T Nation

Predatory Lending


#1

What are your thoughts on this?

I used to work in the mortgage industry as a loan officer. I don't have a lot of time to go into it right now, but it was fucked up, even on the small scale. Policies have changed since then, but damage was still done to the economy via great sales people who knew how to make a bad deal look good and also knew how to use their friends to say houses were worth more than they were.

These people, and the government's housing programs (Fannie Mae, Freddie Mac), are responsible for making it look like there was far more demand for housing than there actually was. Now everyone has houses that are worth far less than they paid for them.

What many people don't realize is that this affects the whole market. If your neighbors buy a house and it's appreciated at far more than it's worth because the mortgage broker used an appraiser who was his friend, then the actual value of all the surrounding properties goes down.

Basically, there are more houses than people who can afford them, so the price of the house drops. Thus, when you go to sell your home because you can't afford it, you wont get near enough money to pay off the loan. Also, if enough of these move into your neighborhood, the value of your property will tank, and you wont be able to refinance for the amount you should.

Overal, what's bad for your neighbors is bad for you. Also, if a small-time mortgage broker can do so much damage to the economy, imagine what a corporate bank can do.

Just some thoughts from personal experience.


#2

The question I keep asking is how any bank can operate like that and still stay in business?

What's going on?


#3

They can't but there's a time period between them doing these bad deals, which make the economy look great, and reality of the damage done setting in. That amount of time is usually too long for people to realize what's going on. Banks could hypothetically lend like this for 15 years before crashing; they would be riding on confidence. Momentarily, it looks like there's more money than there is. This, for a short while, stimulates hiring rates and the rest of the economy, so all indicators are growing and things look great. If several Banks were doing it, that's a LOT of damage done before people wise up and the banks shut down.


#4

The banks have implicit guarantees by the Federal Government.
They are de-facto nationalized. However, the FED and all other cooperating central banks are privately owned by stakeholders from some of the same banks.

So it goes like this basically:

FED loans money through various means to achieve negative real interest rates -> Banks lobby the Federal government to create favorable regulations(i.e. loose housing lending standards) -> A bubble forms as Banks make nominal gains in the "loosest" sector(s) -> When the miss-allocation of capital gets high enough that the consumer can no longer sustain additional credit expansion(de-leveraging) the bubble bursts and interest rates rise -> The federal government eliminates the losses of the FED owning banks through bailouts resulting in real gains for the largest stakeholders -> Repeat.


#5

What's interesting to me about this is that they must lobby with the government to create loose lending standards. I think a lot of people are under the impression that if the government did away with lending policies altogether, everyone would benefit.


#6

You misunderstand. The reason they have to lobby for loose lending standards is because the market corrects for low interest rates with higher standards(higher down payments, etc...) in order to stop the bleeding of credit driven by the FED. Without those regulations to remove the risk of lending, the bubble can't continue to grow and less damage is done. The government doesn't create "lending policies" and can't "do away with them" interest rates are by definition the cost of borrowing and behave based on supply and demand just like anything else. Government "standards" and "regulations" are nothing but price controls. They put an artificial "floor" or "ceiling" in place that prevents corrections from happening.


#7

I wasn't referring to the rates themselves; I was referring to overseeing the processes by which loans are approved. A lot of polices are in place which are supposed insure that loans aren't made based on false information.


#8

If a fish swims in to a sharks open mouth willingly, was the shark actually hunting?


#9

It is if you change the shark to a snapping turtle and Take into account his worm-shaped tongue.

Unless you have a degree in business, it's not the easiest thing to see through a good loan officer or real estate agent's pitch. You want a home, they show you numbers that mean you can get one. They show you how you can afford it, they get good deals for you, they make the numbers work. Unless you happen to have an inside knowledge of what exactly they did to get you that good deal you're pretty helpless. You have no idea that the house you refinanced for 245,000 is actually only worth 200,000.


