How did we get here and where do we go?
During my real estate career I’ve come across more than a few predatory lenders — lenders who do not, as a rule, serve the buyer’s best interests. Unlike reputable mortgage brokers and banks, they are willing to subordinate the buyer’s interests to their own, and that almost inevitably causes trouble.
A subset of the predatory lender is the inexperienced loan officer who, due to lack of experience, education, or oversight, hasn’t a clue that what he’s doing is not quite right.
I’ve had cases where the loan officer continued to assure everyone involved — the buyer, the agent for the buyer, and the agent for the seller — that “this is definitely going to close,” even up to the morning of closing, only to have it turn out that his underwriting department didn’t share his opinion.
I don’t know if you ever saw “Glengarry Glen Ross,” but its grim lesson is the state of denial that a desperate salesman may get himself into, even without malicious motives. And the one who pays will be the buyer.
And eventually, as we learned over the past couple of weeks, the American taxpayer.
“I can get you into a house with absolutely no money down!” cannot ever be true, yet how many hopeful buyers have succumbed to the lure? The fact is that every buyer will need to have at least $500 – 1,000 cash on hand to cover the costs of earnest money to be deposited, a home inspection, and an appraisal — all of these amounts are generally “pay-as-you-go.”
The risk of purchasing with "no money down" is that you’ll end up owing more on the house at closing than you could sell it for. Particularly if all your closing costs are rolled into the mortgage, it would be virtually impossible to turn around the day after closing and recover your investment; the costs of sale will come back to bite you.
Then there are lenders who make it possible for you to afford the monthly payments on the dream house you didn’t think you could afford by offering you an adjustable rate mortgage. They don’t make a big deal out of the fact that “adjustable” almost always means “upwards,” of course, but if you do ask about that they are likely to reassure you that “the way houses are appreciating, you’ll be able to refinance before your interest rate goes up.”
And here lately we’ve learned what happened to THAT option.
There have even been loan officers who falsified income information (without the buyer’s knowledge) in order to get the loan approved by higher-ups. But it gets worse:
In one case, the lender manipulated the transaction to the point where the poor buyer ended up with a mortgage on the property that well exceeded its value. The usual checks and balances didn’t exist because the buyer’s agent, the lender and the appraiser all worked for the same company; in addition, that company styled itself a “charitable” organization that collected a “non-taxable donation” of several thousand dollars from the seller and transferred a portion of it as a “gift” from seller to buyer. And added it to the mortgage, of course, while giving the seller a charitable donation receipt for funds he never paid.
As it turned out, just over a year later that buyer lost the home to foreclosure.
But before that happened there’s no doubt that, quick as a wink, that lender sold the note. A mortgage note has value, after all, as an income producer. And whoever bought it — a bank or investment company — almost certainly sold it to someone else. By the time the buyer defaulted, who knows where it had landed? But one thing for sure, it could no longer be sold. And that made one less pool of money available for the investor to use to buy more mortgages.
As more and more “subprime” mortgages went into foreclosure, the inventories of more and more investors became unmarketable, and the investors had less and less money to invest. The amount of money available for loans of any kind dwindled and the economy slowed to a crawl.
At the same time, more and more foreclosures began to force down the market values of homes around them as well as increasing the time it took to sell any home.
So now we end up with Wall Street investment companies being sold, going bankrupt or having to be bailed out, and with our nation in a precarious situation not unlike that which brought on the Great Depression. Last week, the Bush Administration proposed to buy up those bad mortgage notes in order that the investors can get a fresh start and maybe perk up the economy as a result.
The Administration, fearing considerable worsening of the situation, has urged Congress to take immediate action and vote this week to provide the $700 billion that it believes will be needed just to begin the bailout. It is proposed that Henry Paulson, the Secretary of the Treasury, be given absolute discretion in using the funds — what to buy, how much to pay, and so forth. And doesn’t want legislation held up by too much debate.
Gives me a queasy, been-there, feeling.
I believe that there are just a few tweaks needed in the proposed legislation.
As it stands, the investors would get rid of their losers, while the American taxpayer would acquire them. I say there should be something there for the taxpayers, who being asked to take on the risk.
Some decent additions to the legislation that have been proposed include forbidding the beneficiaries of bailout to give multimillion-dollar “golden parachutes” to the CEO’s that are responsible, a restriction that was imposed in the case of Fannie Mae and Freddie Mac.
There is legislation that was proposed back in the spring, that would empower bankruptcy judges to rewrite the terms of a mortgage with the goal of keeping the homeowner in the home. This should be included because it makes sense and because foreclosures have a negative effect on the community. And to the extent that the lender took advantage of a buyer, or should have known better than to lend to someone who was obviously not qualified, it’s justice.
I wrote to Elizabeth Warren, a nationally recognized authority in bankruptcy at Harvard Law, because I wanted to be sure I have this right. Here’s what she replied:
It has also been proposed that a new stimulus tax credit be given the vast majority of Americans, the poor and the middle-class, to help them get over the hump that has resulted from all this.
And finally, for now, it is imperative that regulations be put in place over the lending industry to make sure this never happens again.
Put all this together, which can be done immediately, and it just makes sense.
Originally published September 22, 2008
A subset of the predatory lender is the inexperienced loan officer who, due to lack of experience, education, or oversight, hasn’t a clue that what he’s doing is not quite right.
