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MUST READ - Alan 'AJ' Nisen's Primer On The Sub-Prime Crisis. The Players.

* * * * HARD CORE REAL ESTATE TALK AHEAD * * * *

IT'S BEEN A VERY BUSY WEEK and I had not planned to do any thinking today.

With a flurry of incoming calls from home buyers planning summer trips to the area to look at homes, getting packages off to a couple of relocating families, tending to the needs of a couple of referrals from wonderful ActiveRain friends, the usual referrals of buyers, plus my usual schedule of posting to ActiveRain, it's been a very busy week indeed. My primary job this week is really the upgrading and reorganization of new servers to host my web sites. My old server was about 5 years old, obsolete and didn't offer any support. Eeekk!!! Cross your fingers for me that the migration of domains from the old server to the two new ones goes smoothly. ActiveRain has had my sympathy during the recent server problems. I've complained when a post got dumped, or I got dumped or some such, but I have also sympathized. ActiveRain is so fully integrated into my broker model I found myself, as did many, just sitting back and waiting for the system to operate smoothly. It's better, but this post was dumped once before before being indexed. Yipes!

SOME THINGS JUST MAKE ONE THINK.

Coffee in hand and relaxed at my computer, the first post on my ActiveRain subscription list this A.M. is an article by Alan 'AJ' Nisen, A Very Simple View of Our Sub-prime Crisis. Who is to Blame? This is a MUST READ for anyone remotely interested in the mortgage mess.

My first response was to comment to Alan's post, but that's not always enough. I want to point an arrow to Alan's post and recommend it as a primer on the players in the recent sub-prime crisis. Real Alan's post and decide for yourself. I'm not much for playing the blame game, but in the case of such massive abuse of our financial markets, those responsible should be identified and if laws were broken, should, of course, be prosecuted. I'm in favor of perp walks, but we won't see many of them because this is white collar crime and some of the activities were actually regulatory abuses and outside the criminal statutes.

WHOM DO YOU BELIEVE WAS MOST RESPONSIBLE FOR THE MORTGAGE MESS??

COMMENT:

Very nice Alan.

My vote for the largest contributor would be the investment banks on Wall Street. It was they who pooled the international funds, including Sovereign Wealth Funds, to buy the RMBSs, investment securities backed by residential mortgages. Alan Greenspan had rates so low, the billions of international money had no place to go. WAIT! Let's take some mortgages, carve them up, bundle them and resell them as Mortgage Backed Securities. Americans will always buy homes, won't they? Americans will always pay their mortgage payments won't they? All those Billions of Dollars from around the globe looking for a place to put those $Billions fed the frenzy of more and more sub-primes to originate, bundle, carve up, bundle again and sell again. Folks don't always understand just how much money went into these instruments. $900,000,000,000 is a hard number to wrap your head around.

Fannie Mae was, IMO, the most negligent entity and justice won't exist until Franklin Raines is prosecuted for the perfidy of manipulating the books at Fannie Mae to stuff cash in his own pocket. Thanks to Mr. Raines' greed, Fannie Mae has been a non-player in bringing health back to the mortgage markets. Instead, the consumer is picking up the tab through Draconian underwriting schemes invented to shift the cost of the recovery from Wall Street to the home buyer.

"DECLINING MARKETS SYNDROME" Remember the insane underwriting guideline that required a higher down payment if home prices were falling? The "declining market syndrome" was the most inane guideline to come out of any government or quasi-government or federally charted entity in memory. Prices are falling because they are too high for the consumer to qualify. Therefore, the consumer must put more cash that they don't have into the purchase as a down payment. N E W S F L A S H! The market was bringing those prices down. The home should have been easier to buy, not harder.

"I'm Mad as Hell and I Won't Take It Any More". Once the home prices surpassed the consumers' ability to qualify to buy, it was like a house of cards that came tumbling down. In a way, although the government tried to manipulate fixes for the Wall Street crowd, if the consumer isn't going to cooperate, it isn't going to last. In fact, now that I think about it, the market worked. Perhaps thinking isn't so bad after all.

They, the financial houses on Wall Street, all relied on the consumer to continue to buy homes at higher and higher prices and to continue to pay the mortgage payments. As residential home prices got higher and higher and qualified buyers became more scarce, exotic loan instruments were designed to provide mortgages to home buyers, whether or not they could demonstrate the ability to repay the loan. My favorite was the "NINJA" loans? No income, No job, No assets. There was more than a small amount of mortgage fraud involved, the fallout is just beginning to be revealed. Fact is: when the consumer said "NO MORE", the investment geniuses were all left with a fist full of worthless securities. The government is still trying to figure out ways to make the consumer pay without knowing what is happening. The great handouts are preliferating. It is an election year.

You gotta love it.

ALAN: I hadn't planned to do any thinking this morning, but thanks anyway.

MORE FROM THE WASHINGTON POST ON SUNDAY, JUNE 15, 2008

Posted by Lenn Harley, Real Estate Broker, Maryland & Virginia on 06/14/2008 11:20 AM

Comments (61)

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61 Comments on MUST READ - Alan 'AJ' Nisen's Primer On The Sub-Prime Crisis. The Players.

JUN

2008

Lenn,

Thanks for dwelling on the mortgage mess, and continually posting with your typical clarity.

Lenn, great ThemThem to Alan & The Active Rain Team (seems like they are getting it all fixed for us day by day), interesting article, thanks for pointing it out. Being Saturday were not supposed to be thinking, LOL.

Featured Post in the ThemThem Group

Lenn, I do not believe it is possible for you not to think, it would be hard to imagine that you can turn it off. This is a great post. So true. Yes, it is an election year and this whole mess is now a political football. unfortunately. This is truly a big mess.

Lenn, You are one of the main reason why I enjoy Active Rain. I can't tell you how many ignorant people I run into on a daily basis who believe it was 100% Mortgage Brokers fault. I explain that while I am sure thier where bad brokers the root of the problem was wallstreet. It is like they burry their heads in the sand

Wonderful summation of Alan's article Lenn.

