Life, Liberty, and Freedom from Rate Increases

Over the past few days Treasury Secretary Henry Paulson has been hinting at a plan to freeze "subprime" mortgage rates. This culminated in today's announcement of the plan by President Bush. All I can wonder is where has conservatism gone?

The plan has been agreed upon by Wall Street firms, the administration, and lenders. The plan offers individuals with adjustable rate subprime loans a free, five year interest rate freeze on their mortgage rate, assuming the following circumstances:

1. Borrowers must be current on their subprime mortgage payments
2. The rate freeze will apply to 2/28 and 3/27 arms (two or three year fixed loans) loans taken out between January 1, 2005 and July 30, 2007 that will adjust in 2008 or 2009.
3. The rate freeze will exclude the following:

• borrowers who are delinquent on their payments
• borrowers whose introductory rates have already expired or will expire before January 1, 2008
• borrowers whom mortgage companies determine have sufficient income to pay the higher rates
• mortgages on homes that are not primary residences
  

If President Bush had any conservative credentials left, they are gone now. Never again should the word conservative be uttered in a sentence with President George W. Bush's name. Many conservatives have been arguing that point for years... but never has there been a more clear example than this policy diverging with conservative principals.

Basically, this "plan" will only benefit people who made bad choices or lied. Period. A lender has to consider a borrower's ability to repay a loan. While most people got into adjustable subprime loans looking for a bandaid, intending to refinance or sell before the introductory rate adjusted, they were fully informed of the impending adjustment and had to sign waiver after waiver explaining their understanding. Many borrowers, fearing the potential for higher payments in the future opted for fixed payments from day one with no chance of adjustment. Those borrowers made responsible and honest choices, and for the past year or two have paid higher rates and payment than their adjustable rate counterparts. For their fiscally responsible decision they get nothing, while the adjustable crowd gets a free pass and a continued lower rate for 5 more years.

And what about the people who refinanced this past year, hoping to avoid their payment adjustment? They paid for new appraisals, application fees and other closing costs while other customers who didn't act responsibly now get a Christmas gift from Uncle Sam.

And what about the people whose rates adjusted this month instead of next? They get nothing, even though the people whose payments are scheduled to adjust just 25 days from now get a free five year rate freeze. Is this fair?

And lets not forget about people who mortgage lenders determine have enough wealth to make their higher payments. Their payments will adjust like they are were supposed to, or they can spend the money to refinance. The cost for taking a loan they could afford and being fiscally responsible? Higher rates or greater out of pocket expenses.

So if you weren't responsible or downright lied on your application you get a free pass and five years of extra savings... while the rest of us who have worked hard for every payment we make and considered the ramifications of our financial decisions get nothing but a bitter lesson: Don't worry if you lie... don't worry about saving or the future... don't worry about your home or your family... a bulging federal government so eager to remain in power and make you reliant on their welfare will continue to let you suck on their teat. And the rest of you who work hard will continue paying the bills for everyone else.

...

My wife and I bought our new home eleven months ago. We could have opted for a "subprime" adjustable rate mortgage and borrowered 100% of the purchase price. Instead we opted to put much of our savings down so we could obtain a conforming fixed rate loan. We have great credit and worked hard for everything we have, but it would have been much easier the borrower 100% and take a less stringent subprime adjustable loan instead of putting money down and verifying income and employment. Today our government rewards our responsibleness by telling us we made the wrong choice. Had we borrowed more and invested less in the home, we would have received a freeze on our interest rate for an extra 4 years. Had we done that, we would have more savings today and a lower mortgage payment. So much for being responsible.

...

I have been both a subprime and prime borrower as well as a subprime and prime loan originator. I have the unique experience of having been on both sides of the table and spent my entire adult career in the mortgage business. This is wrong on so many levels. All of what has been going on and most of the media reports this year have been wrong on so many levels. The industry agreed to act out of fear of additional increased regulation and an overbearing government. The government chose to act out of a lack of knowledge of the industry and a pandering for political gain. Three of the states most affected by the current mortgage crisis are California, Nevada, and Florida. Two of those three states have high electoral college votes and very important primaries. Do you think that is a coincidence?

...

If the federal government isn't going to stop playing politics with industry, free markets be damned, then capitalism is dead. Without capitalism, democracy will wither on the vine. What then will fill the void?

Andrew Cuomo is a traitor.

I hate it when people throw that word around, its lost so much of its meaning. But in this case, its entirely true.

