banks, Wall Street, the Federal Reserve, and the government agencies that are there to check them represent this giant club of assholes who have no incentive to check one another’s power.

I don’t have the answer but I know that the proposed regulations won’t work. My gut feeling is that half ass regulations will only make it worse. I want a competitive banking industry, which is impossible with the Federal Reserve and the government involved in the capacity they are working towards. This I know for sure: Clever people will always find a way around regulations and the more time goes on, the more damaging their escapes prove to be for taxpayers.

For the last twenty years, the comparative advantage of the United States has been in making debt, not creating wealth. Clever people will figure out how to make debt look like something it isn’t and it will continue to finance our economic growth much like junk bonds and mortgage backed securities have in the past. This is what we are good at as a country and the expense of it gets more burdensome every year.

Like I said, I don’t have all the solutions. Perhaps, we can save Jello salad with a few cookbooks and some help from our Grandmas, but I think small banks are on the verge of extinction. With the power of the banks and their links to Wall Street, the Federal Reserve, and the U.S. Government, there is no hope for small banks and all the Jello salad in the world won’t make it better.

Mr. Slumlord, A Gift From the Devil

The Mortgage Devil was a ruthless salesman and a horrible boss. When he wasn’t stealing loans from my commission statement he was bitching about the time I was demanding of him. He was a producer, vice president, and in title only, my manager. His management style was unique. One time he had me perform my own performance evaluation saying it was a management technique, yeah right, he was the Sultan of Spin. I knew he didn’t want to waste his time managing his loan officers, he wanted to be originating loans. What a dick.

After complaining profusely about the Devil stealing my loans to anyone who would listen but primarily to my operations manager, henceforth to be known as The Enabler, the Mortgage Devil called me to tell me he was giving me a loan. He was going on and on about how generous it was of him and how the agent on the deal was one of mine, so really it was only fair that I had the loan. It was a $70,000 loan meant as a peace offering to compensate me for the $500,000 in loans he had already taken from me.

What I think happened is that he stole the loan from me before I could talk to the customer. During the phone conversation with the Devil, I was perplexed as to why he didn’t just do the loan. Once I actually spoke to the customer it all became clear. This was not a gift, no, this was the Mortgage Devil pawning off a bat shit crazy customer on me because he figured that a $500 commission wasn’t going to be worth it. The Devil, appearing to be helpful, had once again screwed me.

I mentioned this customer in an earlier post on the habitual offenders, detailing the customers who became so prevalent in your life that it felt like you were in a relationship with them. A sick, twisted, stalk you till you die kind of relationship. This customer was working on becoming a slumlord and when I say he was a total pain in the ass, I am being generous. He was a vile and hot headed guy with an ego that was completely unjustified. To make matters worse, he suffered from delusions of grandeur about the real estate empire he was building in a sad little community that only had one thing going for it; it was thirty minutes from the ocean. His properties were targeted to low income people and he was awfully proud of all the Section 8 vouchers that would be paying for his bills.

That first loan for him was a nightmare and foreshadowed the torture I would endure during the next ten loans I did for him. Actually, it might have been more but I have probably blocked it out in an attempt to protect my sanity. Every one of his loans was either a no down payment or a very tiny down payment investment property loan, which are nightmares. He and I fought on a regular basis about the documentation he had to provide during the loan process. One time he told me he wasn’t going to give me something I needed and I said, “Fine, good luck finding enough money in your couch cushions to pay cash for the house.” He called back and apologized.

I was pregnant by the time I did his third loan and because I had a history of high risk pregnancy, I was sent to a specialist, a few hours away, for a series of tests and ultrasounds. I told the slumlord the day before that I would be unavailable and would be back in touch with him in 48 hours. During my ultrasound, my phone was vibrating so intently that my purse fell off the countertop. I left my doctor’s appointment and listened to 15 increasingly disturbing voicemails from Mr. Slumlord. I was pissed. I called him and told him again that I was taking a personal day and that if he called me and left me threatening messages one more time, I would never do a loan for him again. He hung up on me.