Lenn - If you say it's a must read, it must be. I'll be back ...

Thanks for sharing Lenn! I read the article! It confirms our worse fears, and yes this was an asset bubble that everyone piled onto, until consumers pulled the plug. It was driven by raw greed! The softening economy....think of it as an intervention of sorts, but it is going to take a long time to sober up from that party!

Mike. The mortage mess is still with us. Can't get away from it.

Duane. Thanks. It seems like a good mix.

Miriam. Truthfully, each and every time I hear that Congress is going to do anything, I quake in my boots for the consumer and our industry.

Matthew. I firmly believe that it was the Wall Street gangs and their co-conspiritors at the fed and on the hill that were the cause of this mess. Mortgage brokers qualified and sold loans to investors. What the investors did with the instruments is where the problems start. Sure, there was some mortgage fraud involved, but there always has been and always will be. But, it was never massive enough, even this time, to cause a callapse of an entire industry.

Jason. Alan's post was well organized and presented. Folks not in the industry will benefit by a reading of this summary of the folks involved in the mortgage mess.

Dana. Thanks. It did make me think.

Jim. BINGO!! Well put.

Lenn - It was and is a fantastic read! A pure informational and educational tool, for sure. I hope like heck that it gets as much attention as possible. Thank you for pointing it out.

Lenn, that was a great clear read on some of the problems. And thanks. AJ

And my apologies Lenn, this is a fascinating post in of itself. Hard-Core to the bone, sober & intelligent take on the reality of things. As typical, you will be defined in part by the wisdom you display upon the Real Estate Industy.

Lenn- What a straightforward and concise way of putting down the fact as they are. Now, are any congressmen, senators or government losers reading this? Like, get a clue! We are going to take it anymore! Get out of our lives and our businesses, go get a life! They are the most crooked and all about them entitiy in our country. I just cringe when I hear people who want more government in their lives, like somehow the government is going to come and save them.

I vote with you on this these guys passed it all off and made a ton of money.

Jason. Thanks. Alan's post will help many folks get a handle on the characters involved in the mortgage mess.

Alan. Thanks. It was a tad too much for a "comment".

Katerina. I agree completely.

Charlie. Thanks. The ones who made $Millions are the ones I want in a perp walk.

Lenn there are DISHONEST people in every segment of the Banking and Real Estate Industries that had a hand in this. Starting with greedy Realtors that did not care how the deal got done as long as they sold the house to the gready investors on the secondary market that did not care what they were buying as long as they made money right there and then on it.

If the rules had been followed with Subprime, Neg AM's, Stated and all other programs we would be fine right now. But the GREED of a FEW has caused a big problem for the majority that did try to follow the rules.

So the figure should not be pointed at anyone segment, it should be pointed at the crooks that will always be around trying to dance around the rules and make a fast buck. Unfortunately the rest of us are left behind to clean up the mess until the crooks figure out a new way to make a fast buck.

I know that our local Banking Commission is investigating several Lenders and Brokers (I personally know of one), and if these people are found guilty of what they are accused of, they should be locked up for a very long time and the loans that they wrote taken off the books.

I could also have started this with greedy homebuyers and investors that closed their eyes as to what they were getting themselves into.

Lynn: Thanks for the lead to AJ's post. While I did disagree with him as to where the blame should be put, I agree with you that in order to have this sort of thing not happen again, that anybody who did anything illegal should be punished.

That said, I think that way too much blame has been levied at the mortgage brokers. I think that they are the easiest target because they have the least ability to protect themselves.

While some mortgage brokers were doing some illegal things and unethical things, for the most part they were simply selling a legal product.no different that 7/11 selling cigarettes.

I wrote about this issue on two of my posts and if anybody is interested, they can search for "Stop Blaming the Mortgage broker".

And Lynn, I also have to disagree with about housing prices being artificially inflated. The real reason that home prices have appreciated...particularly in certain markets is demographical in nature.

The population just surpassed 300,000,000 people here in the US and is expected to surpass 400,000,000 people by the year 2050. Also, with the graying of the population, household size is going down meaning that household formation is going up.

Of the increase in population something like 80% of the increase is expected to live within an hour of one of the coasts...while it might have seemed like a speculative bubble, it was really just demographics at work. When the credit crises thing is figured out or works it's way though (a more likely event at this point) you'll see home prices in starting to go back up again. It can't be avoided.

Bob Mitchell

ValueList Real Estate Services, Inc.

Hi Lenn,

There were so many people involved in the sub=prime crisis. The combination of a few of these seem to have created a "Perfect Storm"

All the best!

Kevin. That's exactly what happened.

George. I can't blame the consumer. They do not, by and large, understand the mortgage instruments, the real estate contract or much of anything else, even when they shake their head up and down. Many speculated, but they couldn't have done it without the aid of a mortgage.

I can't blame the real estate agents. We sell the homes. We don't finance them. If no one will approve a loan, the deal doesn't get done.

I can't blame the mortgage brokers. If they follow the guidelines, they are not responsible.

It's the GUIDELINES that are to blame, if one wants to blame.

My choices for blame are Wall Street, Fannie Mae and Congress. The fish rots from the head, not from the tail.

Bob. If what you say is accurate, our population hasn't decreased, yet the demand for housing has come to a screeching halt.

I believe that the unrealistic low interests rate drove our market for 3 years and then when prices got out of qualifying range, the consumer simply stopped being suckered into buying more and more expensive homes.

The mortgage mess was simple manipulation of the financial markets to benefit from the phony loan guidelines to satisfy the market for homes.

I have no idea what I just said.

It looks like there was a perfect storm -- The fallout is unbelievable -- I could see it coming, but those who should have been watching seemed to turn a blind eye.

Joan. I don't know that they turned a blind eye. I believe that they were just milking the gravy train.

I saw it coming too in 2005 and sold my house in Bethesda and built my home in the country. I hve taken a real hit on this one, but I didn't buy it for investment. I wanted to move to the country with the deer.

