Thanks for the compliments. I am glad that you find this blog enjoyable and useful. That is the best compliment that I can receive. Thank you.

As for JL, while he does come off a little strong he does have some important points. The primary thing that I think he illuminates is that it is important for the press, and those covering the issue to stay away from he said – she said type arguments which is valid.

I try not to sensationalize, but I do feel very strongly that a lot of bad things went on in our industry and so I talk with passion. I don’t feel that is sensationalizing I think it is more just my anger shining through at the thought of what some in our industry did to people.

I hope you continue to find useful and enjoyable information here.

Regards,
Morgan

I have been reading your posts lately and can say you offer a refreshing and unique approach to the subject matter you cover.

Your points are well thought out and it’s obvious you have both the knowledge and experience to back up your statements. This was readily demonstrated in how you answered the comments by the other poster, who seemed to have an agenda to discredit you, but fell short of reaching his mark.

In any event, I commend you for the job you are doing. Keep up the good work.

Jim Gilly

When Fannie and Freddie come out with numbers ranging from 15% – 50% of possible loans that could have qualified for prime go subprime I am not the one making up the sensational numbers.

And I don’t think that saying if you have great credit and ended up in a subprime mortgage you probably got screwed is sensational.

Just because an industry shill says they have seen “no scientific evidence” doesn’t mean that the numbers are wrong either. I am going to finish with a quote from yet another blogger (that’s three of us now) at Calculated Risk (both HousingWire and Calculated Risk are well respected blogs from people with a decades of experience in the industry) who says (and you can read her full post here: http://tinyurl.com/2vbmvy

“Welcome to the wonderful world of mortgage industry logic, as mediated by the press. Duncan sees no “scientific” evidence here, even though he is being confronted with estimates that are derived from much more than a simple credit score. Nabors seems to think that Fannie and Freddie use automated underwriting systems that don’t capture DTI or appraised values. The GSE systems, of course, don’t simply “capture” appraised values; they have internal AVMs that subject those reported numbers to a plausibility check. Nor do they “look at” FICOs. They do “capture” FICOs in the dataset. But what they “look at” is the entire contents of at least one and usually three full credit reports (from each of the three major repositories). Plus about a thousand other data elements.

But if you’re an underinformed sucker, you can read these statements by Duncan and Nabors–which are blaming you for not knowing enough–and think that the claims being made by Guaranteed Rate, Fannie, and Freddie are based solely on looking at FICO scores. If you’re a reporter or editor who uses “ration” instead of “ratio” and “appraisal value” instead of “appraised value,” it is possible you haven’t had enough exposure to the industry and its lingo to know when smoke is being blown in your direction. And if I say you have no one to blame but yourself for printing nonsense from an industry shill, you better not start trying to explain to me why people who read CNNMoney are at fault if they don’t know more about their mortgage eligibility than their lender appears to.”

Thanks for taking the time to share your thoughts JL.

Borrowers signing loan docs with a PPP sign a PPP rider that says in large font that they are getting a loan with a PPP. If they are getting 5.5% when prime rates are also 5.5% this isn’t quite the “scary thought” you alluded to in the original post.

You’re sensationalizing a story that doesn’t warrant it. First, that story referenced borrowers being charged 5 points on their loans, not exactly getting the same loan as a prime borrower. Second, the story itself quotes the Chief Economist for the MBA Doug Duncan who “doubted that very many prime customers do get put into subprime products.”

“I have yet to see any scientific evidence that that is true,” he said. “If you only see credit scores, that doesn’t capture the whole story.”

As far as HousingWire chiming in, two bloggers saying something doesn’t make it true.

Again, I appreciate the purpose of your blog and support the idea of more informed consumers who are less likely to fall prey to the vultures among us but the facts speak for themselves, no twisting needed.

PJ over at Housing Wire chimes in on this saying “the incentive was certainly there” and there it was. The incentive was more money for originators. You can read his post here:
http://tinyurl.com/2ozzu6

Thanks for sharing your thoughts. From my experience as the secondary markets manager of my company I am going to strongly disagree with this statement:

“You state that “subprime loans pay mortgage originators more money of course!” This is patently untrue and indicates a lack of understanding of secondary markets.”

Each bank determines how much a loan with a certain note rate is worth to them. Each bank sets its own par rate. Subprime banks in an effort to jam as much business as possible through the doors offered much better pricing when buying the loans than did the prime banks. So a loan with the same note rate a subprime bank such as New Century and Fremont would pay you more as a correspondent lender than selling that loan to a prime bank. Regardless if they were selling the same note for the same par price on wall street they choose what operating margin they wanted to make and what they choose to pass on to originators.

New Century, Fremont and Encore offered incentives that prime banks wouldn’t touch – such as offering a full point for each loan sold to them regardless of if it was priced at par on their rate sheet. They also offered correspondent lenders volume incentives including an extra point on volume over $2 million each month, etc. These incentives add up to lots and lots of money.

This caused correspondent lenders to jam loans through New Century, Fremont and Encore to pick up the extra point in incentive for the exact same loan that would be sold with no spread at a prime bank. If they had to sell a pre-payment penalty to get the same rate they sold the pre-pay for the rip.

I personally know of companies that took prime borrowers and put them in New Century loans to hit that incentive. Loans that at the same note rate would be paid at par at a prime bank were paying 101 or more at subprime banks.

