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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.
Tuesday, May 18, 2010
Friday, May 14, 2010
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.
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.
Wednesday, May 12, 2010
When Bat Shit Crazy Became The New Black
In the fall of 2005, I came to realize that bat shit crazy was pervasive. Not just in my industry, or my office, but basically throughout my entire world. It didn't take me long to realize that the Mortgage Devil had every personality disorder ever named and probably a few unique to him that he should have proprietary rights to naming. The Bank of Hell was a nightmare and the Mortgage Devil laughed with delight.
I was hanging out in my own branch alone and minding my own business when A. Hole strolls in one day and sits down in the office next to me and starts unpacking shit like he is planning on staying. He starts eating fried chicken and checking the Washington Redskins message board. I can see the fucker because our two offices had some kind of weird sliding glass window between them, which might of come in handy except we have nothing to pass each other but dirty looks. I am pissed. My sanctuary away from the craziness of the other branch has been invaded by another loan officer who is eating my least favorite food and is by the way, not even a fan of my favorite football team. Boo. The phone rings and he actually answers it, "Bank of Hell Mortgage, A.Hole speaking." Now I'm really mad because I have been alone in this branch for months and that is my phone and if there is a loan waiting on the other end well, it is mine and all mine.
Why did I hate A. Hole so much in the beginning? The answer is because of the Mortgage Devil and the ultra competitive and paranoia rich environment he created. The Mortgage Devil was a Top 20 producer in the entire nation that year which is a huge deal in an industry with a plethora of assholes originating loans. I don't want to give the impression that I think all loan officers are assholes, there really are a lot of decent people in the industry, I just didn't get to meet too many of them. This is akin to hearing how beautiful New Jersey is but then you spend your whole time on the turnpike and wonder if there are secret places that non residents are not allowed to see.
When I was hired I was promised my own office and branch and basically no competition. Then one day, I get called to the main branch of the Bank of Hell and there sits Curly Sue, A.Hole, and this third loan officer that I call the Quaker. I really don't know what religion the Quaker was even though A.Hole has told me like twenty times, I just know that he didn't really swear or drink and even though he was some strict puritan he ogled all the Mortgage Devil's assistants like he was trying to figure out where to stick his dollar bills. I hated them all at first sight.
Really, it was bad enough to have to compete with the Mortgage Devil in our market. Then throw in his old partner, a Top 100 national producer, who had jumped ship and I was basically trying to break a cartel. Now I have to compete with three more loan officers in my own company against my own boss? I saw recently that there was an article about the Mortgage Devil from back in the day that was praising his aggressiveness and determination and the quote was, "You would not want to have him in your territory!". No shit, I don't even want him on my planet.
So my anger about the new loan officers was because I knew something that they didn't. In my naivety I had assumed that feudalism died in the middle ages when in fact, it was alive at the Bank of Hell and the Mortgage Devil was the Lord. Apparently the fact that the Mortgage Devil made money on every loan the loan officers did underneath him was not enough for him, nor were the accolades and awards, nor the $125,000 monthly income. It seems that the Mortgage Devil's narcissism also made him think that every loan one of his loan officers did really should have been his. He would take our commission statements and go down them line by line to see what loan(s) he could take from us and put in his name. It was like a tax on us poor serfs for the privilege of working for the worst boss ever.
The first time this happened to me I am sitting in my sanctuary by the sea when the phone rings and the Mortgage Devil is on the other end. It was a little like this:
Turdy: "Bank of Hell Mortgage, This is Turdy."
Mortgage Devil: "Turdy, I have been going over your commission statement and we need to talk."
Turdy: "I thought I had a good month considering I have only been here for a few months."
Mortgage Devil: "I think you had too good of a month, there are some loans on here that I'm wondering how you stole from me."
Turdy: "Stole from you? I'm sorry, I have no idea what you are talking about."
Mortgage Devil: "Well lets start with this loan for Mr. Smith. I talked to a Mr. Smith last month about doing a loan for him and then I see you close a loan for someone with the last name Smith. What am I supposed to think?"
Turdy: "Perhaps, that Smith is a very common name."
Mortgage Devil: "Hmm, well tell me how you got that loan and this other one for the real estate agent, whats her name, Judy."
Turdy: "Well the Smith loan was a referral from a loan officer I used to work with that couldn't get the loan done at her company, the guy used to work with her husband. The Judy loan I got because she is one of my best friends and we play golf together, in fact we are meeting for happy hour and appetizers later."
Mortgage Devil: "Well I had a deal with Judy last year, why wouldn't she ask me to do her loan?"
Turdy: "Probably because she is one of my best friends??"