"I wanted to move to the country with the deer." awesome line...I will use it as a close..."it's a great time to buy. If you really want to be with the deer/ next to family/ closer to your employer/ in a better school district...buy now knowing the RE is cyclical and the longer your expected time to sell the lower the risk."

Lenn, Blame game aside in this as the inestment banks knew they had buyers for these portfolios and with billions of dollars waiting to be had they bundle'd them knowing these were high risk, more risk than normal, and sold them off knowing they were a ticking time bomb waiting to explode while reaping billions of dollars for themselves.

Cameron. Thanks. I couldn't have said it better.

Seems they all tra-la-la'd over to the oil futures market. First it was tech stocks, then energy, then real estate (MBS), now oil. Everyone needs oil huh, everyone will pay their gas bill huh?

I see a stinky pattern. I think you think along the same lines as I do. What are your thoughts? Are we living in the age of "SPECULATORS GONE WILD?"

Great post as always Lenn. When I see your face I know I am required to think :)

Thanks Lenn for bringing us this post and Alan's. Thanks.

Renee. Indeed. They're like muggers slinking behind the "hedges" in the dark. Keep thinking.

Michael. My pleasure.

Just remember: what really caused the crisis was greed. Consumers and bankers alike. And people forget their history.

Veronica

Lenn- Thanks for highlighting Alan's post. It was worth the read.

While your choice of Wall Street, Fannie Mae and Congress may deserve the bulk of the blame, I believe they had help from consumers, real estate agents and mortgage brokers.

Four years ago, I heard a presentation by a mortgage coordinator of a large real estate firm. He was encouraging agents to get their buyers into more expensive houses. He was touting interest only, adjustable rate mortgages and had a slide show demonstrating how the buyers could be in a much more expensive home, with the same monthly payment as they would have in a smaller home, with a 30-yr fixed rate, conforming mortgage. He assured some of the skeptics, saying, when the rate adjusted, they could simply refinance. When I left that "side show", I felt like I needed to go home and take a shower.

Unfortunately, I'm sure some of the agents, who heard that spiel, went out and repeated it to their clients, completley ignoring the fact that they would be encouraging them to take out a mortgage where they would build no equity and the rate would jump in 1 to 5 years. If home prices stopped escalating, or heaven forbid, declined.....nah...that couldn't happen.

Lenn~ Yhanks for pointing out his post. I will go read it in a few minutes. Too bad we have so many greedy and selfish people in this world.... But, they really aren't getting away with anything, even though they think they are...I wonder how those people sleep at night????

There is blame to be placed all along the system. Way too many people held their noses and moved forward with business practices that they knew were not sustainable. I wouldn't tar all mortgage brokers or all real estate agents or all of Wall Street, etc. But too many of us were too willing to take the money and not ask the hard questions.

I'll admit to having had buyers that I worried about and pushed to try and get them to make better financial decisions. I generally got put in my place, and rightfully so. It wasn't my business. And, yet, I wish now I'd tried harder, pushed harder. I'll bet I'm not the only one.

If so many people all along the line hadn't decided that the money made the stink bearable, it couldn't have happened! I do believe most of the blame lies at the top of the food chain. But I don't know that there's any segment of the entire industry where all the hands are clean!

Thanks for your insight!

Lenn sorry but I have to disagree with you on a few of those.

- Yes we can blame the borrower. I have had more borrowers than I would like to say, that I have warned them of the consequeces about KNOWINGLY lying about their income (Stated Loan) in order to qualify for a loan that they can't afford, they then went to sleaze bags that did the loan. Or the ones that I have warned about an artificial initial monthly payment (Neg Am, or Pay Option ARM), and yes they then went to sleaze bags that did it for them. They knew what they were doing and did it with their eyes WIDE open.

- Yes we can blame the Realtors that knew that the buyer did not have the income to purchase the home but sent them to sleaze bags that they knew would do them.

- You are right we can't blame the Mortgage Brokers that followed the guidelines, but we can blame the sleaze bags that didn't and lied to get around them.

- Whether the guidelines were part of the blame or not can be easily argued both ways so I will leave that one alone for now.

- Wall Street, and Congress deserve a good part of the blame, but not all of it.

- Fannie Mae, and Freddie Mac part of the blame for me is in their allowing the debt to income ratio's to go up to high other than that their guidelines were good if followed correctly.

I don't like disagree with you because I respect your opinion, but I have seen these things first hand, tried to warn borrowers about what they were about to do, and the wolves that would help them do it, but in some cases it fell on deaf ears. So yes I can blame them and the sleaze bags that helped them do it.

Lenn, you just completely resolved my internal unrest at NOT CARING that Wall St. bonuses will take a hit this year, along with predictions of lay-offs. I knew that there was a reason for my gut reaction to the prediction here in New York- lower bonuses (and huge houses foreclosing on the east coast) just don't warrant sympathy somehow. Except, the bonuses were rather nice for a second home purchase...oh, well.

Lenn, as usual you are able to articulate the frustration of most agents, sellers and buyers. I like
AJ's writing too but will you continue to be my Barbara Walters without an impedement? Thanks for sharing your "empty headed" moment. I wish I could "not think" like that! Later in the rain~Deb

Oh, and I do have some strong opinions but it's not my time to think. *smile*

Lenn... good, thought provoking post..... here is my partial take and who I can blame and why....

Yes, the broker who was too cheap to go out and get FHA... who instead, sold a subprime loan and not a FHA loan. This was usually at least 1% different in rate, in most cases... and usually on a 2 yr or 3 yr adjustable. Which meant they had to refi before their rate went up and still added at least another $5,000 onto their equity. I could be here for a while on this one.

The consumer who went to settlement and found out that their rate was higher and or more fees. Nobody had a gun to their head. Yes, delaying the settlement for a day or two might have been risky or an inconvenience for them and others. But many loan officers preyed on consumers, hoping that they would go through with the transaction. if they would have complained and threaten to back out and or not sign, if the loan officer didn't correct the closing.... hell, then call the manager or ask to speak to the owner.