I've said it before and been accused of yelling it in the office. Now is not the time to try and achieve political gains, especially when you don't know what you are talking about. Any politician who uses the current crisis in the mortgage industry as a way to make a name for themselves or play political leapfrog over rivals is evil. There are good people facing serious hurdles paying their bills. There are hard working Americans, who have never missed a payment, suddenly facing lates on their credit report and the potential for foreclosure. There are countless workers in the mortgage, construction, and real estate industries facing smaller paychecks or unemployment. And these things spread.

Now is not the time to "pile on".

New York Attorney General Andrew Cuomo is coming out with both barrels against Fannie Mae, Freddie Mac, Washington Mutual, and the mortgage industry in general. And he's doing it with press releases and political maneuvering. You think there was a "credit crunch" going on now? Wait until Fannie, Freddie, WAMU, or some other large national outfit just decides to stop lending. That's what has already happened in the subprime market and with some smaller prime players. Just wait until the big boys in the conforming market follow suit. And you think getting a loan was hard now and foreclosures were bad.... if this kind of thing continues, you haven't seen anything yet.

The always animated Jim Cramer is right to use his platform to go after Cuomo. I saw him do it on tv last night, and he's continuing the drumbeat today. Cramer calls him a communist... I think he's even worse than that.

Politicians in Washington and around the country are coming up with new laws and regulations that will supposedly fix the mortgage industry. They are eliminating variable products, yield spread, stated loans, and other alternatives that helps consumers and their advisors structure a deal to make the purchase of a home a viable option. When the options left aren't attractive or feasible for the consumers out there who are trying to get out of a rental or trying to keep a home... they will have no where to go. Consumer confidence will continue to go down. Ownership rates will continue to go down. Credit scores will continue to go down. Other industries will be affected as people can't afford what they once could, or can't make minimum payments for what they now have. Prices and values will continue to fall. The only things that will increase will be the foreclosure rate and unemployment.

This is serious business, and a serious problem facing our country. While many in the media and elsewhere would rather discuss Rosie O'Donnell's job prospects or whether or not J-Lo is pregnant... our country is on the brink of a recession. And anyone who uses the backs of hardworking Americans facing tough times as a way to catapult into greater political capital is a traitor. Our country and its people come first. Don't sacrifice them and us... don't make the situation worse just because you think your political prospects will become better.

You want to make the situation better? Leave it alone. How many times can I say it... Lender's don't want to foreclose on a home. It is a zero-sum game at best. Changes need to be made, but they need to be made by the people who understand how this works... Washington, North Carolina and other state legislatures, and politicians around the country have proven they don't. The market can't work this out with the threat of lawsuits, increased regulation, and political posturing. The threat of bad debt is bad enough.

Keep meddling around and everyone will take their ball and go home... where do you think that will leave homeowners or the economy?

No More Silence. No More Privacy. No More Huckabee?

I haven’t blogged in quite a while. For the past couple weeks I have been trying to comply with an overbearing government and its knee-jerk political reactions to the growing crisis in the credit and mortgage markets. My brother and I own a small local mortgage broker. At our largest, we had 10 or so employees (ourselves included). Now it is just my brother, father, and myself. We have each been in this business a long time and have seen many ups and downs. Nothing compares to what we currently are experiencing. I blame politics and large brokerage firms 90% for the current crisis. The other 10% goes to speculators who were convinced by some HGTV show that they could make a quick buck flipping houses. But that’s neither here nor there... let’s talk about the past few weeks and why American Elephant has been silent.

To be blunt, business sucks. As a broker, we listen to the needs of our customers and provide them options for mortgage loans offered by various lenders. Since the start of 2007, over 100 lenders have closed, many programs have changed, and various legislative measures have been raised or have already passed. Imagine trying to play a par 5 hole when your choice of clubs keeps changing and the hole keeps moving... and don’t forget the rules, they are amended every other day. Except this isn’t a game, if I don’t sink the ball, one of my customers might have to keep renting, might have higher mortgage payments, or might even lose their house. I take my job and the financial well-being of my customers very seriously. Changes in the industry are not just making my job difficult, they are hurting good, hardworking Americans, a cross section of which are my customers.