Mortgage Devil: "You should know I keep an eye out for this stuff. I guess you can keep the Judy loan commission but I'm going to have to take the Smith loan because I can't have stuff like this going on in my branches. How am I supposed to trust you?"
Turdy: "You can't take that loan, you never even talked to the guy. He is a friend of a friend. I was counting on that commission to pay bills and buy Christmas presents."
Well he took that loan and many more from me during my stay in the feudal system of Hell. Here is a man making 1.5 million a year who is stealing $2,000 commissions from his loan officers to boost his numbers so he can get more awards and inflate his ego some more. After I left the Bank of Hell I calculated that he had taken more than $25,000 in commission away from me in one year, on loans that were legitimately mine. You couldn't complain about it to anyone because all the Senior Veeps loved their Top Producer and the Mortgage Devil could do no wrong.
This is why I hated all the other loan officers, including A. Hole. I knew that it was going to be even harder to make money if we were all competing for the Mortgage Devil's sloppy seconds. It took time for me to not feel resentful of the competition from A. Hole in part because the Mortgage Devil wanted it that way and also, the Redskins thing was kind of hard for a fanatical Bears fan. If A. Hole had been a Packers fan or a Vikings fan, I can promise you that this blog wouldn't exist.
I have to close with a note on the Quaker. Even though I couldn't stand him when we worked together, I have developed a respect for him now that is pretty special. When the Quaker left the Bank of Hell he pulled the ultimate coup on the Mortgage Devil. He bought the domain name of the real name of the Mortgage Devil. If you type in www.insertrealnamehere.com you are transported to the Quaker's website with a huge picture of the Quaker and testimonials to his greatness as a mortgage ho. Priceless move, out deviling the devil. You are alright, Quaker, you are alright.
I was hanging out in my own branch alone and minding my own business when A. Hole strolls in one day and sits down in the office next to me and starts unpacking shit like he is planning on staying. He starts eating fried chicken and checking the Washington Redskins message board. I can see the fucker because our two offices had some kind of weird sliding glass window between them, which might of come in handy except we have nothing to pass each other but dirty looks. I am pissed. My sanctuary away from the craziness of the other branch has been invaded by another loan officer who is eating my least favorite food and is by the way, not even a fan of my favorite football team. Boo. The phone rings and he actually answers it, "Bank of Hell Mortgage, A.Hole speaking." Now I'm really mad because I have been alone in this branch for months and that is my phone and if there is a loan waiting on the other end well, it is mine and all mine.
Why did I hate A. Hole so much in the beginning? The answer is because of the Mortgage Devil and the ultra competitive and paranoia rich environment he created. The Mortgage Devil was a Top 20 producer in the entire nation that year which is a huge deal in an industry with a plethora of assholes originating loans. I don't want to give the impression that I think all loan officers are assholes, there really are a lot of decent people in the industry, I just didn't get to meet too many of them. This is akin to hearing how beautiful New Jersey is but then you spend your whole time on the turnpike and wonder if there are secret places that non residents are not allowed to see.
When I was hired I was promised my own office and branch and basically no competition. Then one day, I get called to the main branch of the Bank of Hell and there sits Curly Sue, A.Hole, and this third loan officer that I call the Quaker. I really don't know what religion the Quaker was even though A.Hole has told me like twenty times, I just know that he didn't really swear or drink and even though he was some strict puritan he ogled all the Mortgage Devil's assistants like he was trying to figure out where to stick his dollar bills. I hated them all at first sight.
Really, it was bad enough to have to compete with the Mortgage Devil in our market. Then throw in his old partner, a Top 100 national producer, who had jumped ship and I was basically trying to break a cartel. Now I have to compete with three more loan officers in my own company against my own boss? I saw recently that there was an article about the Mortgage Devil from back in the day that was praising his aggressiveness and determination and the quote was, "You would not want to have him in your territory!". No shit, I don't even want him on my planet.
So my anger about the new loan officers was because I knew something that they didn't. In my naivety I had assumed that feudalism died in the middle ages when in fact, it was alive at the Bank of Hell and the Mortgage Devil was the Lord. Apparently the fact that the Mortgage Devil made money on every loan the loan officers did underneath him was not enough for him, nor were the accolades and awards, nor the $125,000 monthly income. It seems that the Mortgage Devil's narcissism also made him think that every loan one of his loan officers did really should have been his. He would take our commission statements and go down them line by line to see what loan(s) he could take from us and put in his name. It was like a tax on us poor serfs for the privilege of working for the worst boss ever.
The first time this happened to me I am sitting in my sanctuary by the sea when the phone rings and the Mortgage Devil is on the other end. It was a little like this:
Turdy: "Bank of Hell Mortgage, This is Turdy."