Lasty, I blame greedy Wall Street... remember this program... the Stated W-2 program. Shit, you mean I could make a set income and still gross up my income, depending on my job title? Now, that would be like fraud, but this program allowed for it... and also, the 80/20 no docs, let alone the stated loans at this LTV... I can prove nothing and get a loan with no money down? And who cares if my rates are extremely high... I'll refinance.

And yes, the declining markets didn't help.... but I don't put much of the blame on this part, because if we didn't allow for the things mentioned about and did old school mortgages, it wouldn't be as bad... fixed rate mortgages and if you did a stated, that you had to have at leaat 20% down.... forget about fico scores... people lose jobs.... people have deaths in the family. And it can happen to people with 700 credit scores.... anyhoo.... I am tired of all of this talk. In the last 10 months, I have been trying to ignore most of this chit chat and focus on business... and for the most part, it has work.

Overall, some good issues stated in your post.

jeff belonger

Great explaination Lenn. There is much blame to spread around. I will read the entire article. Thanks.

JUN

2008

Lenn Harley.... you are one of the many I come to read. Always thought provoking, always right on the money.

Thank you for making this post worth the read : )

Lenn,

My son currently works for a mortgage company where last year, 23 year old loan officers were making $50,000-$100,000 a month. Their ethics?? Extremely questionable. The company bought internet leads by the 1,000's, and each loan officer would make 10 phone calls a day, and churn as many $600,000 loans with 3 points overage as they possibly could. Would they stretch the truth on loan applications? Um, yes.

But....

$600,000 x 3 points = $18,000 x 80% commission = $14,400 for each loan. Even the slackers who only closed 5 loans per month made plenty of money with which to buy new toys. Were those loans sold according to the established guidelines?? Well yes, but the guidelines didn't teach them how to make $80,000 per month. They figured that out on their own. Or were taught how to do so by their company's executive team or their peers. If it took a little fraud here and there....the standard response was the usual one. "What are the chances of us being caught?"

Stated income loans were never meant to be used by AM/PM clerks to claim their income was $12,000 per month. They were primarily for self-employed borrowers who either had 1-foot thick tax returns, or wrote their $450,000 per year incomes down to only $30,000, when everyone knew what their actual "ability to repay" was.

Loan officers and their company executives (who collected the remaining 20% plus processing fees on each loan) absolutely have culpability in this mess. They made incredible fortunes milking those guidelines for all they were worth.

Now, if the guidelines were never in place....I realize they couldn't have capitalized like they did.

Then there were Realtors. You know how the anthem goes: "What my loan officer tells my buyer to do is of no concern to me". Especially when it came to doing whatever it took to close yet another $900,000 sale and walking away with over $20,000 in commissions. Five of those a month?? They, too...have culpability. Turning the other cheek does not absolve one of guilt when you know your buyer can't afford the house their buying.

But....if the guidelines weren't in place, they couldn't have done it. I understand that.

Buyers? Well...here in Southern California, people wanted to buy regardless of "what" had to be done. What better way to make $350,000 than to buy this year and sell next year??? If that meant stating "whatever" as your income, so be it. It sure beat having to wait 10 years to EARN that kind of money!

Yes, yes....I know. It was the GUIDELINES that led them to it.

Just like it's the gun manufacturers who cause all of the shootings in this country, and the cigarette companies for making people smoke, the beer manufacturers who are responsible for all of the drunk driving accidents, etc.

While I agree that Wall Street's greed had a lot to do with this by providing the instruments that tempted our entire industry into "malpractice of their trade"...it's hard to cry fowl when the industry itself knew what they were doing.

Maybe it's time we stop blaming others for our own actions. It's not the automobile manufacturers who cause most car accidents. It's us ignoring the speed limits because we're late for an appointment.

Hey...on a sidenote.....I just saw on the news last night that Susan Atkins, one of Manson's followers who clearly was "under his spell" and consequently not responsible for her part in the Tate/LaBianca killings...wants out again. I'm not for it. I think she's responsible for her own choices that day.

Dave

Veronica. Of course it was greed. However, when in a professional business position, one is supposed
to adhere to a certain degree of ethical conduct because the professional has the body of knowledge
to know where the line is drawn. The consumer has not the body of knowledge to understand where
the line is.

The moguls on Wall Street wanted a place to put all of the international wealth and they purposefully
designed the instruments and guidelines that set the stage for the mortgage mess.

Just my opinion, of course, but the facts support it when we look at the investigations of the Wall
Street players. Problem with the investigations is that they take years.

Marilyn. We all heard the same scenarios. Consumers, I believe, were sucked into that
market. My bottom line is, the mortgage instruments and guidelines that permitted these bad
decisions are way over the heads of the consumer. Sure, the consumer bought homes with
risky loans and ultimately a lot of the lost their homes. However, the moguls on Wall Street
made $Billions from hedging these RMBSs. The guys on Wall Street knew what they were doing.

Vickie. They sleep just fine because they have no conscience.

Julie. I honestly believe that most consumers who purchased the homes with risky loans were victims,
not perps. The consumer focuses on the product or service that they purchase, not how it's made or
how it's done. The dishonest merchant or vendor is the cause, IMO.

I agree. It started at the top of the food chain. The consumer didn't come on the scene and
say, I want an XYZ loan. The impetus for these loan instruments were designed and pushed by
Wall Street to have a place to put the Billions that their real clients, the international investment
class, wanted to put their money.

George. George. We don't really disagree. I believe it's a matter of degree. You didn't encourage
your buyers to take bad loans. Neither did I. But, the Neg Am, or Pay Option ARMs were promulgated
at the top.

I am of the opinion that this was a case of the tail wagging the dog. Rather than investors responding
to consumer demand, the consumer responded to the market of mortgage instruments designed and
offered by the investment houses that made $Billions on the hopes and dreams of the American
family who saw a once in a lifetime opportunity to have their dream home. Oh, and the regulators
who held their noses and played the three monkeys game.

