We Sell Money: Part I The Habitual Offenders

So, I guess the time has come to address some of the loans we made while at the Bank of Hell.  This is tricky for me because I could write an entire book on this subject alone and it would probably trigger your gag reflex and a pained expression of righteous indignation.  I'm going to try and take this slow and do this in installments in an attempt to lessen the odds you want to beat up your local banker.

Make no mistake about it, a loan officer is a salesman.  Unlike people who peddle things you don't want and don't need, loan officers peddle money.  Being a loan officer was a little like what I imagine it is like to be Santa Claus, you have something almost everyone wants and you make people happy.  Now I recognize that I am a shitty Santa Claus, the kind that would get you a house and allow you to run up all your credit cards and then my bank will come take it away before you were even done playing with it.

I did so many loans for some customers that three years later I still remember their phone numbers and addresses.  These customers were either people that I refinanced multiple times to take cash out of their homes or people who were bit with the speculation bug and were investing in lots of properties.  The latter included people buying houses to flip and slumlords.  A. Hole reminded me this morning that I once told a customer working on becoming a slumlord that he had been a very busy boy and was wearing me out.  I believe my frustration with him peaked that day because he was signing his fifth contract on an investment property in four weeks, and every loan was a nightmare.  I had quite a few of these pain in the ass customers who expected my bank to finance properties for them ad nauseam and for awhile, we actually did. 

Banks typically limited the number of properties they would finance for one customer, usually this number was around ten.  Ten properties, with at least ten loans to one customer, is a considerable amount of risk for a bank to bear on the residential side.  What it allowed investors to do was to capitalize on great residential loan terms and rates instead of getting  a commercial loan.  Commercial loan rates are higher, require larger down payments, and must make sense in terms of cash flow while residential loans do not have these downfalls.  There was a point at the Bank of Hell where I had four deals for one borrower who was purchasing four rental units and I was able to finance these for him with no down payment and an interest only mortgage payment.  That was selling money at its finest.

What banks didn't limit was the number of times you could refinance the same home which was a huge relief to the customers that I refinanced anywhere from five to six times in a three year period.  This is the phenomenon that made me aware we were headed into a recession in late 2006.  The spiral of doom began with me refinancing someone and getting them cash out of their home to consolidate other consumer debt, resulting in a lower monthly mortgage payment and cash in hand for the customer.  Feeling wealthier because of the cash in hand and the appreciation in their home's value they would proceed to spend money like a drunken sailor, to be fair here I must point out some actually were drunken sailors, but I digress.  Once the money ran out they would start using their credit cards again to maintain the standard of living they couldn't afford because their wages weren't rising but they didn't care because they knew their home value was appreciating.  Once they had run up more debt they would return to the Turdy Ferguson ATM again and apply for another cash out refinance.

The scariest customers were those who were simultaneously becoming slumlords while also using their primary homes as an ATM to purchase more real estate.  I had a few of these customers as well.  You might wonder whether I ever considered telling them this was a bad idea.  The answer is no, why the hell would I tell them that?  Every loan they signed for made money for me and at the time, I was in true believer mode.  True believer mentality in the mortgage industry was that we were making people wealthier.  I used to have my prepared sales pitch about why customers should not put money down on their homes and it went a little like this:

Customer:  "How much money do I need to put down?"


Turdy:  "Well that is the great thing, I can get you a loan with no down payment."


Customer:  "Isn't that risky?"


Turdy:  "Not for you, why should you bear the risk of the investment?  Banks are institutions set up to take risks, they are experienced at it.  Let them take the risk for you."


Customer:  "Hmmm, I never thought of it like that."


Turdy:  "Let me put it another way, not putting money down allows you to maximize your return on the investment in the house.  You can invest the money you would have put down on the house in the stock market and earn a rate of return on that.  Then every single penny of equity on your new home is pure return because you didn't make an investment to get that return.  Being fully leveraged means pure profit."

Customer:  "Wow, I had no idea  I could do that.  When can I close?"

While my skills at selling were admirable, no one was better than the Mortgage Devil.  He was a true believer of epic proportion.  When A. Hole ran into him shortly after the bubble burst all the Mortgage Devil could say was, "Look how those greedy bastards on Wall Street fucked it up for the rest of us".  Irony with your nonsense, Sir?

That my friends is today's lesson on how you inflate a bubble.