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

Having worked in the mortgage financing sector in the mid to late 1990s, some of the stories and anecdotes below are based on first hand experience witnessing problems, abuses, and potential abuses that later griped the U.S. mortgage market and contributed to the global financial meltdown. I got out of the business in 1999 after seeing a 19 year old single mother and high school drop out, with limited work experince (at minimum wage, of course) qualify for government-backed AAA credit, Fannie Mae financing. It wasn't much of a shock when the shit finally hit the fan. The global impact, and the fact Ivy League business schools taught this crap - how to bilk the U.S. government because everybody expected craddle to grave protection - was somewhat of a surprise.

Subprime lenders & manufactured housing
In 1968 the single family home was already an endangered species, and the American Dream - a home of your own - was more and more out of the reach of American homebuyers. By 1971, the Nixon administration recommended that Americans should do, as a practical solution to the housing shortage, what some already had done to keep costs affordable - take the wheels off a camping trailer and convert it into a permanent residence. Thus was born modern American trailer trash culture.

Fannie Mae guidelines require a home, in order to qualify for real estate financing, be fixed to a permanent foundation. For a trailer home to qualify it must be attached with rebar to a concrete slab. No problem. Jack it up, pour concrete, dry, crawl under, attach rebar. Done for about $2000 in the mid 90s. Without it, all a "homeowner" possesses is land & chattel, not real property. Once it's assessed as real property by the local assessor, complete with water meter and electrical hookup (conforming to gudelines), it qualifies for real estate financing. The difference in appraisal value can be astounding, compared to its value as land and chattal. A $4000 lot with a $5000 trailer could be appraised as a $25,000 home.

Texcorp
Texcorp, a Texas based subprime hedge fund, got into it in a big way and was willing to fund all sorts of crap nobody else wanted to go near. Singlewides, doublewides, no problem. Typical appraisal problems only related to what percentage the land was worth versus the value of the building and how it fit into the overall value of the loan.

Well at some point Texcorp (and other subprime lenders) had to stop funding real estate loans on trailer homes. Still not a problem. Manufactured homes (also known as modular homes), that is, a home constructed at another location and hauled in, still qualified. Hence appraisers and brokers no longer did loans on trailers, but manufactured housing was booming. And the bigger the better. A typical modern doublewide manufactured home is worth about $50,000 plus the value of land. A doublewide trailer home with aluminum siding (to hide the fact they were trailers) was ideal.

Needless to say, Texcorp was bought out.

New Century Mortgage
New Century Mortgage's marketing was more aggressive than most B lenders. Rather than wait for the phone to ring, a loan rep visited brokerage offices almost daily to look over your shoulder at the latest application so as to get a jump on other lenders, before a broker started shopping a loan.... Where do I begin telling anecdotes about encounters with these company reps, discussing how to circumvent particular problems, and dress up a loan? ..... Refs Housing advocacy groups were also leaders in the fight against subprime lending in low- and moderate-income communities, "In fact, community advocates had been telling the Federal Reserve about the dangers of subprime lending since the 1990s", according to Inner City Press. "For example, Bronx-based Fair Finance Watch commented to the Federal Reserve about the practices of now-defunct non-bank subprime lender New Century, when U.S. Bancorp bought warrants for 24% of New Century's stock. The Fed, rather than take any action on New Century, merely waited until U.S. Bancorp sold off some of the warrants, and then said the issue was moot." However, subprime loans were so profitable, that they were aggressively marketed in low-and moderate-income communities, even over the objections and warnings of housing advocacy groups like ACORN.
 * Transcript of Public Hearing held on January 14, 2004 Regarding Bank of America Corporation, and FleetBoston Financial Corporation at the Federal Reserve Bank of Boston.
 * Federal Register|Consumer Advisory Council; Solicitation of Nominations for Membership, A Notice by the Federal Reserve System on 06/20/2007.

No Doc, Low Doc, and Stated income loans
A stated income loan typically is for business owners who have trouble qualfying for mortgages using personal income tax returns because they are in a cash business and underreporting income. Underwriting guidelines understand that some business people are tax cheats. Thus the "Stated income" loan was born.

Rather than tax records, loan underwriters are willing to use bank deposits (at one time in the 1980s, accounting ledgers were sufficient for business owners with no bank account) as "proof of income". These gross totals don't show operating expenses or net personal income. Hell, underwriters don't even require a financial statement on the condition of the business. Or even if, whatever income the lender imagined the business operator netted, is divided with a partner. A prospective borrower's income is not proven, or verified, it is stated.