Laurie. This is a matter of scale. If you look at the "modest" bonuses they will still get, it's still
quite sufficient to finance a modest 2nd home. We can't have any sympathy for the Wall Street gang.
However, I'm not talking about the lowly traders. I'm talking about the investment bankers who
perpetrated these schemes, knowing that the consumer wouldn't be able to sustain their financial
plan of refinance. These guys on Wall Street have the financial ability to understand the
home price affordability gap that started to materialize in early 1995. Geez. Even I saw that one
coming.

When we start having sympathy for the Wall Street gangs, we loose perspective. Of course, my'
perspective is from investigating those guys for about 10 years at the SEC. I know how they work
and I know how the portals of government enable them.

Deb. When we think, we write. When we write, folks respond. Then we have to read. Then we
have to respond to the commentators. Then we have a conversation going. Of course, it could
be worse. We could be using our "non thinking time" cleaning the house. Naaaaa.

Jeff. You bring up one important point. Neither consumer nor mortgage companies allowed for
family catastrophies. Of course, that's all incorporated into actuarial computations. It would appear
that there was no risk management involved on Wall Street, my favorite target.

Wayne. We're not in the blame game, wait, we are. We have to get to the bottom of what went
wrong or it could happen all over again.

Kelli. Thanks. Appreciate the thoughts.

David. Oh, yes, the old boiler room technique. Everytime I had a buyer who was "pre-approved"
by an Internet lender, I knew that there was little hope of them being a credit worthy buyer for
their stated price range.

"What are the chances of us being caught?" That's true. What were the chances?

I'm reluctant to blame the Realtors. Most Realtors can't qualify a buyer for affordability. That's not
a part of the requirements of licensure. Real estate agents and brokers broker home purchase and
sale transactions. We qualify our buyers, if we know how, only to make sure that they are in the
right price range. We don't originate their loans. It is, however, part of the due diligence of a mortgage
company who is going to be lending $500,000 to a buyer.

For the buyers in CA, if the guidelines didn't permit stated income, they could never have done it.
The problem was in the guidelines. I know one Internet lender who told one of my buyers that "your
income to be stated on the application is the income that is required to qualify for the loan."

Sorry David. I don't buy the analogy of the gun manufacturers, cigarette companies and beer
companies. The consumer is capable of knowing that if you shoot someone they might die. Or,
if you smoke you may become addicted to cigarettes. Or, if you drink and drive, you may kill
yourself or someone else. The consumer can understand that.

The consumer does not understand financial dynamics of, if the real estate market values drop,
you may not be able to refinance. They shake their heads up and down and it goes right over
that same head.

"While I agree that Wall Street's greed had a lot to do with this by providing the instruments that tempted our entire industry into "malpractice of their trade"...it's hard to cry fowl when the industry itself knew what they were doing."

With that, I agree completely.

Everyone knows speed kills. Not everyone understands the real estate market, the financial markets or the financial guidelines. Wall Street does.

Susan Adkins has no brain.

Thanks for your thoughtful comments David.

Hi Lenn...

I've just returned from commenting on AJ's post. Came back here to thank you for pointing us over there. I'm not into the blame game either but what an intriguing topic :)

TLW...ROAR!

Thank you....I wasn't going to do a lot of t hinking today either...but it looks like more rain...and this is preferable to worry about all the folks here without...fill in the blank...due to floods. Ah yes....it is an election year...and let's hope folks think hard and long when they go to the polls...

TLW. I am all for getting to the bottom of and exposing the Wall Street Gangs that perpetuated this monumental fraud that engulfed our industry into the worst housing debacle in history.

Thanks for dropping by.

Sally and David. We all think when we go to the polls, don't we???

For years I would tell my loan officers that these loans (whichever type was being discussed - subrime, high LTV 560 score, subprime 80/10, NINA, NINANE (NoDoc), bank statement - I would tell my LO's that these loans were performing.

Performing loans are those that have regular monthly payments, according to the loan terms

Smart people were tracking the actual payments and the loans were performing, or the loan program would not be offered.

I think that simply what happened is the markets added more and more programs too quickly, without testing performance.

Kind of like the dot com crisis, where any new start was given the OK.

At some point, performing programs were replaced with programs that were not going to perform. Lenders kept adding new programs. The question was not will the borrower be able to pay. The question was can I sell this on Wall Street.

By the time these smart people could track the too rapidly growing product lines, really takes about two years, we were in a mortgage crisis. Probably made worse by denial and by a corporate environment that encouraged blindness and silence.

Whistleblowers were probably not welcomed.

Another general approach with lenders is to out pace delinquencies. If you delinquency went from 2 to 4%, to drop it back to 2% increase your volume.

But if the new volume is worse loans, then that strategy cannot be maintained.

Richard

Lenn, thanks for making this so clear. I sorta knew it, but not as clearly as you made it. I do agree that as far as the sub prime loans and the effect they have had on borrowers now a days, it will take some time to recover. Unfortunately, the wrong people are bearing the effects of the market. I may send this to a Senator I know, I do believe that most of them have NO clue, how it happened and the part they played.

Richard. Thanks. Very good observations.

Missy the activist. I love it.

I am off to read ! Lenn, thanks for always making the things you write easy reading and easy to understand ! Mortgages are a mess...your spin clarifies so much !

As always we enjoy your posts that are always informative and thought provoking. Thanks for always taking the time to share your insights. We appreciate it.

You hit quite a few of them right on the head. Though I do think we as realtors and mortgage people all added to our crisis. Also the American public that wanted "newer, better, bigger" is also to blame. Nobody predicted the downturn or the possibility of this severe of a home value decline

The subprime mess is a a true mess, but what you are seeing a now almost 2 years after the start of the melt down is a some self rightness going on. I remember talking with realtors a couple of years ago and they were on their soap box about lenders are starting to tighten up guidelines and they were talking about how this was going to harm the housing market. I don't think I ever recall a single Realtor saying I don't want this commission on this sale becuase my buyer is using a subprime loan. Howvever I do recall a lot of shopping the buyers around because they were turned down elsewhere and even adding to the price so the buyers could have he closing cost paid( no skin in the game ). I think we have to get past the what was and start working with what is..... the subprime mess happen and and a lot of folks made a lot of money doing subprime loans and a lot of people have been hurt and still is going to be hurt by this mess but the idea that realtors had not any degree of helping make this happen is just a people trying to make themself feel better after taking a lot big checks to the bank.