Mortgage Devil: "Turdy, I have been going over your commission statement and we need to talk."
Turdy: "I thought I had a good month considering I have only been here for a few months."
Mortgage Devil: "I think you had too good of a month, there are some loans on here that I'm wondering how you stole from me."
Turdy: "Stole from you? I'm sorry, I have no idea what you are talking about."
Mortgage Devil: "Well lets start with this loan for Mr. Smith. I talked to a Mr. Smith last month about doing a loan for him and then I see you close a loan for someone with the last name Smith. What am I supposed to think?"
Turdy: "Perhaps, that Smith is a very common name."
Mortgage Devil: "Hmm, well tell me how you got that loan and this other one for the real estate agent, whats her name, Judy."
Turdy: "Well the Smith loan was a referral from a loan officer I used to work with that couldn't get the loan done at her company, the guy used to work with her husband. The Judy loan I got because she is one of my best friends and we play golf together, in fact we are meeting for happy hour and appetizers later."
Mortgage Devil: "Well I had a deal with Judy last year, why wouldn't she ask me to do her loan?"
Turdy: "Probably because she is one of my best friends??"
Mortgage Devil: "You should know I keep an eye out for this stuff. I guess you can keep the Judy loan commission but I'm going to have to take the Smith loan because I can't have stuff like this going on in my branches. How am I supposed to trust you?"
Turdy: "You can't take that loan, you never even talked to the guy. He is a friend of a friend. I was counting on that commission to pay bills and buy Christmas presents."
Well he took that loan and many more from me during my stay in the feudal system of Hell. Here is a man making 1.5 million a year who is stealing $2,000 commissions from his loan officers to boost his numbers so he can get more awards and inflate his ego some more. After I left the Bank of Hell I calculated that he had taken more than $25,000 in commission away from me in one year, on loans that were legitimately mine. You couldn't complain about it to anyone because all the Senior Veeps loved their Top Producer and the Mortgage Devil could do no wrong.
This is why I hated all the other loan officers, including A. Hole. I knew that it was going to be even harder to make money if we were all competing for the Mortgage Devil's sloppy seconds. It took time for me to not feel resentful of the competition from A. Hole in part because the Mortgage Devil wanted it that way and also, the Redskins thing was kind of hard for a fanatical Bears fan. If A. Hole had been a Packers fan or a Vikings fan, I can promise you that this blog wouldn't exist.
I have to close with a note on the Quaker. Even though I couldn't stand him when we worked together, I have developed a respect for him now that is pretty special. When the Quaker left the Bank of Hell he pulled the ultimate coup on the Mortgage Devil. He bought the domain name of the real name of the Mortgage Devil. If you type in www.insertrealnamehere.com you are transported to the Quaker's website with a huge picture of the Quaker and testimonials to his greatness as a mortgage ho. Priceless move, out deviling the devil. You are alright, Quaker, you are alright.
Tuesday, May 11, 2010
Bad Santa...
For today’s entry I wanted to keep it light and a little humorous. For some reason I was thinking about the first Christmas I spent with the Bank of Hell. When I first joined the Bank of Hell, I remember sitting in the lunchroom and someone was bragging about the great Christmas party the Bank of Hell had last year. It was held at the Hyatt….the rooms were paid for, dinner paid for, open bar, massages (insert happy ending joke here), gifts were waiting in their rooms, they paid for your spouse to attend, blah, blah, blah.
I was getting ready to make a smart-ass remark that I would pay to keep my spouse at home…but I was abruptly “shushed” because the commercials were over and “The Young and the Restless” was back on. A rule that I quickly learned at the Bank of Hell was that between 1:00 p.m. and 2:00 p.m. everyday the office shut down as far as processing and closing loans. All of the Minions gathered around a crappy 13” TV in the break room with “rabbit ears” for reception to watch that shitty Soap Opera. If you happened to take lunch at that time you could NOT speak during the show…only during the commercials.
So, times passed and the Minions awaited their invitations to this Christmas Party. As Thanksgiving rolled around they waited and waited. Nothing. Most of them have worked for the Mortgage Devil for years and know he does everything at the last minute despite his Magic Whiteboard that never misses a closing date (sarcasm inserted for effect). I am thinking…he forgot to organize the thing. But he has an Assistant that takes care of things like that for him…with a bit of eye-rolling…when he asks her to handle events. I am thinking he forgot about Christmas for he is the Mortgage Devil and Christmas is celebrating his arch-enemy Jesus’ birth… so it is low on his priority list. During this time, the Mortgage Devil is focused on how many loans he can cram down the Minions throats before the end of the year because he has a competitor nipping at his heels for the Top Producer Award. Nothing devastates the Mortgage Devil more in life than losing that award.