They also used tactics such as obscuring credit scores and only offering options with prepayment penalties to maximize their earn. It’s not my opinion, it’s a fact that activities like that were common in mortgage shops.

This quote of yours is wrong: “An experienced originator who can package a loan to be approved on a prime program but sell the subprime rate would make far more money by doing so than they would by placing the qualified borrower in a subprime loan.”

Subprime rates were so close to prime rates that with the incentives the money made sending it subprime was far superior to sending it to a prime bank. Subprime mortgage rates were offered with incentives and large discounts to originators to push borrowers in to a subprime loan. Let’s take a loan in 2005 that would qualify for a 5.5% 30 year fixed rate. Take a loan that On the prime side selling at par or maybe par +.25 and that same loan add a prepayment penalty and that loan now yielded significant YSP. Imagining a loan officer convincing someone to take that a prepayment penalty to make YSP and ignore the prime bank offer is not a scenario that is hard to fathom.

Your point about putting them in a subprime loan because they couldn’t structure it is accurate. It is a whole lot easier to send a loan through subprime than put it together to be purchased by a prime lender. I agree that part of the problem was with lazy or uneducated loan officers taking that approach.

In regards to speaking to 4 lenders who are all pitching subprime rates here is where that example comes from. If you have 700 FICO scores but fill out a LendingTree or LowerMyBills inquiry to refinance and you rate your personal credit as fair (because you either don’t know what 700 means or you don’t know your score is 700) your information will be sent to 4 subprime mortgage companies. You will most likely only get subprime mortgage offers. If you don’t take the time to go out and you wrongly assume that if 4 lenders are offering you similar programs than that must be what you qualify for you will assume that is the best you can do.

If I’m shopping for a TV and go to Best Buy, Circuit City and Target and the prices are all the same then I am going to assume that is the best price I can get on that product. I might not feel the need to go out to the web to check TV prices at another 10 places. No matter how many Howards billboards I drive by.

Let me say that on this point: “If you have a 700 credit score and sign docs on a subprime loan, you need to accept the majority of the blame. Yes, you were taken advantage of but you live in an economy where better options are crammed down your throat and you still accepted an inferior option.”

I agree with you to an extent. Borrowers need to take responsibility for their actions and personal decisions. However, just because you have a 700 FICO score doesn’t make you a mortgage genius. I have spoken with doctors, presidents of universities, lawyers, judges, and even a rocket scientist who haven’t the foggiest of how the whole mortgage process and market works. These people are bright, have exceptional credit and still are confused. It doesn’t bode well for the rest of us.

As for pandering to the woe is me crowd, I don’t think you can honestly say that I do that. I call home owners out on the mat all the time here. People who used their homes as ATM’s, recklessly refinanced and pulled cash out for short term gains and to finance a lifestyle that could not be sustained deserve to pay for their irresponsibility.

That being said there are egregious acts that were committed by mortgage brokers and lenders in the name of commissions and just becuase there is already a lot of coverage doesn’t mean that the end is near. There is a lot that needs to come out still.

You state that “subprime loans pay mortgage originators more money of course!” This is patently untrue and indicates a lack of understanding of secondary markets. A loan in and of itself does not pay more than any other. Every loan has a “par” rate which requires no cost and pays no premium. A prime loan has a lower par rate than a subprime loan. So if we compare note rate to note rate, the prime loan will pay more. An experienced originator who can package a loan to be approved on a prime program but sell the subprime rate would make far more money by doing so than they would by placing the qualified borrower in a subprime loan.

Which now begs the question, “If they don’t do it for money, then why do LO’s put prime borrowers in subprime loans?” And the answer is lack of knowledge and experience. The subprime programs allow you to put together a POS file and still get an approval. If POS files are all you can create, you send them to subprime lenders that are happy to oblige your ignorance.

Does this make it OK. Absolutely not. Screwing a borrower isn’t any better if you do it out of ignorance instead of greed.

Which leads to your next gross overstatement, “How can they ask for a prime loan when the four banks that talk to them only offer them 2/28s?” The question is a straw man. You set up an argument that you can’t lose with a false premise. The unstated premise being that 4 out of 4 lenders would quote subprime terms to prime borrowers, thus duping them into believing that a subprime loan is the only one they qualify for. Let’s be aggressive and say that 50% of originators only know how to do subprime loans so that is all they quote. If a borrower were wise enough to call 4 lenders when they are getting misled they would only have a 6% chance of having all 4 quote them subprime terms. Get more realistic and say that 25% quote only subprime terms and the number drops to .4%. This doesn’t happen in the real world and you are doing your readers a disservice to imply that it does.

Try to remember that you live in a world where DiTech, Greenlight, Countrywide, etc. run an ad during nearly every commercial break stating their current low fixed rates. If you don’t watch TV, that’s OK they plaster it on billboards, blast it over the radio waves, mail it to your house and put it in the newspapers.

If you have a 700 credit score and sign docs on a subprime loan, you need to accept the majority of the blame. Yes, you were taken advantage of but you live in an economy where better options are crammed down your throat and you still accepted an inferior option.

Please stop pandering to the woe is me, we’ve all been abused by the mortgage industry crowd. There is enough justified outrage that we don’t need gross exaggerations and mischaracterizations clouding the issues.