Golden National Banking
One particular subprime lender with all sorts of interesting low doc programs was Golden National Banking of upstate New York. Golden National sought to expand across state lines (as a result of deregulation one could say) and establish relations with brokers in a competetive environment. The phone rang, the underwriter was reviewing an appraisal with the "Type of Home" box marked "Adobe". The underwriter said, "Ain't no way a mud hut is worth $150,000." I had to explain, "In New Mexico, virtually all homes are adobe-style homes. Even Oprah Winfrey owns an adobe home in New Mexico." After three days, Golden National issued a blast-fax nationwide soliciting business from brokers with an advertment, "We Now do Adobe Homes!"

Seasoned funds vs non-seasoned funds
In the absense of meeting guidelines, lenders allow for "compensating factors" (limit:two) or reasonable explanations why a particular, otherwise qualified buyer, cannot conform to guidelines. One compensating factor is 6 months PITI (6 months Principal, Interest, Taxes and Insurance, in plain English, 6 months monthly payment in the bank). "Seasoned funds" means you would have to show monthly bankstatements over an extended period of time. Golden National offered a Low Doc program (probably because of their competitive environment) allowing for "No seasoning", meaning all they wanted to verify was the borrowers current bank balance. A broker friend told me what he did (brokers confer with each other regularly how to solve problems) to make a loan work (and a Stated income loan, at that).

The broker drove out to the house, wrote the borrower a check for $5000, had the borrower write a post-dated check back for 5 days later, told him to deposit it tomorrow; the underwriters verified the un-seasoned funds two later later, the loan was approved, and the broker refunded himself his money by deposting the post dated check. Was this illegal? Probably not, per guidelines.

Countrywide
Jezuz. Wikipedia makes this claim about Countrywide: In 2006 Countrywide financed 20% of all mortgages in the United States, at a value of about 3.5% of United States GDP

A seminar on subprime lending
I attended a weeklong seminar hosted by Countrywide which included an entire day on Countrywide's subprime lending. A husband and wife team led the seminar, he did four days on Prime lending and Fannie Mae guidelines, and she headed up Countywide's subprime unit. They knew their stuff, so much so they recommended against attempting to get financing for homes in Mexico (which they purchased for themselves and must've paid cash) cause getting a clear title, appraisals with multiple code violations but no local law to enforce laws that don't exist anyways, no sewer, water, or electrical hookups, difficulties in foreclosure and repossession, etc. etc. BUttt, if you had a client with cash who was serious, they would be willing to talk personally....

First day of the Subprime presentation -- the first ten minutes, Mrs. Subprime Underwriter hands out pages torn from a child's coloring book and a box of crayons. She instructs us all to take a few minutes and color the picture. Quiet. Just like First Grade coloring class. When we're all done, everyone hold up their drawing. Beautiful. Perfect. Well defined, etc., only everyone fails. She holds up the correct answer: the lines in the child's coloring book are Fannie Mae Guidelines. The drawing is all to be done outside the lines, not within.

Subprime borrowers have a history of late payments, collections, defaults, charge offs, forfeitures, bankruptcy, credit counselling, and consolidation loans. Subprime borrowers usually need an incentive to be told that if they make good on the opportunity offerred, they can improve their credit score and qualify for cheaper rates later. The loan originator has to be a debt counseler and maybe offer consolidation to help lower their monthly debt service to fit Fannie Mae debt-to-income ratios (28/38, meaning 28% housing payment & 38% total debt service; whether it's monthly take home or gross income, depends). Converting a car loan to mortgage debt, and spreading the payments on 2 year old car over 30 years seems like a workable solution, but is it wise? The loan originator's willingness to work with deadbeats, liars, thieves, and dumbfucks can be lucrative, but generally speaking, they don't understand a fucking word you say, tell you what they think you wanna hear, can't give a straight answer, and live pretty fucked up lives. That's why they're subprime.

They're also poor decision makers. They can't recognize a good opportunity when it's offered, and usually choose to do things counterproductive to their own bests interests. They are incapable of determining how much of a loan payment they can handle. Sometimes - many times - the lowest payment you can work out is $600; you ask them, knowing full well given the facts and circumstances, no way can they handle it over the term of the loan. That should kill the deal, and you get paid nothing for your time and labor. But they still qualify, and the $4500 commission you make is dependent on them closing.