But I digress…finally a week before Christmas and the Bitchy Receptionist sends a mass email to the office that went something like this:
The Mortgage Devil is taking us to watch a depressing movie followed by dinner at a half-assed Steak House. Be there or feel the wrath.
Obviously, I took a little liberty with the email but it is basically the “Cliff Notes” version of what had been planned for the evening. We are told to be at the Theater at 4:00 p.m. to watch the movie “The Family Stone”. It is a fine movie…but here is what happened. I am sitting near the Mortgage Devil who is constantly checking voice mail during the movie which is obviously annoying and distracting. I don’t want to spoil the movie for anyone who hasn’t seen it, but honestly it was released almost 5 years ago, and if you haven’t watched it yet….you probably won’t ever see it. The mom in the movie dies of breast cancer…yeah, a real “pick me up” during the holidays. To make matters worse the Minion two seats down from me is sobbing and balling her eyes out. After we leave the movie, I learn from another Minion that she just lost her sister a couple of months ago to breast cancer….wow! That sucks. To be fair, the Mortgage Devil had no idea about this turn in the movie when it was picked (and I doubt he even picked the movie)... But…sheesh…that sure put a damper on the evening. Then we were on our way to the half-assed Steak House.
I am the only one that has ordered a cocktail at this dinner. Great…I am drinking alone…which made me feel a little awkward. So, I go around the room mentally and to try to figure why each person isn’t drinking. The first Minion just really isn’t a drinker. She is a hard worker but not a real exciting person outside the office. The next one used to be a drinker (I hear) but supposedly left her husband because he drank too much. But the truth was her ex-husband always drank too much and she was just bored with him and wanted to hook up with a Pastor instead (yes, all of this is true). Sitting next to her…hmmm…I know she has a wild side and to borrow a line from “The Family Stone” will “fly her freak flag” on occasion so what was up? I ask her quietly. She doesn’t feel comfortable drinking in front of the Mortgage Devil. I get it…sorta’. I have zero respect for him at this point nor do I care what he thinks of me…so…fuck it, I am drinking on his dime.
After the food and ice-teas are consumed, it is Christmas present time. So, what does the Mortgage Devil get for his staff for Christmas? He does earn between $1 and $2 million a year at this point. Well…crappy DVD’s from the bin at the Dollar Tree. No, I am not shitting you. I got a “Laurel and Hardy” DVD from him. What…the…fuck? I am not 75 years old. Seriously….Dollar Store DVD’s.
Merry Fucking Christmas!
I was getting ready to make a smart-ass remark that I would pay to keep my spouse at home…but I was abruptly “shushed” because the commercials were over and “The Young and the Restless” was back on. A rule that I quickly learned at the Bank of Hell was that between 1:00 p.m. and 2:00 p.m. everyday the office shut down as far as processing and closing loans. All of the Minions gathered around a crappy 13” TV in the break room with “rabbit ears” for reception to watch that shitty Soap Opera. If you happened to take lunch at that time you could NOT speak during the show…only during the commercials.
So, times passed and the Minions awaited their invitations to this Christmas Party. As Thanksgiving rolled around they waited and waited. Nothing. Most of them have worked for the Mortgage Devil for years and know he does everything at the last minute despite his Magic Whiteboard that never misses a closing date (sarcasm inserted for effect). I am thinking…he forgot to organize the thing. But he has an Assistant that takes care of things like that for him…with a bit of eye-rolling…when he asks her to handle events. I am thinking he forgot about Christmas for he is the Mortgage Devil and Christmas is celebrating his arch-enemy Jesus’ birth… so it is low on his priority list. During this time, the Mortgage Devil is focused on how many loans he can cram down the Minions throats before the end of the year because he has a competitor nipping at his heels for the Top Producer Award. Nothing devastates the Mortgage Devil more in life than losing that award.
But I digress…finally a week before Christmas and the Bitchy Receptionist sends a mass email to the office that went something like this:
The Mortgage Devil is taking us to watch a depressing movie followed by dinner at a half-assed Steak House. Be there or feel the wrath.
