User talk:RobSmith/Essay:Fannie Mae financing and the subprime market

This may take some time to complete, but hopefully should provide some interesting and informative reading. nobsWould you like anchovies on your sub-prime mortgage? 18:18, 13 February 2013 (UTC)
 * If anyone wishes to add or correct information on Fannie Mae Guidelines pre-1999 or pre-2008 crash, please feel free to edit. nobsWould you like anchovies on your sub-prime mortgage? 19:22, 14 February 2013 (UTC)

Rob, first I agree that ARMs were a terrible invention. They were used to conceal the true cost of credit in what amounted to a completely unregulated environment in which the National Bank Act preempted all state usury law for national banks and the Alternative Mortgage Transaction Parity Act - the parity was to put state chartered banks on a competitive level with national banks - gave the same level of preempt to state chartered banks. Second, I have a lot of experience with TILA. Disclosures are difficult in places, but they do provide meaningful information to consumers. Have a look at the the mortgage disclosure section in TILA itself and relevant parts of Reg Z, which is how the Federal Reserve Board implements TILA and the Cranston-Gonzales Amendment. This will be familiar to any homeowner as the source of the Truth in Lending Disclosure. I admit determining the APR, which is a purely a term of art and can have little meaning in the context of the kinds of ARMs unsophisticated people were getting, is difficult. . In any event, the contents of the disclosure aren't completely meaningless. As a practical matter, it's not terribly difficult to calculate payments under an adjustable rate note according to its adjustment and amortization schedule if you assume scheduled rate adjustments at the maximum amount permitted by the note. That's difficult to track out precisely but you can get a fair idea of how things will shake out because rates typically adjust yearly after the "teaser period" (6 months, 1/3/5/7 years) and the indices used to calculate rates have been trending (mostly down) relatively predictably. I'll get you an ARM calculator so you can plug in LIBOR, COFI, 10 year Treasury rates for typical ARMs and see what I'm talking about. But yeah, precise calculations are basically impossible. It's heartbreaking to see loans negatively amortize when the consumer no longer has any right of rescission for TILA disclosure violations on non-purchase-money loans. 19:30, 18 February 2013 (UTC)
 * Have a look at Ocwen, Fairbanks, and Aurora if you want to know what "bad" means. [[file:Nuttysig.svg|68px|link=User:Nutty Roux|Nutty Roux]]100x100 anarchy symbol.svg 19:37, 18 February 2013 (UTC)
 * Will do that. I raised this issue with some borrowers who appeared interested and aware enough. In the rush to refinance, we did it both ways: got people to convert fixed over to ARMs with the prospect of cheap rates tomorrow, and get people to convert ARMs over to fixed by scarring the hell out of them with future high rates. In the heyday of the refinance boom, neither Fed regulators, nor Fannie Mae, nor Congress ever in the slightest attempted to revise the mandatory TILA Form to include a simple asterisk saying, "Does not necessarily apply to an Adjustable Rate Mortgage cause rates may change." IOW, they didn't care, or more bluntly - give a rat's ass - about disclosure or truth in lending. They just wanted the job done quickly and were willing to cut any corners to do it.  nobsWould you like anchovies on your sub-prime mortgage? 21:11, 18 February 2013 (UTC)
 * Lenders were supposed to give consumers the Consumer Handbook on Adjustable Rate Mortgages, which does have that disclosure in addition to a lot of helpful info about ARMs. I don't think a single consumer I've helped in a decade ever read it. I probably read it 10 years ago. I have only anecdotal evidence closing agents failed to give it out - a friend who worked for Chicago Title says that in the early and mid 2000s the booklets came stacked in 40 pound boxes the lenders purchased from the OTS, OCC, GPO, or wherever and that they couldn't keep them in stock. Your article needs to mention yield spread premiums. Give me a call sometime and I'll explain how insidious a problem they were - mortgage companies essentially induced brokers to breach their limited fiduciary duties to consumers by selling them mortgages at rates higher (the spread) than they actually qualified for (the par rate) in exchange for a "discount" (seriously, "loan discount" is how it's described on line 801 of the HUD-1). And there wasn't a damn thing anyone could do about it after HUD undid the 11th Circuit's decision affirming class certification in Culpepper v. Irwin Mortgage, a case over the legality of YSPs. [[file:Nuttysig.svg|68px|link=User:Nutty Roux|Nutty Roux]]100x100 anarchy symbol.svg 02:48, 4 March 2013 (UTC)

I hope my HP 12c skills are still up to snuff after all these years. Check it out: 03:10, 4 March 2013 (UTC)
 * It's 2003 and a single mom has a 650 Fico and wants to refi her $300k house in Cruces.
 * Rates are shitty by today's standards but are actually historically low.
 * Say the par rate for a 30 year fixed is 7.5, but the broker wants to make $3,750 for doing about 2 hours of work.
 * At 7.5, payments would be ~$2,246 or ~$808,873 over the life of the loan.
 * The broker tells her the loan is "no points," which for some reason consumers seemed to think only cost what the disclosed closing costs were - but that's not so. The broker was taking a yield spread premium disclosed on the HUD-1 as a "loan discount."
 * He sells the loan at 8.75 - payments are ~$2,468 or ~$888,721 over the life of the loan. The consumer doesn't know any better because consumers never see wholesale rates - they only see advertised rates, which are packed with enough fees to be meaningless - their only purpose is to induce consumers to believe rates are maybe 1.5 points or more worse than they really are depending on the loan (A paper, B paper, etc.). This lady is C paper and she's lucky to get 8.75.
 * That means she will end up paying ~$79,848 so the broker can get $3,750.
 * If she had simply financed the $3,750 as a closing cost, it would have cost her ~$9,381.66, or ~$70,467 less over 360 months with her payments being only ~$26/mo vs. ~$222/mo with the YSP.
 * Putting that in perspective -> the $3,750 turned into nearly 10% of the entire cost of credit over 360 months.