A survey of deadbeat subprime borrowers shows they all think they're only experiencing temporary difficulties, and their credit will improve in the future. But this never happens. This basically was Countrywide's daylong presentation on the subprime lending.

I did more business with Countrywide daily, both it's Prime unit and subprime, or B and C lending unit, than any other underwriter, save Headlands Mortgage. Headlands got bought out by Greentree, mainly cause of the crappy loans they approved, well before Fannie Mae ever loosened the underwriting guidelines.

...in house loan processing...a prize steer as earnest money...

Long Beach Mortgage
These guys were a genuine piece of work. Court filings read,

It's these type of loan programs that give veracity to statements like this, only it is a question of scale. The above programs were in place for about a year between 2005 and 2006, about the same time Fannie Mae was exposed and became embroiled in scandals for lowering its standards and revising its guidelines in 1999. This should have been a "heads up" about the type of crap Fannie Mae was buying; too bad it took 7 years to uncover. In the case of Long Beach however, there's no way the number of loans they wrote between 2005 and 2006 could have sparked a global financial meltdown.

The guy who taught me the mortgage business at one time lived in Long Beach, and had a long association with Long Beach Mortgage probably since its beginning. I never did any business with Long Beach but read their rate sheet daily. When I had a problem loan, his advice usually was "submit it to Long Beach". The joke among brokers was they never rejected anything. In the course of several years I submitted maybe two loans to Long Beach (by fax, it wasn't worth paying the postage) and probably received conditional approvals. But I never acted on the conditional approvals cause I just couldn't in good conscience comply. Something had to be wrong.

Fannie Mae
A New Deal deal.

Form 1003
Fair housing laws and the Community Reinvestment Act.

Automated underwriting
The glories of modern technology and not having to deal with humans.

Truth in Lending Disclosure for an Adjustable Rate Mortgage
How do you determine the real cost of a loan on a yet-to-be-determined interest rate? yet the law requires disclosure in the interests of "consumer protection". This is another one of, that white-knight of consumer protection, wp:Paul Sarbanes, brilliant ideas.

Only answer me this, Sen. Sarbanes: were you that much of an ignorant dumb-fuck, siting in the United States Senate knowing your prime piece of consumer protection legislation was gutted by the Adjustable Rate Mortgage? and consumers, having put their faith in you and the government, were legally being misled when the loan originator, by law, had to stick a "Truth in Lending Disclosure Statement" in their hand? Since it is impossible to disclose the future rate and cost on an ARM, the disclosure statement for a 30 year fixed rate had to be used, when they knowingly were purchasing a 2/28 Adjustable Rate. Fuck. the only reason the 2/28 Adjustable was invented (rather than a straight 30 yr ARM) was to circumvent your claim to fame. Where the fuck were you when YOU KNEW consumers were being deceived and misled, wholesale?

Personal anecdotes

 * A 30 year mortgage for a 68 year old retired couple who lost all their retirement savings with the explosion of casino gaming in the United states. The home previously had been owned outright for nearly two decades. The couple were retired from their sucessful insurance agency, but continued maintaining an office and a small payroll while they recieved residual income from clients.

Here's at least two obvious questions about religion, ethics, personal responsibility, and the role of government. All forms of gambling were illegal in most states until about the mid 1980s, under Reagan & the Religious Right, when governments realized gambling was a source of revenue (which they needed because of Reagan's tax cuts) and a redress of grievance for Native Americans getting fucked over. And what was once the purvue of the mafia, the numbers racket, now became the source of education and scholarship funds. Everybody knows you can't beat the House, and in the long run if you patronize these gambling establishments, they are going to get it all. Hence, in the Reagan era, these restrictive laws put in place by religious fanatics of an earlier era to save people from themselves were deregulated (in most all states, save Tennessee). Educated, successful people, knowing the risks and background history, still gambled away everything they worked for their entire lives (probably because they were bored in the evenings and went to the casino rather than a church function). Now, should Fannie Mae be used to bailout irresponsible mortgage borrowers, people who know better, admit their own stupidity and wrecklessness, and in all likelihood won't live long enough to pay off a 30 year loan?

Maybe they acted stupid and wreckless only because they knew the government promised to be there to bail them out and they wouldn't live long enough to see the consequences.

Churning
Broker fees on a client list.