I’ve had cases where the loan officer continued to assure everyone involved — the buyer, the agent for the buyer, and the agent for the seller — that “this is definitely going to close,” even up to the morning of closing, only to have it turn out that his underwriting department didn’t share his opinion.
I don’t know if you ever saw “Glengarry Glen Ross,” but its grim lesson is the state of denial that a desperate salesman may get himself into, even without malicious motives. And the one who pays will be the buyer.
And eventually, as we learned over the past couple of weeks, the American taxpayer.
“I can get you into a house with absolutely no money down!” cannot ever be true, yet how many hopeful buyers have succumbed to the lure? The fact is that every buyer will need to have at least $500 – 1,000 cash on hand to cover the costs of earnest money to be deposited, a home inspection, and an appraisal — all of these amounts are generally “pay-as-you-go.”
The risk of purchasing with "no money down" is that you’ll end up owing more on the house at closing than you could sell it for. Particularly if all your closing costs are rolled into the mortgage, it would be virtually impossible to turn around the day after closing and recover your investment; the costs of sale will come back to bite you.
Then there are lenders who make it possible for you to afford the monthly payments on the dream house you didn’t think you could afford by offering you an adjustable rate mortgage. They don’t make a big deal out of the fact that “adjustable” almost always means “upwards,” of course, but if you do ask about that they are likely to reassure you that “the way houses are appreciating, you’ll be able to refinance before your interest rate goes up.”
And here lately we’ve learned what happened to THAT option.
There have even been loan officers who falsified income information (without the buyer’s knowledge) in order to get the loan approved by higher-ups. But it gets worse:
In one case, the lender manipulated the transaction to the point where the poor buyer ended up with a mortgage on the property that well exceeded its value. The usual checks and balances didn’t exist because the buyer’s agent, the lender and the appraiser all worked for the same company; in addition, that company styled itself a “charitable” organization that collected a “non-taxable donation” of several thousand dollars from the seller and transferred a portion of it as a “gift” from seller to buyer. And added it to the mortgage, of course, while giving the seller a charitable donation receipt for funds he never paid.
As it turned out, just over a year later that buyer lost the home to foreclosure.
But before that happened there’s no doubt that, quick as a wink, that lender sold the note. A mortgage note has value, after all, as an income producer. And whoever bought it — a bank or investment company — almost certainly sold it to someone else. By the time the buyer defaulted, who knows where it had landed? But one thing for sure, it could no longer be sold. And that made one less pool of money available for the investor to use to buy more mortgages.
As more and more “subprime” mortgages went into foreclosure, the inventories of more and more investors became unmarketable, and the investors had less and less money to invest. The amount of money available for loans of any kind dwindled and the economy slowed to a crawl.
At the same time, more and more foreclosures began to force down the market values of homes around them as well as increasing the time it took to sell any home.
So now we end up with Wall Street investment companies being sold, going bankrupt or having to be bailed out, and with our nation in a precarious situation not unlike that which brought on the Great Depression. Last week, the Bush Administration proposed to buy up those bad mortgage notes in order that the investors can get a fresh start and maybe perk up the economy as a result.
The Administration, fearing considerable worsening of the situation, has urged Congress to take immediate action and vote this week to provide the $700 billion that it believes will be needed just to begin the bailout. It is proposed that Henry Paulson, the Secretary of the Treasury, be given absolute discretion in using the funds — what to buy, how much to pay, and so forth. And doesn’t want legislation held up by too much debate.
Gives me a queasy, been-there, feeling.
I believe that there are just a few tweaks needed in the proposed legislation.
As it stands, the investors would get rid of their losers, while the American taxpayer would acquire them. I say there should be something there for the taxpayers, who being asked to take on the risk.
Some decent additions to the legislation that have been proposed include forbidding the beneficiaries of bailout to give multimillion-dollar “golden parachutes” to the CEO’s that are responsible, a restriction that was imposed in the case of Fannie Mae and Freddie Mac.
There is legislation that was proposed back in the spring, that would empower bankruptcy judges to rewrite the terms of a mortgage with the goal of keeping the homeowner in the home. This should be included because it makes sense and because foreclosures have a negative effect on the community. And to the extent that the lender took advantage of a buyer, or should have known better than to lend to someone who was obviously not qualified, it’s justice.
I wrote to Elizabeth Warren, a nationally recognized authority in bankruptcy at Harvard Law, because I wanted to be sure I have this right. Here’s what she replied:
Congress should amend the ill-advised bankruptcy statute enacted just a few years ago to permit neutral bankruptcy judges to adjust mortgages, principal and interest to keep people in their homes and to keep payments flowing on mortgages.
If a homeowner can afford a long-term, fixed rate mortgage that will pay off 100% of the current market value of the home, then everyone is better off … and the family stays in the home. If the family can't afford that, then it is time to give up the house and move on.
Either way, we can reach a bottom on the housing market, force the investors to take their losses, and move forward.
This plan won't cost the taxpayers a single dollar. And it will force the lenders to come to the table to negotiate over the value of these mortgages instead of waiting for another government bailout.
It has also been proposed that a new stimulus tax credit be given the vast majority of Americans, the poor and the middle-class, to help them get over the hump that has resulted from all this.
And finally, for now, it is imperative that regulations be put in place over the lending industry to make sure this never happens again.
Put all this together, which can be done immediately, and it just makes sense.
Originally published September 22, 2008
Labels: bailout, bankruptcy, crisis, economy, mortgage, Paulson, subprime
posted by The Voice | 4:49 PM
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