As if that doesn’t make things difficult enough, I live and work in a state trying to lead the nation on mortgage reform (more appropriately called “regulation”). North Carolina has been a trailblazer for years in regards to the mortgage industry. We were one of the first states to prohibit prepayment penalties on loans of less than $150,000. We were one of the first states to limit mortgage company fee “junk fees”. We were one of the first states to require background checks and licensing for individual loan officers as well as their employers. All of those regulations I support, but this year things have gone too far. Now the state is in the process of eliminating all broker and lender originated subprime loans, stated loans, adjustable rate loans, yield spread premium (which will cost borrowers more out of pocket), as well as interest-only and other hybrid products. All of these restrictions are on brokers and lenders yet banks are somehow exempt. I guess a 9-5 bank un-licensed loan officer is more likely to help the average consumer who needs some extra assistance with their loan while a licensed mortgage broker, who works longer hours and provides a greater range of products is out to screw everyone? Yeah right. The need for mortgage brokers was created by the void left by banks. We are open longer hours because our customers work for a living. And we don’t turn our nose up at you if you don’t have a $20,000 CD or the perfect job and 2.4 kids... we work with people, sometimes for months or years to help them improve their financial position. We often work nights, weekends, and often at less cost to our consumers. But we are the ones who need to be regulated because the banks decided we have taken too much of their business.

But all of that hasn’t even kept me silent this week. What has kept me silent is the absolute inability to find time to write as I try to comply with my state’s overbearing new regulations on my industry. You see, our small, family-run company received an audit questionnaire earlier in September, and we had just a short amount of time to complete it. Some of the items we had to provide include:

• a spreadsheet detailing personal info, ssn, credit score, loan amount, etc. of every person we have ever spoken with whether currently active, funded, denied, or withdrawn by the customer. EVERYONE.
  
  
• 15 months of bank statements, credit card statements, and a list of all assets
  
  
• tax returns
  
  
• personal details (ssn, etc) of all employees past or present since opening, including their education and license history, phone numbers, and reasons for termination
  
  
• every marketing piece every produced since opening
  
  
• and much more
  
  
• OH. And they pulled my credit, without my consent.
  

And we haven’t done anything wrong. Our attorney didn’t know anything about it. When I called the Powers That Be about our audit I was told that it is a customary random audit that they are giving all mortgage brokers and our number just came up.

Read that. No probable cause, just a random search with apparently no right to privacy for ourselves or our customers. I am to provide phone numbers, socials, credit scores, loan-to-value ratios, and other documentation about you that the government has no legal right to. And I have to provide it in a very small period of time, in an excel spreadsheet, that I am supposed to send them via e-mail.

I can’t even begin to discuss the privacy issues of e-mailing a government agency that kind of data. You hear stories about government hard drives missing and laptops disappearing all the time. If I was that careless with my customers’ data, you can be sure I would be sued... but when its the government... no big deal.

But just forget the privacy hurdles to providing all of that data. Imagine a small 3 person company having to go through all of its paper files and gathering that data on 650+ different people while still trying to manage a business during a down turn. We've changed software, changed locations, and reduced our staff over the past three years. While we keep great paper records in every file... they were in every file and loan files can be huge. Needless to say my wife didn’t see me very much over the past few days.

This is not stuff they told us we would have to provide when we got our license three years ago. In fact, some of the information they are asking for didn’t even have a legal definition until late March... yet that doesn’t stop a government body who wants to enforce regulations retroactively and investigate you without probable cause just because “your number came up”.

I’m disgusted by the whole thing and fail to see the rationale or even constitutional basis for such investigations without cause. And lest you think we have done something wrong to warrant such a search let me tell you clearly the contrary. After 650+ files and at one time 10 employees, we have had only one customer complaint (from a person who decided not to make their mortgage payments). When we refused to lie on their behalf they made a complaint against us that has long since been dismissed as having no standing.

But that doesn’t matter. An overbearing government has to do something to earn its budget... and right now increased restrictions and a witch hunt on mortgage businesses are both popular and politically advantageous.

For the past few weeks my life and my business was put on hold in realization of that very fact.

And now we come to Presidential Candidate Mike Huckabee, the support of whom I am currently re-thinking. You see, I submitted a question through Governor Huckabee’s website a few weeks ago. Unbeknownst to me during that past week, Governor Huckabee answered my question. I found it tonight... and then I began to blog.

Click here for the question. I won’t quote the whole thing or the whole answer. Read it for yourself and make your own judgments. This post is already long enough. But please pay attention to the segment of the Governor’s response I will quote below:

My sympathies are not with the billionaire hedge fund managers, but with some of the folks getting foreclosed on. These people qualified for normal mortgages, but their mortgage brokers steered them to these sub-primes with teaser rates because they got bigger commissions. Now credit standards have been tightened, and they no longer qualify for traditional mortgages. I don’t think the government – meaning we the taxpayers -- should bail them out, but I think lenders should be pressured to refinance these loans so that the rates rise more slowly and affordably. Some people did buy houses they knew they couldn’t afford, and I don’t have much sympathy for them.

We need increased regulation of the mortgage industry to get rid of things like ridiculously low teaser rates and stated income loans where borrowers don’t have to prove they’re qualified.