The Bank of Hell was so proud of its J.D. Power awards for customer service that every customer received a survey after their loan closed asking them to rate their experience. As luck should have it, Mr. Slumlord filled out his surveys for the previous loans I did for him in a fit of rage. He rated me horribly and wrote nasty comments about how I wouldn’t call him back. I shit you not, I talked to that guy nearly every single day of the week for one entire year.

I didn’t find out about the survey for months. You know how I found out about the survey, you guessed it, a phone call from the Mortgage Devil telling me that I was pulling down our branches ratings and I had some explaining to do. I was summoned to the main branch of the Mortgage Devil’s territory and read the riot act by the Enabler and the Devil himself. At some point, I interrupted them with a dismissive, “This is bullshit.” I explained that Mr. Slumlord was angry when I took a personal day and took it out on me by trashing me in the survey. I was also forced to point out that I currently had four loans in process for him. This is the remainder of that conversation:

Mortgage Devil: “He said in his survey that he would never come back to the Bank of Hell again so I think you better rethink your story.”

Turdy: “Here’s my pipeline report, he closes on Friday. I guess he came back because no one else wants to deal with him, I mean that is why you gave me his first loan right, you recognized what a pain in the ass he was.”

Mortgage Devil: “Well good, I guess this is resolved. Ask him not to fill out anymore surveys, ok?”

I left the meeting and called Mr. Slumlord and told him if he wanted his loans to close he had to promise to behave and not write anymore stupid stuff; he apologized. The next four surveys from him were glowing accounts of my talents as a loan officer and included flowery praise about the personal attention I gave his loans.

I still know Mr. Slumlord’s phone number having it burned into my frontal lobe by sheer repetition. I don’t know what happened to him or his properties. The properties could be in foreclosure or perhaps, he has been attacked by one of his poverty stricken tenants for leaving harassing messages, I cheer for the latter. I do know that not having to talk to him is one of the best parts of being out of the mortgage industry.

Note: I just remembered that the Mortgage Devil made me write a letter explaining my bad survey from Mr. Slumlord. This is what I remember:

To Whom it may Concern-

My customer, Mr. Slumlord, is crazy. He still calls me for loans constantly.

Best regards,
Turdy

It's the Banks, stupid!

I love underdog stories, particularly sports ones but really, any underdog tale will do.  I was born with a soft spot for the underdog, the scapegoat, and the misrepresented.  This tendency makes me feel bad for mortgage brokers and sub-prime loans because big banks, the Federal Reserve, and Fannie Mae have really let them get thrown under the proverbial bus.

When I left a brokerage to go to the Bank of Hell I had no idea how uneven the playing field was.  In terms of checks and balances on loan fraud and quality, brokers were way ahead of the game.  The wholesale system has one inherent check on fraud, the underwriting of a loan took place outside of the office where the loan was originated.  This prevents a loan officer from having a personal relationship with their underwriter which goes along way in making sure loans are properly handled.  At the Bank of Hell, The Mortgage Devil's mantra was that we should sell real estate agents on the fact that we had local underwriting because it implied we could get loans done more quickly and also, it made real estate agents  feel good to know that if the loan had problems the loan officer could walk to the next office and shakedown the underwriter.  The truth is that local underwriting creates the opportunity for fraud.  Frankly, loan officers shouldn't be able to touch their loan files once they are done with the application, no good can come from it.

Obviously, there were shady brokerages and independent mortgage companies doing business during the peak and yes, a lot of these were sub-prime, but, there is a bigger story about the preferential treatment of banks over brokerages that isn't getting told.

The fundamental difference between mortgage operations was whether the company had a direct and contractual relationship with a bank or not.  The firm I started with had correspondent and wholesale relationships with investors and banks.  The firm was not owned by a bank nor directly affiliated with one but, because of our relationships I could sell the loan products of these other companies, including banks like Wells Fargo.  In contrast, the Bank of Hell owned its mortgage division while companies like Countrywide, owned a small bank.  There were tremendous advantages to having a direct relationship with a large bank and now I know that the major advantage of this was the bank's relationship with Fannie Mae and the Federal Reserve.

