In all fairness, I actually like the excerpts from "Greed, Fraud & Ignorance: A Subprime Lender's Look at the Mortgage Collapse". Daniel McGinn, a correspondent writing for Newsweek.com wrote a reviewof this new 'from-the-trenches' tell-all about the subprime industry. Written by Richard Bitner who co-owned Kellner Mortgage Investments, it is a review and perspective of the subprime lending mess from the inside. Kellner, a sub-prime mortgage company who took loans from mortgage brokers, went out of business in mid-2007. Richard Bitner reviews his companies experience and the lessons that can be learned and issues corrected.
The most refreshing perspective about the subprime mess is summed up in this excerpt from the book. On a loan that Kellner was required to buy back from an investor because the borrower defaulted in the first 3 payments, Mr. Bitner reviewed the file to see what went wrong."As I went down the list, my thought was someone must've made a mistake. Aside from a good property value, there was not one redeeming factor to this loan. The credit stank, income was light, employment was spotty, and there was no rental history or savings to fall back on. Put all this together and it was a foreclosure waiting to happen. What the hell were we thinking closing this loan?"
Have you heard that one before? Finally, a reality check. He continues,
"I checked everything in the file against the investor's guidelines, trying to figure out the mistake. Then it hit me. We did nothing wrong. Our underwriter approved the deal, we funded it, and the investor purchased it from us because it fit their guidelines. There was nothing manipulative or fraudulent about the loan. Everything from the income to the appraisal was accurate."
There it is. In simple, straight-forward truth. Loan officer's in many cases weren't to blame nor were customers at fault. Mortgage lenders like Kellner probably should have figured it out, but relied on a perception of security because so many larger lenders and banks were doing these same loans....giving a false sense of stability. Bitner's reaction to his discovery?
"I was pissed off but I didn't know who to blame. It's not like the guidelines suddenly appeared. We'd been closing loans with similar borrower profiles for over a year. In fact, the 5% down payment product was a niche we'd been promoting to our brokers. For the first time I was seeing this product pushed to the extreme, and from a risk standpoint, it made no sense at all."
As Bitner describes it, sub-prime lending started off as a means of providing financing to a higher-risk client whereas before there was no means of financing for those people. It was still a choice. My first boss in my first job once taught me 2 things about sub-prime lending.
1) Always offer a customer choices. Don't give them one option for a 30 year fixed rate loan at 8.00% but show them a 30 year fixed rate at 8.00% OR a 3 year fixed rate at 7.50% and ask which did they feel more comfortable with.
2) In addition to rule #1 (above), always include the third option. What's the third option? That they don't have to do any loan today.
It was ingrained upon me and many others that did sub-prime lending 10+ years ago (when 10% down-payment was the LEAST a buyer could put into a transaction) that customers could and often should choose to wait and improve their credit. But ultimately, it's the consumer's choice. Otherwise, who in their right mind should be buying $70,000 SUVs? Who should be purchasing $30,000 media room packages?
Like erosion, the edges of acceptable risk and sound standards were gradually pushed until people like Mr. Bitner reviews a loan as described above and realizes things have gotten beyond acceptable risk and common sense lending.
So does Richard Bitner have a unique perspective on the situation? Perhaps. Does he have ideas and solutions for how to FIX the industry? Buy the book. One thing I do know....he has a blog....but then, who doesn't?
©2008 Ken Stampe
Ken Stampe is a Mortgage Loan Originator, Mortgage Author and Mortgage Loan Officer Instructor living in Dallas, TX. Ken provided his first client a mortgage loan in 1996 and writes about home buying and mortgages to help clients make smart home mortgage loan decisions. Contact by email at Ken@KenStampe.com
What resource do SMART home buyers use?... Mortgage Calculator Bank.com