In the above selection and the totality of Governor Huckabee’s response he has shown either a complete misunderstanding of what a mortgage broker does or a brazen attitude about their livelihoods. I take offense to the Governor’s response personally, and I ask him to cite any studies that, weighing all detail (such as job stability, equity, credit score, documentation provided, assets, etc), suggest that there is a large contingent of consumers who have been “steered” into loans below what they actually qualify for. I also object to the notion that mortgage brokers “steer” consumers into sub-prime loans for the purpose of making bigger commissions. Being a broker of both prime and non-prime loans, I can not think of any reasonable occurrence where a borrower could be unwittingly steererd into a subprime loan as opposed to a prime loan so the loan officer could make more commission. Assuming a broker has equal access to prime and subprime lenders, it is easier to make yield spread on a prime loan so why would a broker steer a borrower to a subprime loan if a prime loan was available? Now I can accept that a borrower may get a subprime loan when they could have otherwise received an FHA loan... but that problem is due to the extremely high barrier of entry for a mortgage broker to have FHA access (approximately $10,000 in annual audit fees).

Furthermore, I can’t stress enough how much I object to eliminating “stated” loan products. We live in a time where people change jobs frequently, are more likely to become self-employed, and have more than one source of income. Ending stated loans will seriously diminish self-employed individuals from obtaining homeownership, at least in the short term. Why would someone who supports the FairTax also support eliminating the ability entrepreneurs to own a home? The IRS is already burdensome enough, but ending stated loans will give the IRS even greater effect. Imagine a small business owner just starting out, not claiming legitimate business expenses because their Adjusted Gross Income would decline and thus they couldn’t qualify for their full documentation mortgage loan. That is the exact result you would find in a world without stated loan products.

The Governor concludes by calling for additional regulations on the mortgage industry. Governor, I have just cited for you what my small family business is experiencing in the face of increased mortgage industry regulation. What additional regulation and restriction on my customers ability to choose their mortgage loan would you propose? What additional regulation and restriction on my ability to earn an income would you propose? In what circumstance can you cite where increased government regulation on an industry and a lack of consumer choice has actually worked in favor of consumers? I can think of none.

Minorities Denied Mortgages?

According to this article, minorities in my neck of the woods are denied mortgages at twice the percentage of whites. The articles makes the leap that "the primary factor appears to be minority status."

B.S.

I've been in the mortgage business a long time, I've never once met a loan officer who was willing to give up a commission because he/she didn't want to work with a minority. I'm sure that person exists... but does it account for a doubling of the denial rate of applications? Not a chance.

Loan officers are generally either entirely paid on commission or mostly paid on commission. Furthermore, mortgage brokers and lenders don't get paid if they don't close loans. In that environment, can you really imagine that a large percentage of loans are denied because the loan officer would rather stick it to a minority than make a paycheck?

The study referenced only cites income levels when comparing applicants of different races. Yet income is only a small fraction of what goes into approving someone for a loan or not. Where is the mention of credit scoring, job stability, rent verification, or personal assets? Where is the mention of down payment, equity or liquidity? I would like to see the raw numbers, but I would be willing to bet that when all factors are considered the denial rate between minorities and whites is not nearly as disparate as the article implies.

• Are minorities of similar income levels likely to have as good credit scores as whites?
• Are minorities of similar income levels likely to have as good credit histories as whites?
• Are minorities of similar income levels likely to have as many debt accounts as whites?
• Are minorities of similar income levels likely to have as much in savings as whites?
• Are minorities of similar income levels likely to have as much down payment as whites?
• Are minorities of similar income levels likely to have as much personal assets, liquidity, job stability and rental verification as whites?

These are the questions you have to answer in order to determine if there is discrimination in the denial rates of minorities versus whites. But the article, the report cited, and those who want to politicize all of it either cannot or will not answer the above questions. Quite possibly the answer will not correspond with the result they desire.

I can only speak from my experience and from the people I know in the business. I will not make broad generalizations about minority groups because generalizations serve no useful purpose and my office's overall work may or may not be representative of the industry in total. However, I have never seen any evidence of a broad conspiracy in the mortgage business to deny people mortgage loans. I have worked with a number of minorities over the years, and never once has a lender or one of my loan officers denied a loan because of race. We treat all loans equally and try to improve all borrowers financial stability. I assume most mortgage companies' experiences are the same.

And doesn't the assumption of racist mortgage denials fall in stark contrast with other media reports lately? How can mortgage brokers be actively denying loans to minorities and at the same time be offering them loans they can't afford causing mass foreclosures? How can we on the one hand be guilty of unnecessarily turning down business and on the other hand be guilty of giving people loans who don't qualify for them?