Market corrections happen in almost every market in due time. But believe me that if you don't think realtors will sell a house for 500k knowing it should be 400k but becuase the market will allow it ........they will do it because the market will set the price not realtors..... ( I heard this a 1000 times )

its time to honest about what happen and quick preaching don't you think ?

lets get back to the business of selling homes using the tools we have and quit talking about what we know longer have.

Thanks Melissa. We all watched the mortgage mess evolve. It's good to learn from it so it doesn't ever happen again. One thing for sure. If the Wall Street gang gets a chance, they'd do the same thing all over again.

Bob and Carolin. Thanks for stopping by and commenting.

Russ. I have yet to approve a loan. Nor have I yet to buy a position in a hedge fund. Nor have I done anything more than sell homes. My buyers are fully documented borrowers and only one went to foreclosure. It was a sub-prime, but fully documented. She defaulted because she didn't want to make her payments, not because she couldn't.

Ron. I disagree. The mortgage industry has been trying to cut the agents out of the process for years. They finally succeeded with the web sites and advertisements that attracted the consumer to the lender as the first stop in the home buying process.

You say that Realtors took the commission on the $500,000 house. That is our job. There is no fraud involved when we manage a tranaction. We don't manage the mortgage process. When the lender provided a pre-approval letter or a loan commitment, are we supposed to request the supporting documents??? We'd be laughed out of town.

If a buyer isn't qualifed, it's the lender's job to say NO. The lenders I refer to have no hesitation to say NO! When that happens, my buyer either buys what they are qualified to buy or finds another agent. No one forces the lender to approve.

When the guys on Wall Street are inventing the exotic instruments that permit high LTVs or manulipate the financials to fit the buyer into an instrument, that's not the agent doing something to collect a commission. That's a lender selling a loan for which they are going to collect a pot full of cash.

No one here is preaching. We are documenting for our fellow travelers what we believe happened so that if we see something that looks too easy in the future, we might know that it is.

I spent 10 years investigating the guys on Wall Street. I know how they manipulate financials and know that they have no compunction about manipulating a market where thousands, perhaps a million consumers will lose their homes and/or have their credit impaired for the next 5-10 years. The fact that many of the profits in these investment vehicles were "off balance sheet" transactions should tell us something. Sweeping this recent experience under the rug isn't going to help agents in future questionable deals.

The reason AJ's article was so helpful is because it presented the entire cast of players. Experienced agents are not as likely to be taken in by the miracle loan. New agents know little more than the consumer and these writings could help.

If you believe that I'm dishonest in my perspective of the mortgage mess, fine. But, questioning my integrity isn't going to change my perspective.

Don't even try to shush me. You can't.

You're wright, it is a must read. I always wonder why no one ever mentions the "Excalation Clause, No appraisal, No inspection contingencies, etc." on the contract.

Thanks

Hans

Lenn,

Alan's article is of course deep and excellent. There are many players in the vast mortgage industry and they all had a hand in the subprime mess. The federal regulators are supposed to keep the playing field functioning more or less smoothly, so que pasa?

Hans. The "No Escalation, No Appraisal, No Inspection" is a market matter. The lender is not put at risk with an unqualified buyer. That's an agreement between the buyer and seller that the buyer is willing to put their money where their mouth is to get the house they want.

"No Escalation, No Appraisal, No Inspection" is cash over list or cash over competing offers. The no inspection is the option of the buyer.

Many buyers who are financially able are willing to pay more than the competition to get what they want. The inspection is a contingency and could cost a buyer the opportunity to get the house they want.

None of these things involve mortgage fraud, misrepresentation or exotic loan matters. These matters did tend to push the market up but it was interest rate driven.

Would I advise a buyer to pay over list for a house?? Of course, if the buyer understands that they may have a negative equity for a while. And only if they planned to own the house for a while.

Sellers are free to price a house according to their own decisions and buyers are free to pay what they wish for a property to get what they want.

Lenn

I am not trying to hush anyone. I believe in open and free dialog of the facts as much as anyone if is to include all the facts. I also believe in open and free markets.

Just like this sub prime mess was created in a free market. There was a lot of people looking the other way ( including Alan Greenspan ) as long as the money was flowing.

Realtors knew they had buyers buying houses that could not even get a credit card, it is easy to say it is all the lenders fault, in they should have known better ( no one disagrees ) but to say that the real estate people did not make lot of money as well during this time and were not advertising with the mortgage companies no money down homes or payments based on neg am loans is very disingenuous... Realtors did have a hand in this mess or correction ( half full/ half empty)

I just think AJ's post is not totally honest with all the facts. ( left out some players )

Lenn,

I've read all the responses...and I'm glad you posted this piece. You're very astute...and obviously well-versed on all matters real estate. I also think you're right that this whole topic...and the range of answers are a worthwhile read for newer agents who possibly aren't aware of how these situations came to pass.

Here's some advice for them:

Advice #1.) When your valued and trusted loan officer tells you your buyers in no way qualify for the loan, do not call ten other lenders to find the one who says he can do it. If you already got nine "no's"...something is probably amiss. Looking the other way and pleading ignorance as the 10th lender funds the loan...doesn't absolve you of responsibility. Rather, it makes you an absolute accomplice in the crime. It's not necessarily your job to pre-qualify or approve the loan, but it doesn't take a rocket scientist to know that your buyers can't afford an $800,000 home when Mr. is a substitute teacher, and Mrs. works at Walmart. Oh well...that home is the 12th short sale in your farm, and if you play your cards right, you might even get the listing. Bear in mind, however, that it'll be a bit harder to pit lenders against each other and see who wins this year...but at least you've had a lot of practice...so anything's possible.

