Tracy Warren is not surprised by the foreclosure crisis. She saw the roots of it firsthand every day. She worked for a quality-control contractor that reviewed subprime loans for investment banks before they were sold off on Wall Street.
It was her job to dig into the loans and ferret out problems. By 2006, they were easy to find.
“I’d see people who were hotel workers saying that they made, in California, making $15,000 a month so that they could qualify for a $500,000 home,” Warren says. “If a hotel worker is making $15,000 a month changing sheets at the Days Inn, everybody would want to do it. It just really made no sense.”
Warren has worked in the mortgage business for 25 years, the past five in quality control. Most recently, she was a contract worker for a company called Watterson-Prime, which did loan audits for investment banks. She says their biggest client was Bear Stearns, which recently all but collapsed because of its exposure to bad loans.
The people who approved those loans must now be crunching numbers for the L.A Times (a 54-35 lead is ‘narrow’ and a ‘bare majorit[y]’)
http://new.kendallharmon.net/wp-content/uploads/index.php/t19/article/12747/
Several years ago when the banks were very strick in qualifying borrowers, the do-gooders called the banks “racists” and “discriminatory” towards the poor and those without good income documentation (“did I hear undocumented or ‘undocumented’ income).
The banks were forced to be “more lenient” towards the poorer and lower-income. They complied.
Now it is obvious that most home-owners in deep trouble today had “over-qualified” themselves in their application process. MOreover, most of them clearly lied and misrepresnted facts in their application to obtain loans that were much more than they could handle in the first place.
On top of that, most of these home owners did not stop at buying homes they could not have qualified for in the first place, they added more store and credit cards and new car loans to boot.
As much as I am sensitive to the plight of those in financial difficulties, it would be very wrong for me and for the society to close its eyes to the truth. This crisis will happen again if the truth is not told.
Government bail-out would not cure the greed and the untruthfulness to led to this crisis in the first place.
Some of the lenders were also as greedy and as dishonest as the borrowers – wanting to make as much loans as possible, even when it was obvious the borrowers were misrepresenting facts.
As I priest, I have a duty to call it as it is. I am neither a politician nor an economist, but I know what happens when people make and have more committments than their income would support.
Fr. Kingsley+
Arlington Texas
Spiro [#2]: You are repeating a common misconception: that government pressure forced FDIC-insured banks to originate the bad loans that created the subprime debacle.
The fact is that most subprime loans were profit-motivated. Lenders originated them to make money. Investors bought them in hopes of further gain. Many of the worst loans were originated by largely UNREGULATED nonbank firms such as mortgage brokers.
If government pressure (rather than the profit motive) were the reason for imprudent subprime lending, then you’d expect banks to have originated the worst loans and unregulated lenders to have originated the best. That is not at all the case.
If government pressure were the reason for imprudent subprime lending, you’d also expect banks to have had difficulty selling their subprime loans to investors (e.g., to have been able to sell the loans only at a discount). That was not the case.
Irenaeus,
I hear what you are saying, but you are still missing my point: Most borrowers in mortgage trouble today contributed to their trouble by either misrepresentation, or through “house greed” – going for more bells and whistles and upgrades that they could hardly afford, or by taking a 2nd or third mortgage and adding some other commitments.
I agree with you on the lenders’ greed, though.
There is enough blame to go round, but we must not over-look important facts. When someone buys a home with very little or no downpayment, it is not prudent to borrow more from a home “equity” that was never there in the first place. It is also a matter of fact that a good number of the home-owners got inflated appraisals in other to borrow even more from a non-existent equity.
Fr. Kingsley+
Fr. Kingley [#4]: Fair enough.
Thanks for the input and the fairnessmy friend.Let’s keep on praying for those in all sorts of financial and other troubles, that they may be delivered from their distress.
Had meant to say “…..in order to borrow more….
Actually, Irenaeus and Spiro are both correct. Both government regulation (mortgage banks, including subprime, ARE govt-regulated, just not by the FDIC) and profit motive were factors. E.g., all loan applications require racial data in the “government monitoring” section.
However, constant media characterization of the credit crisis as the “subprime crisis” obscures a much larger problem, including the WaMu Option ARMs, whose negative amortization feature compounds the problem of falling values with rising loan balances.
The problem was exacerbated by cutting the loans up into pieces and creating the mortgage derivatives. Those are so-called Level 3 assets for which there are no reliable values (and hence, no liquidity).
While Spiro is correct that there were many instances of borrowers lying on their apps, in just as many or more there were loan officers/brokers falsifying the apps without disclosing this to borrowers and burying those lies in the mountain of paper that borrowers have to review and sign. And when the borrowers are non-English speaking, there is a high likelihood that they are unaware of the misrepresentations.
Finally, much of the problem resulted from banks/mortgage banks bribing originators by paying them more to sell out their clients and put them into ill-fitting loans.
Ironically, subprime loans can actually be quite attractive. E.g. I have clients who have 30-year fixed loans from subprime lenders at rates as low as 4.5%. So the media continues to present a false picture by following its normal pattern of painting with a broad, overgeneralized brush on a canvas that has far too many different angles to be put into one convenient category.
The really sad thing is that there was nowhere borrowers could go to get a knowledgeable professional opinion about the appropriateness of mortgage offerings. Attorneys, CPA, CFPs, etc., do not have sufficient knowledge of the dynmaic mortgage market to be able to advise adequately. And 95-99%+ of loan originators have no real financial education and training but are simply salespeople peddling a product. Is it any wonder that so many borrowers are in the wrong loans?