Maybe the city of Raleigh needs to look at other options instead of going on a witch hunt after discrimination that might not exist. Let's look into what the real cause is without making supposition. Then, only after you have identified the cause, can it be fixed. If you want to spend tax dollars combating the racial disparity in the mortgage business, it might be better spent on financial education in schools, credit education for the public, and money/debt management training for prospective homeowners. Maybe there should be an analysis of cultural differences when it comes to debt, finances and depository accounts?

I'm tired. Tired of combating societal impulses for media-driven buzzwords, a lack of personal responsibility, and the creation of evil that doesn't exist... all at the expense of what? The truth.

The truth doesn't matter anymore. We're all just a bunch of racists.

Once an Opportunist, Always an Opportunist.

When I got to the office this morning, my brother (and partner in the family business) told me to go to Yahoo and watch this video. I did, and thus starts another lovely day in the mortgage business.

The video shows an interview with Michael DeLaSantos who is mislabeled as a former mortgage broker. Actually, he is a former loan officer who worked for a broker or lender. That is a big distinction, especially in Virginia where Michael worked because Virginia doesn't require loan officers to be licensed (at this time).

But I digress, his license, and that factual inaccuracy by ABC News is not the point of this commentary. The point is to call out a one-time opportunist for what he is... still an opportunist.

I made my living in the subprime business. I did not, and do not take advantage of borrowers. I did not and will not close a loan for someone if I don't believe they have the ability to repay. I did not and will not offer a loan to a customer that I wouldn't offer one of my family members, or myself. That is how a good mortgage broker does business, subprime or otherwise.

But apparently not Mr. DeLaSantos. Michael was an opportunist. He tells you with wide eyes and a slight smile about putting people in loans he knew they could not afford, about offering higher interest rates without regard to better programs for the borrower, and lying on applications to make a quick close. Michael says he felt guilty about such practices, but the lender and his boss encouraged him to do it. Michael made his quick bucks and kept his mouth shut while putting his commission checks in the bank.

Why has Mr. DeLaSantos now seem the error of his ways and finally found a conscious? The fact that the mortgage business has gone bust and he probably doesn't have a job right now might be one factor. Its easy to call attention to your past transgressions now that there is no profit in it anymore. Of course it wasn't Michael's fault... the lender's made him do it.

Now, this generous soul, having ended his evil ways, is volunteering his time at the Center for Responsible Lending. It sure is easier to volunteer and change your tune now that you can't make money sinning any more, isn't it Michael?

Now instead of taking advantage of helpless borrowers, Michael appears to be taking advantage of the current economic crisis... getting publicity by calling out his past employer, lender and co-conspirators while still not taking much personal responsibility. Now Michael is ceasing the opportunity to get some more limelight and is taking advantage of the mortgage brokers out there... many who didn't do business the way Michael did. But you wouldn't know that from the video.

In order to make himself feel better, Michael with ABC News seem to think that all mortgage brokers do business the same way Michael did. And it is the mortgage brokers who created this mess and are responsible for the sky falling on home lending and an ever increasing foreclosure rate.

Now that he has cleared his conscious, I wonder what is next for Michael DeLaSantos? Is this the beginning of his negotiations for a book deal??

Most brokers/loan officers are good people who do good service for their customers. Most subprime brokers/loan officers work with their customers to put them in a better financial situation. Have I closed 2/28 adjustable mortgage for borrowers with the idea of refinancing them again. YES, I have, and the idea was to get them the lowest possible payment now to make their expenses and mortgage affordable. BUT, every time I have offered them advice on how to improve their credit and financial position so when they come back to me or another mortgage broker in 18 months to 2 years, they can refinance into a better, fixed-rate program and never have to worry about it again. My customers always have my phone number and always receive as much attention as needed, both before and after the closing, to help them understand how to improve their credit situation and qualify for a better deal. And most of my customers have been successful doing that. In this business, there is not much greater joy than taking someone from the brink of bankruptcy and helping them reduce their stress level and debt and obtain a low fixed rate mortgage that they can have as long as they own their home. Often there are intermediate steps involved because their short term credit situation is bad. But that is why I am a mortgage professional. I work with people to improve their lives, not just make a quick buck.

Not Michael. He could have taken that approach. But instead he took the easy way out, and now this unscrupulous broker is trying to ease his conscious by painting the rest of us in a negative light. Now he is trying to seize another opportunity, still being dishonest, because the last gig is up.

Once an opportunist, always an opportunist. As for me, I'd rather be a professional.