Advice #2.) As the Realtor, you used the price per sq. ft. formula in preparing your CMA, and you wound up overpricing the listing. There's not an appraiser on the planet who uses that formula, but you've never taken the time to actually look at an appraisal in order to understand how value is actually determined. It's not your job. When the appraisal from "Lender A" came in low, you pulled the loan and gave it to "Lender B" who had a little more "control" over their appraiser. That appraiser didn't want to risk losing the account, as it made up 90% of his income. Besides, you promised your next 5 deals to that lender if they could do it...and the loan somehow funded. The property was $65,000 overpriced due to your lack of training, but at least you were able to find an unscrupulous lender to fund it anyway. What a great job you did for your buyers. Excellent negotiating on your part! They're now in foreclosure, by the way, but at least it's not your fault. After all, the 10th lender approved the loan, not you.

Lenn, there are only about 1,000 more examples just like the two above. You know it....and I know it. And while I understand when you say that "Realtors don't approve loans, lenders do"...there is no way to argue the role Realtors played in creating this mess.

You pointed out that loan officers have been trying to cut the agents out of the process for years. But that's because every other real estate office had their own mortgage company and Realtors received higher commissions for referring the deal in-house (without regard for whether the lender was the best choice for the buyer or not). It was self-preservatio that lenders tried to become the first point of contact. Heck, nowadays there are so many Realtors doing the real estate deal AND the loan that the entire transaction should be suspect. FHA won't allow it because it's a conflict of interest. Of course, people get around THAT one by putting the loan in another loan officer's name and spiffing them a couple hundred bucks.

The rose-colored glasses have to come off. You wield a lot of power on this site. It would seem a better use of that influence to admonish and enlighten those agents who absolutely had a hand in creating this mess, versus absolving them from any culpability as a whole and thus virtually condoning their actions.

Dave

JUN

2008

It's rare that I bookmark a post, but this one I am going to. Later in the week when I have more "me" time to read I will want to come back to it. Thanks Lenn.

Dave.

You are not logged in. If you would kindly log in and identify yourself, we could then understand your perspective.

If, as you say, I have rose colored glasses by not including the agents in the "blame game", I would suggest that at least everyone knows that I am an experienced agent/broker/REALTOR/fiduciary and that's my perspective. I fully understand my job which is brokering real estate transactions as a fiduciary of home buyers.

Now, either I live a very sheltered life, or the influence of REALTORS in the mortgage mess is wildly exagerated. On more than a few occasions, even in posts and comments to ActiveRain, I have read "what does she know, she's just a Realtor".

From the years 2003-2006, the critical years of the exotic loans, my agents and I brokered over 700 transactions. Not one case of mortgage fraud was involved. A buyer either qualified or they did not. That is the training my agents received. If an agent asked about a particular scenario and I said, "that would be mortgage fruad", that was the end of that buyer.

If the agent used a lender's services to qualify a buyer and the lender said NO, the buyer was sent home to either repair credit, pay off debts or look in a lower price range for which they were qualified. We shopped mortgage companies for rates and lender fees, not for lenders who would commit mortgage fraud. I run qualifying numbers for 5-10 prospective home buyers every week. I have no problem telling someone who inquires about a $300,000 home that they are qualified for homes in a $125,000 price range. I don't start looking for a mortgage company representative who will get them approved for $300,000.

If, as has been stated by so many mortgage representatives, the pressure put on the loan officer by the REALTOR is too strong a force for the lender to resist and when the REALTOR threatens to take an unqualified buyer to another lender, let them. If the only way a buyer can be approved is by mortgage fraud, seems to me that the loan officer has to make a choice, to be a tool of a pushy REALTOR or commit mortgage fraud. I read this scenario often and the loan officers appear to be representing a picture whereby the agent has power over a loan officer. Since when? Agents and brokers work for our buyer clients. We follow our buyer/employer's lawful instructions. Loan officers don't represent buyers. They are employees of mortgage companies. I once had a loan officer offer to falsify a VOD for a buyer who needed reserves. He could do that because his wife was an officer of a bank branch. I moved the loan and never used that mortgage company again. Agents can say NO. Are you telling me that loan officers can't say NO? They can and do every day.

Mortgage companies have guidelines to follow for loan approval and the guidelines don't include mortgage fraud. Even the guidelines for stated income loans require that the income be stated accurately. There is a "verification" at the bottom of every loan application"

"Each of the undersigned specifically represents to Lender and to Lender's actual or potential agents, brokers, processors, attorneys, insurers, servicers, successors and assigns and agrees and acknowledges that: (1) the information provided in this application is true and correct as of the date set forth opposite my signature and that any intentional or negligent misrepresentation of this information contained in this application may result in civil liability, including monetary damages, to any person who may suffer any loss due to reliance upon any misrepresentation that I have made on this application, and/or in criminal penalties including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, Sec. 1001, et seq.;"

There are always going to be a small minority of agents who would facilitate mortgage fraud. They do not represent the agents that I have the pleasure of knowing. Further, the loan officers that would commit fraud do not represent the mortgage industry representatives that I know. Those agents and brokers are not a force strong enough to bring down an entire financial industry. That takes power and Realtors have little to no power. In fact, I would suggest again that not even mortgage loan officers have the power to bring down an entire financial industry, first national and then international. That takes the kind of power that resides only in the Wall Street power houses that work without timely disclosure, specialize in obfuscation and hide obscene profits (or losses) behind legal structures such as "off balance sheet entities". The media focuses on industry examples of fraud because they feed on sensationalism. There is no news when 95% of all home owners are current with their mortgage payments. There is no news when a loan officer says NO. There is no news when an agent tells a buyer that they don't qualify for the home they asked to tour.

There is no legitimacy in writing "admonish and enlighten those agents who absolutely had a hand in creating this mess" when we don't know your involvement in that mess.

So, if you're going to include the REALTORS in the blame game, come out of the shadows and identify yourself. We can't understand the perspective of one who writes behind the black curtain of anonymity.

Lenn,

My intent was not to hide in the shadows at all. While writing that last post (and responding to company emails and the like)...ActiveRain logged me out without me realizing it. It was only after hitting the "Submit Comment" button that I realized my name didn't show up. I opted to log off and tend to more important matters, knowing I could come back and "face the music" at a later time.