Obviously, I took a little liberty with the email but it is basically the “Cliff Notes” version of what had been planned for the evening. We are told to be at the Theater at 4:00 p.m. to watch the movie “The Family Stone”. It is a fine movie…but here is what happened. I am sitting near the Mortgage Devil who is constantly checking voice mail during the movie which is obviously annoying and distracting. I don’t want to spoil the movie for anyone who hasn’t seen it, but honestly it was released almost 5 years ago, and if you haven’t watched it yet….you probably won’t ever see it. The mom in the movie dies of breast cancer…yeah, a real “pick me up” during the holidays. To make matters worse the Minion two seats down from me is sobbing and balling her eyes out. After we leave the movie, I learn from another Minion that she just lost her sister a couple of months ago to breast cancer….wow! That sucks. To be fair, the Mortgage Devil had no idea about this turn in the movie when it was picked (and I doubt he even picked the movie)... But…sheesh…that sure put a damper on the evening. Then we were on our way to the half-assed Steak House.
I am the only one that has ordered a cocktail at this dinner. Great…I am drinking alone…which made me feel a little awkward. So, I go around the room mentally and to try to figure why each person isn’t drinking. The first Minion just really isn’t a drinker. She is a hard worker but not a real exciting person outside the office. The next one used to be a drinker (I hear) but supposedly left her husband because he drank too much. But the truth was her ex-husband always drank too much and she was just bored with him and wanted to hook up with a Pastor instead (yes, all of this is true). Sitting next to her…hmmm…I know she has a wild side and to borrow a line from “The Family Stone” will “fly her freak flag” on occasion so what was up? I ask her quietly. She doesn’t feel comfortable drinking in front of the Mortgage Devil. I get it…sorta’. I have zero respect for him at this point nor do I care what he thinks of me…so…fuck it, I am drinking on his dime.
After the food and ice-teas are consumed, it is Christmas present time. So, what does the Mortgage Devil get for his staff for Christmas? He does earn between $1 and $2 million a year at this point. Well…crappy DVD’s from the bin at the Dollar Tree. No, I am not shitting you. I got a “Laurel and Hardy” DVD from him. What…the…fuck? I am not 75 years old. Seriously….Dollar Store DVD’s.
Merry Fucking Christmas!
Ben Bernanke Can Suck It
I think this blog has an identity crisis. Some days there are humorous and silly stories, other days we give inside descriptions of the lending industry, and then there is today. Today's post is triggered by my absolute abhorrence of the Federal Reserve, Alan Greenspan, and Alan Greenspan's mini-me: Ben Bernanke.
Now that you know I am completely biased about the Fed you might wonder what egregious event triggered a rant that includes telling Bernanke to suck it. Was it proof that the Fed was a fundamental partner in the destruction of our economy? Nope. Was it the reviving of swap lines with foreign banks to deal with the crisis in Greece? Not that either. The truth is, I am incited by a seemingly innocuous commencement speech delivered by Bernanke at the University of South Carolina and its coverage here.
Bernanke delivered the message to young college graduates that money can detract from happiness and that they should not take high paying jobs just for the money. Instead, they should seek the path of happiness because pursuing money may result in a decline in the thrill over time. WHAT A BASTARD.
Here is my translation of Bernanke's speech after being run through my bullshit detector and my disingenuousness spotter thingy.
The ass kissing coverage in The Atlantic about this speech made me angry and ill at all the same time; an impact that was reminiscent of doing shots of whiskey in college, not pretty.
As economists, we do talk about utility maximization and yes we accept that this isn't solely tied to money. But, we also recognize the one clever thing Bernanke didn't discuss and the Atlantic writer failed to mention that is sort of important; we maximize our utility subject to CONSTRAINTS!!! Holy crap, that is Econ 101. We maximize our utility relative to constraints, kind of important ones, like budgets.
It is not that I think money buys happiness nor do I discount the importance of happiness; that isn't what makes me angry about the speech. For me, hearing an economist talk about happiness in this manner would be like going to a Grateful Dead concert and getting a lecture on responsible drug usage from Jerry Garcia. I'm just not buying it. Also Ben, you are the Chairman of the Federal Reserve, a tiny little organization that earned record profits in 2009 by dealing in money, as jobs for those happiness seeking graduates were vanishing.
I don't want economists preaching to me about how to be happy, particularly not the one that sucks a little joy from my life every day because of his job and policies. I want psychologists, Oprah Winfrey, and chripy little self-help gurus teaching people about happiness.
I want economists, and particularly Ben Bernanke, to solve problems and raise people's standard of living. I want to figure out how to help developing nations, create wealth, and promote economic security. I don't want one of the unhappiest looking middle aged white men I have ever seen teaching me that the secret of life is happiness. Myself, my friends, and the students at South Carolina already understand that. Even my dog gets it.
Why don't you tell us something we don't know. Here's a suggestion: Tell us if we should be scared that you claimed there was no crisis coming but now you are claiming you know what to do to get us out of it. Then tell us when we are going to recover, I promise that would go along way in maximizing utility.
