The Cluster F of SubPrime

For those of you who might think me hypocritical for my condemnation of the contributors to the housing crisis, boo.  I was a loan officer but I certainly didn't create the policies, debt instruments, or institutions that blew up the world.  I was under direct orders to produce more loans and play stupid at corporate meetings where we were meant to stare in awe at Senior Vice Presidents of Liquid Lunches and Nonsense. 


At a corporate meeting one time I had the distinct pleasure (where is my sarcasm font?) of meeting some loan officers from Baltimore that I referred to as Dumb and Dumber.  Turns out that they were doing almost half the volume I was but making three times more than me in commission.  This really troubled me, not because I felt like I was doing something wrong, but because it seemed as though something must be rotten in Baltimore, hon.

After a few cocktails, they explained that they put all their customers in sub-prime loans because the commissions were so much higher.  This was shocking to me because I never really found the sub-prime loans necessary, nor desirable to do.  They were a complete pain in the ass and required me to subject myself to my least favorite part of the business which was dealing with more colleagues (assholes) than necessary.
The other reason I avoided sub-prime loans was that typically I could get a marginal borrower into a better loan, whether it was an FHA, alt-A, or sometimes even a prime loan and that meant better terms and rates for my customer.

I did two sub-prime loans that I remember, one for a guy who slipped out of FHA eligibility because he lied to me about his child support obligation and one for a Veteran.  I did not feel bad for putting the lying guy in a sub-prime loan.  When I explained to him that not disclosing his child support had made him look eligible for the loan but when I received his paystub, his ratios were too high to qualify, his response was, "Fuck it, I'll quit paying the bitch.".  Welcome to a 9% interest rate on a 2/28 ARM asshole.  I will gladly take my commission and maybe even send some of it to your ex.

Mr. Veteran had a certificate of eligibility but did not meet the VA underwriting guidelines because he had a foreclosure that was too recent for the program, if memory serves, it had been less than two years.  Here is the worst part.  When he was out of the country, in military service, his wife had an affair and decided not to pay their mortgage anymore.  She ran off with another guy and let the home go into default.  He returned home from the sandbox to a sheriff's sale notice and divorce papers.  I hated that this guy had to go sub-prime, I truly thought it was a total travesty by our government that this man couldn't get a good loan.  I took a huge loss on his loan, meaning I priced the loan so that I was making less than the required amount by my company, giving my customer a better rate and me a tiny little commission.  I felt like it was the least I could do for someone who got screwed by their wife and the government in rapid succession.

The overlooked thing about sub-prime loans is that the interest rates really were not that high when you consider the inherent risk of the loans.  To put it in perspective, interest rates on sub-prime loans made to crappy borrowers were lower than those rates in the late seventies and early eighties that great borrowers paid.  Sub-prime borrowers even had the option of getting into a 30 year fixed loan, not all of them were the two or three year adjustable rate types.  The reason most sub-prime borrowers did not get into 30 year fixed loans at eight or nine percent is that there was every incentive for the loan officer to put them in the shorter term adjustables.

If you worked for a broker, you were paid in yield spread premium, and most often the investors would limit yield spread on the fixed rate loans meaning lower commissions for the originator.  The invisible hand of profit would guide loan officers into selling the crappy terms to their customers and not even mentioning that they had a fixed rate option, just to earn the minimum rate of return.  Much like Fannie Mae, investors knew that many loan officers are just truly sleazy sales people and they provided originators with incentive to put customers into loans that were not ideal.  Most account executives on the wholesale end and your sub-prime specialists on the retail end, would tell you the only way to make the money you were due was to put the customer into the 2/28 ARM.  The sales pitch for this was, "It is the best way for you to make money because in 18 months you will get to refinance them again!".  An obvious problem with this logic is that in 18 months most of these borrowers were more likely to qualify for food stamps than a new mortgage.

I hear stories now of more loan officers like Dumb and Dumber who put good borrowers into bad loans to make more money.  I have also heard about loan officers who targeted single females and minorities and put them into sub-prime loans.  I don't think this was as prevalent as people perceive.  I think it was largely a problem in Metro areas where there was tremendous fraud going on from the appraiser, realtor, and loan officer.  Not that it is o.k., it just wasn't that common.

What I think is scarier than sub-prime loans is the number of sub-prime borrowers that were given prime loans.  This is a huge reason for the crisis we are in.  It is one thing to trade risky loans that people are aware are risky, even if they are rated decently.  It is entirely different for Fannie Mae to endorse loans as low risk that really stink like sub-prime loans.  As they say here in the heartland, you can put a pig in a dress but it is still a pig.  Fannie Mae spent a lot of time pimping pigs in dresses.