There are numerous examples of how these relationships allowed for more risky lending but I want to start with everyone's favorite loan, the Liar's Loan.  When I worked as a broker, very few of our investors allowed stated income loans to close without something known as a 4506-T, a form that the borrower would sign allowing the company to pull copies of tax transcripts.  The only investors we had that would allow stated income loans without this form were, shockingly, large banks.   Why does this matter?  Well, for starters a 4506-T pulled during the processing of a loan could confirm whether the borrower was lying about the income or whether they even had a job.  Smart loan originators knew better than to grossly overstate income on a loan with a 4506-T because there was the fear of getting caught, not getting paid, and potentially getting fired.  There were probably a number of loan originators who weren't aware of the potential for disaster but the majority that I knew, were very aware and this helped to reduce the risk inherent in a stated income loan.  My first manager in the industry hated the notion of tax transcripts, as he would say, "If underwriters can see your tax return it isn't a stated income loan."  That statement is what F. Ross Johnson referred to as a BGO or a blinding glimpse of the obvious.

So tax transcripts helped to reduce fraud by the loan officer but they served many functions.  A tax transcript pulled after the loan closed, but before it was sold, could have identified whether the loan carried more or less risk than the investor would expect. Sometimes investors wouldn't buy loans after pulling tax transcripts leaving correspondent lenders stuck with a loan they thought they could sell.

Tax transcripts could have prevented a number of issues with loan quality.  Imagine catching liars before the loan closes or before the loan was sold with an understated amount of risk.  In terms of mathematical assessment of loan quality, a random sample of the tax transcripts might have provided a firm with information on the thresholds of risk; ie, what percentage of liar's loans overstated income by 5%, 10%, or 20%.  This type of information could have been used to create thresholds for underwriters.  I'm sure some companies did use this information to reduce risk but the most important players in the industry weren't doing this and that includes Fannie Mae and big banks.   

At the Bank of Hell, we were able to do a number of Fannie Mae backed Liar's Loans.  There seems to be a huge misconception that Fannie didn't do these loans but the truth is that only large banks and large mortgage companies like Countrywide were given the ability to do these loans by Fannie.  I have heard a story that the Bank of Hell got access to these loans after pissing a bitch to Fannie Mae because Countrywide and Wells Fargo had them.  Who knows what kind of sketchiness went on behind the scenes as banks lobbied Fannie for the right for more risky, but prime, Fannie Mae loans.

The beauty of a Fannie Mae stated income loan was that there was no 4506 required, meaning there was no way that anyone would know how extreme the risk was or how bad the lie was.  Perhaps, that is how Fannie Mae wanted it.

At the Bank of Hell we had our own Fannie approved stated income/stated asset loan that A. Hole already blogged about.  Let me be perfectly clear, many of these loans were way riskier than sub-prime loans.  These loans were given to people with fair to excellent credit so while they didn't carry the credit risk, there was tremendous opportunity and incentive for loan officers to commit fraud with this program.  As A.Hole explained, the Mortgage Devil encouraged us to lie about borrower's income to get them into this easy loan program because you could take a loan from application to settlement in seven days. If you have been reading this blog you aware that we were doing Fannie Mae loans at 65% debt to income ratios.  This loan allowed loan officers to do loans with high debt to income ratios by falsely stating the customer's income so that it looked like it was 45% or less.

When these loans were bundled into pools they looked like low risk loans, they were Fannie Mae prime backed loans and had the implied backing of the United States government.  Fannie Mae pimped these pigs in dresses.

The scam gets worse when you add the folks on Wall Street to the mix.  When loans were bundled into securities for trade, these prime loans were mixed with sub-prime loans to reduce the risk.  You offer a lower rate of return on the non-risky piece (the Fannie Mae piece) and a high rate of return on the sub-prime piece which frankly, everyone knew had a very high probability of default.