***********If you are interested, I have opined in print about my fears concerning the Fed, if you care for some snark with your knowledge you can find a reprint of one here.
Now that you know I am completely biased about the Fed you might wonder what egregious event triggered a rant that includes telling Bernanke to suck it. Was it proof that the Fed was a fundamental partner in the destruction of our economy? Nope. Was it the reviving of swap lines with foreign banks to deal with the crisis in Greece? Not that either. The truth is, I am incited by a seemingly innocuous commencement speech delivered by Bernanke at the University of South Carolina and its coverage here.
Bernanke delivered the message to young college graduates that money can detract from happiness and that they should not take high paying jobs just for the money. Instead, they should seek the path of happiness because pursuing money may result in a decline in the thrill over time. WHAT A BASTARD.
Here is my translation of Bernanke's speech after being run through my bullshit detector and my disingenuousness spotter thingy.
Congratulations to you young and important minds on your graduation. I bet you would like to go out and get a high paying job in order to rationalize all the money you and your family spent on higher education. Yeah, well me and my friends sort of helped to make sure there are none of those jobs available. We really weren't trying to screw you exactly, we were just trying to help our friends in the banking industry.
Really I am not solely responsible for your lack of opportunity. You can also thank my predecessor, Federal Reserve Idol, Alan Greenspan. You can also thank the entire federal government, some friends of mine on Wall Street, and some really distorted application of economic logic by a bunch of people who should have known better.
I sense that you might be feeling sad about your futures so let me talk to you about something we all agree on: happiness. Happiness is good and really, it is more important than a job or whether you can afford to pay your student loans. So instead of being sad that you can't get a job what I really want you to do is think about what makes you happy. If its smoking a bong in your parent's basement for hours on end while drinking out of their liquor cabinet and playing your X-Box, then do it. Tell your parents that Ben Bernanke said you have permission to maximize your utility, happiness is important.
(Cut to Bernanke singing "If your happy and you know it...clap your hands)
The ass kissing coverage in The Atlantic about this speech made me angry and ill at all the same time; an impact that was reminiscent of doing shots of whiskey in college, not pretty.
As economists, we do talk about utility maximization and yes we accept that this isn't solely tied to money. But, we also recognize the one clever thing Bernanke didn't discuss and the Atlantic writer failed to mention that is sort of important; we maximize our utility subject to CONSTRAINTS!!! Holy crap, that is Econ 101. We maximize our utility relative to constraints, kind of important ones, like budgets.
It is not that I think money buys happiness nor do I discount the importance of happiness; that isn't what makes me angry about the speech. For me, hearing an economist talk about happiness in this manner would be like going to a Grateful Dead concert and getting a lecture on responsible drug usage from Jerry Garcia. I'm just not buying it. Also Ben, you are the Chairman of the Federal Reserve, a tiny little organization that earned record profits in 2009 by dealing in money, as jobs for those happiness seeking graduates were vanishing.
I don't want economists preaching to me about how to be happy, particularly not the one that sucks a little joy from my life every day because of his job and policies. I want psychologists, Oprah Winfrey, and chripy little self-help gurus teaching people about happiness.
I want economists, and particularly Ben Bernanke, to solve problems and raise people's standard of living. I want to figure out how to help developing nations, create wealth, and promote economic security. I don't want one of the unhappiest looking middle aged white men I have ever seen teaching me that the secret of life is happiness. Myself, my friends, and the students at South Carolina already understand that. Even my dog gets it.
Why don't you tell us something we don't know. Here's a suggestion: Tell us if we should be scared that you claimed there was no crisis coming but now you are claiming you know what to do to get us out of it. Then tell us when we are going to recover, I promise that would go along way in maximizing utility.
***********If you are interested, I have opined in print about my fears concerning the Fed, if you care for some snark with your knowledge you can find a reprint of one here.
Monday, May 10, 2010
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.
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.
Sunday, May 9, 2010
This one time...at Loan Officer Academy...
Ok, this isn't going to be an "American Pie...One time at Band Camp" story where a flute is inserted into some orifice....but who knows.... it could have been because I am not exactly sure what Curly Sue was doing with that Loan Officer from Florida. Now that I have your attention....I previously wrote about the overall experience of “Experienced Loan Officer Academy”. But, I wanted to save a chapter for what I actually learned in training.
Apparently, The Bank of Hell had unleashed a loan product they were very proud of and encouraged us to use whenever possible….and if you followed the steps I was taught, you could almost use it all of the time. More on that a little later.
