I never thought I would receive the response that I have when I began writing about the topic of life at New Century. The subject obviously strikes a chord with a lot of people. The comments I have received are almost all thought provoking and insightful. Some people have suggested I submit a manuscript to a publisher. Others suggest I write more detailed accounts siting actual incidents of fraud and impropriety. Others focus in on the sexual harrassment issue.
What I believe is most important is to focus on what can be learned and what action can be taken to correct mistakes. My views on this subject are both simple and ‘out-of-the-box'. They are ideas that have been forming over time - dating back to the last market shakeout in the wake of the S&L bailout. But I won't be writing about these topics in this post. I'll leave them for the next one.
What I will write about is a subject that nearly everyone discounts or altogether omits when discussing the issues plaguing subprime lending. As a matter of fact, I believe this subject is even more insideous than a lowly loan officer fudging a borrower's income or an underwriter signing off on it or even the lender who allows it to fund. The subject is real estate agents. The reason they play such a critical role is that they, before anyone else, are the point of entry for new homeowners into the housing market.
Like all other industries or services there are good and bad apples. I am not and would not point a finger at responsible ethical real estate agents who play by the rules and set the standard for quality. I will however point the finger at a group of irresponsible agents whose numbers grew in direct correlation with the expanding housing market over the last ten years. These were mostly new agents who did not have strong referral bases and for whom a real estate transaction was a ‘win-at-all-costs' opportunity.
Case in point - while I was at New Century one of my brokers acted as a 'speaker' at first-time homebuyer (no money down) seminars for a real estate office where they procurred a good portion of their business. These first-time homebuyer seminars were commonplace around the country during the real estate run-up. In conversation with this loan officer I learned of the content these seminars provided to first-time homebuyers. The gist of it was this - all you needed was the right credit score and a few other basic qualifications and these agents could get you into a home. There was no regard to whether the buyer could actually afford the home. There existed no content wherein the agents discussed affordability or budgeting or future financial scenarios once the adjustable mortgages they were utilizing actually adjusted. As a matter of fact, this loan officer told me the agents discouraged talking about affordability and budgeting. All they wanted the loan officer to focus in on was the payment to get the buyer into the home. They would also tell the buyers to refer to their accountants (as if the buyer's even had tax or financial advisors) for any budgeting advice. The loan officer was futher instructed to refer to the first-time homebuyer loans as ‘entry-level' loans meant to get the buyer into the house which was sure to appreciate thereby enabling the borrower to refinance into a conventional loan down the road.
Remember, I'm not making any of this up. These seminars were commonplace throughout the US. I'm only siting one case where I had an actual conversation with a loan officer about the subject. Many of my brokers procurred business the same way. In many cases the mortgage brokers themselves were conducting the seminars and handing the ‘now-qualified' buyers out to real estate agents or acting as the agents themselves in tandem with doing the loan - another practice that needs exploring and is a HUGE conflict of interest in real estate transactions. In the case where buyers were handed out to agents logic dictates that financial remuneration exchanged hands. Furthermore, the seminars would also show a buyer how the agent would negotiate a home sales price HIGH enough where the seller could kick-back cash after closing to help cover the buyer's closing costs - again another practice that circumvented lending guidelines and was outright fraudulent. Think about that - an agent negotiating a price HIGH enough so that a buyer could skate in not only with no money down (equitable interest) but that they would even get cash back after closing. Holy crap man - I'll even sign up for that. What a deal!
The problem is that when basic financial restraints are taken out of the equation the ultimate cost is unrestrained. That is where the real estate bubble got its fuel. It got it from first-time home buyers entering the market without the traditional restraints set upon them by institutions like Fannie Mae and Freddie Mac or other traditional lending sources. Once in the market these new homeowners then used rising real estate values to afford their newfound lifestyles. They refinanced, and refinanced, and refinanced - come 2005 I was seeing subprime borrowers that were churning loans over more than once a year to pay their prior debt loads. It was common, not the exception, to see borrowers who'd bought their first home just a few years earlier then embarked on a pattern of debt accumulation and restructuring as fast as the rising market would allow. Now who's to blame for that?
You show me the single party responsible for this credit orgy and I'll name you the genius of all geniuses. I say that because no single party is solely responsible. All the players share in the blame. The issue is how to make sure it does not happen again. I'll talk about that in my next post.
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