In my opinion, Fannie Mae fucked it up for everyone.  There so called "prime" loans were riskier than a lot of sub-prime loans.  Perhaps the borrowers weren't credit risks, but they were overextending themselves with the help of Fannie Mae and the biggest players in the mortgage industry.  This means that virtually every loan pool sold understated risk substantially and investors who thought that Fannie Mae was synonymous with low risk, eventually found out that Fannie Mae was a giant phony. 

We have all bought things based on the implied quality of a brand name only to find out that we bought a name and nothing else.  This in a nutshell is one of the major reasons we are in this mess.  Most of our financial innovation and trading during the housing boom was based on Fannie Mae's name and the implied quality of the loans.  There were a lot of lemons in that pool and as I said before, Fannie Mae is a bitch.

For those of you that have seen the movie Tommy Boy, Chris Farley provides the perfect metaphor for what happened to our economy.  Fannie Mae was selling boxes of crap with a stamp that said "Guaranteed" and now we know what the guarantee was: our money and future economic prosperity.

Abolish The Fed, But Keep the Money

I have met some very interesting people through Facebook and email since starting this blog.  Apparently, I have also triggered the fascination of a guy obsessed with whores who may be taking our name a little bit too literally.  If you are that guy, let me reiterate:  WE DO NOT HAVE SEX FOR MONEY.  As I told you, we have networked with people we can't stand for money and we accepted money for our tiny role in the destruction of the economy, but neither one of us wants to sleep with you for any amount of money. 

I received an email from someone who appreciates my hatred of the Federal Reserve and felt that our shared desire to see the Fed shutdown inferred that I also shared their hatred for money and wanted that abolished too.  Umm, no I don't.  While I appreciate your desire to make the world a better place and I completely understand your righteous indignation with the banking system, I have to completely disagree with the notion of getting rid of money.  Please hear me out....

Our currency has no intrinsic value, it is just paper and crappy metals.  BUT, it reduces transaction costs and facilitates exchange, which is pretty damned important.  Money has allowed commerce to grow and has made people better off by allowing them to exchange with different people relatively painlessly, in turn, allowing people to have necessities as well as luxuries that they otherwise wouldn't have access to.

Imagine if there was no money and we traded in commodities.  We would be forced to specialize in our own "currency", perhaps I would raise goats and chickens to trade for other goods I might need.  In terms of portability, goats and chickens would make lousy currency and would require a much bigger purse than I care to tote around.  Secondly, they stink.  I highly doubt people would enjoy sitting by me at Wrigley Field if I had to bring goats and chickens to buy beer, not to mention, people at Wrigley hate goats.  Just sayin.

In the spirit of beer I offer my third and most important defense of money.  Imagine my community has a few bars and I want to go get a beer.  I load up a few goats and chickens in my horse pulled cart and head off to the bar.  Upon entry, the bartender looks at me and tells me he can't serve me.  I argue that I'm completely sober and he replies, "No, its not that.  Another goat farmer was just here and I finally had to cut him off because I don't need anymore goats."  I might offer my chickens only to find he is stocked up on those to.  He might tell me what he really needs is some wool.  Now I have to go off in search of a sheep herder who needs chickens and goats in the hopes we can trade so I can go back to the bar with wool.  I have the added worry that in the time it takes me to track down someone to trade with, another thirsty bastard will show up to the bar with wool, drink my beer and max out the bartenders demand for wool.  Complicated?  To borrow a line from Mrs. Palin, you betcha. Even worse, I might not ever get that beer. 

Money isn't what is wrong with the world.  I'm sure that is hard for some people to swallow in the economic disaster we find ourselves in.  You can be angry at fraud and corruption but you can't blame money for it.  You might argue that it is the love of money that creates fraud and corruption but I don't buy that either.  Money doesn't make people behave like assholes...people choose to behave like assholes.  Get a bunch of assholes together and you can form a government or a corporation and really do some damage.

I like money and I like beer, and frankly, making change with goats seems awfully messy.