The new “Super” loan product they taught was a Fannie Mae Stated Income/Stated Asset loan. Why is this so special? Let me explain. The acronym loans that Turdy wrote about previously carried a higher interest rate due to the inherent perceived risk of those products (i.e. NINA, NINANE). Fannie Mae backed loans had the lowest interest rate of all the loan products because they were supposed to be A+ “prime” loans. They carried the lowest risk and therefore had the lowest rate. But this whole system got bastardized by the Bank of Hell. But to be fair, it was with Fannie Mae’s blessing…and no, I am not trying to incite Barney Frank.
How did this work? Well, I was taught in training that if I had a client with a credit score of 680 (decent score) or higher on a purchase or 720 (good) or higher on a cash out refinance transaction it could be eligible for the “Super” loan. If you met these score requirements you didn’t have to verify the borrower’s income with pesky paystubs or W-2’s and you didn’t have to verify that the money they told you about for their down payment and closing costs actually existed….and the “beauty” of this was the rate and terms on the loan were the same as someone who fully documented their loan. Brilliant!! But wait ...there is more…if the value you have listed for the property they were purchasing or refinancing was acceptable to the automated underwriting program….you didn’t have to get an appraisal. You could get use an automated value from the “internets”!! Ok, so no income verified, no assets/down payment verified, and no physical appraisal needed to be completed…..and still the interest rate was no worse than the suckers that fully documented their loan with their “primo” credit.
Of course the Mortgage Devil used the powers of the “Super” loan for evil and not good. He took advantage of his self-employed borrowers by having them convinced he could do a stated income/stated asset loan for them a 1/2 % below the competition because he was “such a good guy”. But what he actually did was inflate the rate of the “Super” loan to make a bunch of overage (extra commission). For example…during the time period in question…a traditional stated income/stated asset loan would have a rate of 8.00% for a 30 year fixed while a Fannie Mae’s A+ loans had a rate of 6.00%. So, the Mortgage Devil would have his client call some mortgage broker who didn’t have the "Super" loan and get quoted 8.00%. He would then sell them a loan at 7.50%....he was a hero!! Wait, what is that you say? I thought the “super” loan was the same rate as Fannie Mae’s A+ rate? Well, you are correct. The Mortgage Devil would take that extra 1.50% as overage and make a ton of money of that one loan. As, I was told by my Munchkin Trainer this loan was supposed to give us a competitive advantage against the competition so we could close loans quicker and hassle our borrower’s less. But the Mortgage Devil found a sleazy way to take advantage of the system so that he could pay for all of his second homes.
When I returned from training to the Bank of Hell...I got the "real" training on how to use/manipulate/bastardize this "Super" loan. What was discovered by the Mortgage Devil or one his Minions is the exact sequence you had to follow to limit the paperwork and manipulate Fannie’s system. Here is the step by step way I was taught and why it needed to be done that way:
1) take loan application over the phone and enter into computer.
2) pull credit...if the score meets the requirement move to step 3.
3) go ahead and get an automated value for the property and enter it into the computer
3) make sure you have stated enough income to keep the debt ratio under 45%.
4) send the loan through Fannie Mae's underwriting system to get "Super" loan approval without having to verify the income, assets, and no physical appraisal..Brilliant!
Because if you just put a value based upon what the Borrower thinks their property is worth and you send it through Fannie Mae's automated underwriting it may get approved with that value. You excitedly call your customer and say..."Congratulations, you are already approved. Since your credit is so great...we don't need any documentation or even an appraisal". But what happens when the automated value is different than what the customer thinks the property is worth? If you enter the automated value and Fannie's automated underwriting doesn't like it...then it would red flag the whole loan for excessive value or cut your value where you may have a loan to value problem. No one wants red flag's on their loans or value issues. If you pull the automated value first as suggested in step 3 above, you can see if their is a potential problem ahead of time. Good deal, right? Actually, the system was set up for check and balances against over-inflated appraisals or potential for values exceeding loan amounts. By reversing the steps you circumvent that process. Brilliant!!..hmmm?
Why do you have to keep the debt ratio under 45%...well, because if it was higher it wasn't eligible for a "Super" loan. I know your next question will be..."well what if the income they told you that they made causes the debt ratio to exceed 45%?"....my answer comes from the Mortgage Devil...in his words...you "just bump up the income to make sure it is under 45%". Duh!! It's so simple...and so fraudulent at the same time. He honestly didn't see where this was a problem. You "just bump up the income!"....that was his war-cry that day. Ok....so, we learned today how to turn a Fannie Mae loan into a Liar's Loan....and still charge a higher interest rate to gain more commission...got it!!
Apparently, The Bank of Hell had unleashed a loan product they were very proud of and encouraged us to use whenever possible….and if you followed the steps I was taught, you could almost use it all of the time. More on that a little later.
