Blown Mortgage

Do you know what type of loan you have?  Do you have a 2 year adjustable with a 2 year prepayment penalty?  If so, welcome to the club.  The 2/28 (as it’s called in the industry) is the loan originator’s best friend.  It’s like an annuity or renewable auto insurance policy - every 2 years you’re up again.  Every two years (or sooner) someone is getting a nice commission check.

The scary thing is that there are many prime borrowers that ended up with subprime loans.  Loans just like the 2/28 2-year prepayment flavor.  I have talked to many people over the last few weeks with 700+ FICO scores with fully documented incomes who are in these 2/28 subprime loans.

Freddie Mac, a government-sponsored mortgage-loan buyer, estimated that
borrowers of 15 to 35 percent of all subprime loans it bought in 2005
could have qualified for prime-rate loans.

Fannie Mae, another
government-sponsored loan buyer, estimated up to 50 percent of the
borrowers, whose subprimes it bought that year, had credit profiles
that could have qualified them for prime rates.

Why are all of these prime people in subprime loans?  Because subprime loans pay mortgage originators more money of course!  There are so many stories out there of originators lying to people about their credit scores, of telling them that they only qualify for a 2 year program, the list goes on and on.  I get sick just thinking about it.

Calculated Risk picked up a piece from CNN Money which talks about this phenomenon.  Of course, the consumer is blamed for their plight.  But I ask, how can a consumer make an informed decision when they are being lied to?  How can they make an informed decision when the people they are talking to don’t tell them they qualify for a prime loan?  How can they ask for a prime loan when the four banks that talk to them only offer them 2/28s?

In my opinion this is one of the biggest wrongs the industry could have perpetuated.  Locking people with great credit in to terrible loans for the extra 50 bps in commission.  Worse it was done by obscuring the more beneficial options - which is just plain wrong.

Check the story here and CR’s response.  It can’t be the consumer’s fault when they aren’t told the full story.

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In this post from LA Biz Observed Markl Lacter highlights a recent Bloomberg story of a Secured Funding employee and their scams to cash-in on borrowers in extremely tight spots looking for cash.  I wrote about the downfall of Secured Funding in an earlier post and have heard all of what Taher Afghani claims from numerous other ex-employees about the work environment of Secured Funding.

Afghani says sales pitches typically focused on what a
borrower could do with all of that money rather than on fees
buried in paperwork or annual interest rates as high as 10.5 percent
at the time, at least 2 percentage points more than the rates that
banks charge people with good credit.         

      

“Even with explanations, most borrowers didn’t really
understand what types of loans they were getting,” says Maureen
McCormack, another former Secured Funding employee. “They just cared
about the monthly payment.”

Secured Funding was notorious in the industry for being a completely sleazy operation.  In fact it was our unwritten rule (and many other shops as well) that seeing Secured Funding on a resume was a red flag for any originator or processor looking for a job.

From Marc Lacter’s piece:

Afghani describes chaotic office scenes that recall "Boiler Room,” a
2000 movie about stock brokers at a Long Island wire house. To spur
sales, Secured Funding broke its salesmen into color-coded teams. "If
you weren’t turning those calls into applications, they would drag you
out and make your life miserable,” he says. "The turnover was
unbelievable,” says Afghani, who says he watched eight people pass
through the neighboring desk in seven months. “If you didn’t cut it
right off the bat, you were just fired.” Dane Marin, who worked at
Secured Funding for a year, says managers harangued everyone. “If you
weren’t on the phone very long, you’d get an e-mail saying, `Get your
head out of your ass,”’ he says.

Some of my favorite Secured Funding moments:

• Being told that the minimum fees on any one loan was 10 points.  The family discount was 6 points.
• That TI’s (transaction initiators/telemarketers) abused one man’s social security number to run credit more than 500 times to make their $20 bonus for running credit on customers.
• Loan agents were directed to not answer phones on signing days and made it a policy to not take inbound borrower phone calls.
• Loan agents regularly engaged in shady practices and sometimes outright loan fraud.

I have been told all of these things by numerous former employees, but it could just be rumor. I don’t have anything to substantiate their claims.  But the deafening chorus leads me to believe that there is some truth to the claims.

I do have to disagree with Mark on the way he lumped Secured Funding in with brokers brokering deals to companies like New Century and Fremont.  Secured was a direct lender and did most of their own loans via a huge retail operation.  They had a wholesale division as well - but their massive direct mail campaigns fueled a large portion of their business via their own in-house agents.

Secured also did primarily high-interest rate second mortgages.  Most brokers who worked with New Century and Fremont were not direct lenders (although some were).  I think that when bashing the industry it’s important that we group like with like before we bash.

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