And face the music I have.

I must preface this by offering a bit of an apology...and by stating that your response is indicative not only of your vast experience and knowledge, but also of your moral aptitude and personal code of ethics. My apologies are offered to you because you apparently felt I was suggesting that you...or any of YOUR agents were guilty of committing any offenses which may have contributed to the mess the industry now finds itself in, and I want to assure you that is not the case at all. You're one of the many agents in this country who have achieved a tremendous degree of success BECAUSE of your professionalism, expertise and ethics...rather than in spite of.

But here's where we disagree.

Your previous responses seemed to make a point of absolving your peers throughout the industry of any responsibility in this mess, or at the very least downplaying it somewhat. My experience has taught me differently. I spent 15 years in the mortgage industry, and then nine successful years as a top agent in Southern California before starting my current business which has over 1,000 agents as our client base. In the mortgage industry, we were constantly asked by agents to do things which bordered on...or were actual...fraud. The kind of shop I ran was the same as yours. We never gave in. We lost a lot of business as a result, and even lost top producing loan officers who wanted to walk on the wild side of life, but that was okay by me. Our reputation was flawless....and I much preferred working with those agents whose moral code of ethics paralleled ours. They were professionals...and so were we....and together we did a ton of business together, all the while surviving every FHA/VA audit with flyig colors, while others weren't so lucky. It was always interesting when ex loan officers came begging for their jobs back after their free-wheeling company's doors were closed. No chance....sorry.

As a Realtor, the same code of ethics applied. It was easy to maintain a professional approach to the business, and there was plenty of good business to be had. Yet almost daily, there was evidence that not everyone shared those values. Agents who'd drop off their listing presentations on the doorstep of a soon to be expiring listing. Agents whose in-house lenders would do or say anything to get or even close the deal, which the agents were okay with because they'd make an extra 5% on their splits. Entire offices who would actually train their staff to use the worst ethics imaginable....and other offices who wouldn't put one single hour's worth of training into an agent's career. I know you're aware of the "Rent a Broker" concept. There are tons of them out here on the west coast. Operations consisting of a broker hiding out in a beach house somewhere in Malibu, while steadily adding to the over 1,000 agents who already pay $100.00 a month each ($100,000 per month to hide out in Malibu?) and $200.00 per deal for the "privilege" of working out of their homes without any supervision whatsoever. It's not a great business model, but it IS a prevalent one.

It promotes fraud, either by accident or by design. And in my mind, it's irrefutable evidence of a growing number of agents who DO NOT share your passion for doing what's right. And whose actions have most definitely contributed to the mess we're in. Until individual agents have achieved the financial success you have, they will be tempted by crossing the invisible lines in the sand between what's right...and what's not.

The rose colored glasses comment was not intended to be insulting. It just seemed that your presumption is that others who do what you do for a living....approach it the same way. I assure you they do not. While their numbers may be in the minority (arguable, definitely arguable)...the amount of havoc they wreaked on the industry as a whole will be felt by all of us for years to come.

And for that...and for them...there is no excuse.

Wall Street's culpability? Undeniable. The mortgage industry's culpability? Undeniable. Real Estate agents' culpability?? Equally undeniable.

Signed,

David Daniels

LOL....I was logged out again!!!!!!!!!!!!

Sheesh!

Dave

Dave. Thanks for coming back. I thought, as I was venting all over you, that perhaps you weren't logged in. It hit me quarely between the eyes a few minutes ago when I completed a full Localism post and got dumped with the dreaded "You must be logged in to use this feature."

Here's where we disagree. Your focus is on the greedy, self serving, rule breaking, etc. loan officers and agents.

Mine is on the thousands upon thousands that go about their job day after day serving the public and making our industry pround.

My group outnumbers your group.

Lenn,

Hmmm....I believe the initial gist of this post was to identify the greedy, self serving, rule breaking parties who helped cause the mess we're in today! ::: smirk ::: That was YOUR focus, not mine.

I just wanted to make sure we weren't deluding ourselves as an industry by thinking Realtors had no role. I, too, would much rather focus on the thousands of agents who go about their job day after day serving the public and making the industry proud. But they were not the ones who caused the mess we're talking about.

Problem is...the work (or undoing?) of the many "not so scrupulous" is now having a major impact on the good work performed by the worthy, ethical, caring and professional agents. Their clients' home values are dropping like lead balloons, their neighborhoods are now dotted with umpteen vacant (er, uh, foreclosed) houses, their qualified buyers are facing ridiculously tough qualifying requirements, etc. I can't figure out why our industry can't either police itself better...or have better government control in preventing bad deeds from bad people (oops, you've pointed out the answer to THAT one! Wall Street...and God knows HOW many lawmakers were "stimulating the economy" while lining their own pockets with various forms of "gold and silver").

You mentioned in your initial post the craziness of lenders requiring more down in a declining market. We're seeing that here like I've NEVER seen before. In Temecula (a city hard hit by the mortgage meltdown), underwriters have issued directives stating that all LTV's are to be reduced by 5% across the board.

I also have many elderly friends who took out equity lines of credit to help sustain their simple and somewhat meager lifestyles. Maybe not the best route to choose....but one they chose nonetheless. And now, each and every one of them has received letters from their respective lenders stating that all activity on those accounts are ceased immediately. No additional draws/checks will be honored. So, for those who have $50,000 equity lines of credit recorded against their properties...and who've used only $1,500 so far....they're now prevented from drawing any more out. They have flawless credit, fixed incomes...and what they were sold 2 years ago is now broken. Shame on the lending industry. Shame on the appraisers. Shame on the Realtors who overpriced listings...and shame on Wall Street for providing the instruments with which to do so. And shame on the government for being too caught up in their political aspirations to notice.

P.S. Your blogs are definitely thought-provoking! We may not always agree with each other, but they're always relevant and important reads in my opinion.

Keep up the good work!

David Daniels <--in case I'm logged out again and don't know it yet :P

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