Blown Mortgage

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Dirty, Dirty A.Es.

Part of the problem that puts us where we are today is the way mortgages are sold. The process creates a ton of perverse incentives that cause an overall degrading of credit risk across the spectrum. Wholesalers bop into mortgage companies and talk about program highlights. They employ Account Executives (AEs) to communicate their messages. The AEs chat up how quickly they close loans, and what loans they are looking for. The originators are their customers. A good, knowledgeable rep is worth their weight in gold, because they know which exceptions their companies will and won’t take.

Originators generally have the choice of many different places to send their money. I myself use five total sources, but back in the subprime heyday, there were people in our office four and five times a day–minimum–trying to get us to send our clients to them.

Exceptions: The Rule in Lending

In a sea of sameness, these originators began to sell what exceptions–tough deals–their company took. First Franklin was the ’score driven’ lender, allowing people 12 hours out of their bankruptcy discharge to close loans. This “score driven” bias was a huge reason to send stuff to First Franklin because they could (in 2005) close loans when the borrower had thousands in money owed to bad credit card bills, judgments under 10k, and even Child Support. There were others.

The AEs began selling their “exceptions,” or “niches.” Things that they did that nobody else did. The now defunct Own It was notorious for doing high-loan-to-value loans for people that had no history of paying anything, ever. Do you see what happens?
Successful reps wanted to win, so they would get relationships with underwriters, and write to the LETTER of the guidelines negotiated with their securitizers. Crap loans–that were obviously crap loans–were not only accepted, they were sought after by reps and sales managers. “We’ll do that,” was the mantra of the highly aggressive, industrious and intelligent AE community.

Perverse Incentives

On more than ten occasions, I was told how to do a “phantom second” by a rep–essentially asking me to commit fraud against his own company. On more than five, it was put in writing. I was told to “throw away income docs,” and run it “stated”. And–from the perspective of the AE–they are paid to get acceptable loans. That’s their job, and the incentives were pretty perverse. If you were good at finding–and selling–the soft spots in your company, you get promoted to management, where you disseminate the information even faster. A partial verbatim niche sheet from a now (nearly) defunct lender (bonus points if you guess which lender in the comments).

• unlimited 90 day lates if no NOD filed.
• “Seller Seconds” fine with us (Note: quotes his, not mine)
• 1 DAY OUT OF FORECLOSURE W/620 IF BANKRUPTCY 1 YEAR OLD.

So–the incentive to put volume above all other concerns–including quality–meant that lenders were actually trolling for business that we all knew HAD to be worse than risky. That it remained acceptable for so long was mostly because of the “popular because it’s popular” Ponzi effect of the Real Estate Boom. Once the prices dropped and the valve to “sell or refinance” was removed, well, the mortgages were all Blown.

Chris Johnson is a mortgage lender in Westerville, OH specializing in closing purchase loans in ten days or less. He can be found many places on the web, including here.

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