The new “Super” loan product they taught was a Fannie Mae Stated Income/Stated Asset loan. Why is this so special? Let me explain. The acronym loans that Turdy wrote about previously carried a higher interest rate due to the inherent perceived risk of those products (i.e. NINA, NINANE). Fannie Mae backed loans had the lowest interest rate of all the loan products because they were supposed to be A+ “prime” loans. They carried the lowest risk and therefore had the lowest rate. But this whole system got bastardized by the Bank of Hell. But to be fair, it was with Fannie Mae’s blessing…and no, I am not trying to incite Barney Frank.
How did this work? Well, I was taught in training that if I had a client with a credit score of 680 (decent score) or higher on a purchase or 720 (good) or higher on a cash out refinance transaction it could be eligible for the “Super” loan. If you met these score requirements you didn’t have to verify the borrower’s income with pesky paystubs or W-2’s and you didn’t have to verify that the money they told you about for their down payment and closing costs actually existed….and the “beauty” of this was the rate and terms on the loan were the same as someone who fully documented their loan. Brilliant!! But wait ...there is more…if the value you have listed for the property they were purchasing or refinancing was acceptable to the automated underwriting program….you didn’t have to get an appraisal. You could get use an automated value from the “internets”!! Ok, so no income verified, no assets/down payment verified, and no physical appraisal needed to be completed…..and still the interest rate was no worse than the suckers that fully documented their loan with their “primo” credit.
Of course the Mortgage Devil used the powers of the “Super” loan for evil and not good. He took advantage of his self-employed borrowers by having them convinced he could do a stated income/stated asset loan for them a 1/2 % below the competition because he was “such a good guy”. But what he actually did was inflate the rate of the “Super” loan to make a bunch of overage (extra commission). For example…during the time period in question…a traditional stated income/stated asset loan would have a rate of 8.00% for a 30 year fixed while a Fannie Mae’s A+ loans had a rate of 6.00%. So, the Mortgage Devil would have his client call some mortgage broker who didn’t have the "Super" loan and get quoted 8.00%. He would then sell them a loan at 7.50%....he was a hero!! Wait, what is that you say? I thought the “super” loan was the same rate as Fannie Mae’s A+ rate? Well, you are correct. The Mortgage Devil would take that extra 1.50% as overage and make a ton of money of that one loan. As, I was told by my Munchkin Trainer this loan was supposed to give us a competitive advantage against the competition so we could close loans quicker and hassle our borrower’s less. But the Mortgage Devil found a sleazy way to take advantage of the system so that he could pay for all of his second homes.
When I returned from training to the Bank of Hell...I got the "real" training on how to use/manipulate/bastardize this "Super" loan. What was discovered by the Mortgage Devil or one his Minions is the exact sequence you had to follow to limit the paperwork and manipulate Fannie’s system. Here is the step by step way I was taught and why it needed to be done that way:
1) take loan application over the phone and enter into computer.
2) pull credit...if the score meets the requirement move to step 3.
3) go ahead and get an automated value for the property and enter it into the computer
3) make sure you have stated enough income to keep the debt ratio under 45%.
4) send the loan through Fannie Mae's underwriting system to get "Super" loan approval without having to verify the income, assets, and no physical appraisal..Brilliant!
Because if you just put a value based upon what the Borrower thinks their property is worth and you send it through Fannie Mae's automated underwriting it may get approved with that value. You excitedly call your customer and say..."Congratulations, you are already approved. Since your credit is so great...we don't need any documentation or even an appraisal". But what happens when the automated value is different than what the customer thinks the property is worth? If you enter the automated value and Fannie's automated underwriting doesn't like it...then it would red flag the whole loan for excessive value or cut your value where you may have a loan to value problem. No one wants red flag's on their loans or value issues. If you pull the automated value first as suggested in step 3 above, you can see if their is a potential problem ahead of time. Good deal, right? Actually, the system was set up for check and balances against over-inflated appraisals or potential for values exceeding loan amounts. By reversing the steps you circumvent that process. Brilliant!!..hmmm?
Why do you have to keep the debt ratio under 45%...well, because if it was higher it wasn't eligible for a "Super" loan. I know your next question will be..."well what if the income they told you that they made causes the debt ratio to exceed 45%?"....my answer comes from the Mortgage Devil...in his words...you "just bump up the income to make sure it is under 45%". Duh!! It's so simple...and so fraudulent at the same time. He honestly didn't see where this was a problem. You "just bump up the income!"....that was his war-cry that day. Ok....so, we learned today how to turn a Fannie Mae loan into a Liar's Loan....and still charge a higher interest rate to gain more commission...got it!!
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