#10

Correct me if I'm wrong but it sounds like don't think the FED should even exist. The problem isn't necessarily with the FED, although I personally believe the US needs to restructure their prudential banking supervisory branches and eliminate deposit insurance. The problem is the blatant ignorance by some very large financial institutions. The GFC showed how some of these top management people don't know what the fuck they're doing. Greenspan is also an idiot for believing these institutions understood the things they were involved in. Matter of fact, they still don't know some of the things on their trading books. But basically it boils done to banks running out of ways to make money. Let's not forget banking was originally a social activity, then it morphed to a more shareholder focused business and now it's basically run for the benefit of employees. That's a cultural transformation that doesn't exist in some banks from other parts of the world. And that's why US banks will continually dive into risks they cannot control for. You know, they're basically in this system and they're taking advantage of it. If you get rid of the regulations and regulators a lot of these guys will fail and the whole thing will implode.


#11

"The process by which loans are approved" is also a cost of borrowing. Just because it's not usually expressed in nominal(dollar) terms, doesn't mean it's not effected by interest rates. Mandating the terms of the transaction is also a price control, only the level of the floor and ceiling implied is more obscure(difficult to identify nominally).


#12

It's difficult for me to respond to this, because there are a lot of incorrect premises in your paragraph.
As to your question about the FED...
I don't know if the FED SHOULD exist or not. I do know that the FED is a third party institution that mandates price controls world wide in collaboration with other cooperating central banks. These price controls have resulted in the largest miss-allocation of resources in the history of the world and continue to do so.


#13

aggressive assessments are almost non-existent in today's market, fanny/fredie's policies are pretty tight to the extent where they are losing business in rural areas where it's often hard for assessors to find comparables. local banks won't underwrite their own loans unless the applicant is solid.
also, you make it sound like mortgage officers are going door to door offering loans to unsuspecting victims who are incapable of thinking for themselves figuring out whether they can afford something or not.


#14

Well I'd like to hear what you have to say.

I think "collaboration" is a stretch.


#15

Banks can also get insurance on the mortgage and bundle them and sell them. They can take out as many policies as they want on one mortgage up to 150% of the value, if they have 10 policies, they get much more from you defaulting then paying, plus then they have they inflated value asset on the books, the only negative is the taxes they have to pay out.

And sorry if you don't look into your contract to see your payment goes up in 5 years, that is your fault.


#16

They are all officially part of the Bank of International Settlements. It's an official intergovernmental organization of central banks. A lot of the lending not officially reported by the FED is to foreign banks. This can be a quid-pro-quo to purchase treasuries for example. The vendor-financing between China and the U.S. is an example of central bank collaboration for the purposes of political solidarity.

As to what I have to say on the broader topic...
I'm not patient enough to type it all out, especially since it would include fleshing out fundamental principals of subjectivity in prices and the nature of money and credit.

Edit: I'd elaborate over a VOIP service, its much easier for me to talk then to type if you still want to hear it. PM me if you want.


#17

The control has definitely tightened up since I worked in the industry (2004). Since then a lot of mortgage companies have gone out of business as a result of how much more difficult it is to get a loan through in terms of requirements of credit, verification, and income. They've made it virtually impossible for the mortgage brokers to do what they did when I worked in the field. As a result, you'll notice many firms have gone out of business.

lol. You aren't far off with your door-to-door guessing. Cold calling, door to door... anything was considered valid advertising. We generally worked off of lists of people whose mortgages were a certain age. The majority of the people who refinanced through us had never heard of us before we contacted them. So yes, we were just going around randomly offering loans to completely unsuspecting strangers.

As for thinking for themselves, well, I suppose that depended on their ability to do loan amortization schedules and ability to see through any shady "hookups", which they would have had no way of knowing were happening between brokers, assessors, etc


#18

Yeah the balloon mortgages were ridiculous. The broker I worked under told me to push those for first time home-buyers. The idea was, first time home buyers have to pay large interest rates. However, if they stick to their payments, they can refinance for much lower rates in two years with their improved credit ratings and accumulated equity. So, with a balloon mortgage, someone would pay a very low amount for those two years, and then refinance with their accumulated equity (and remember, this was during a time when housing prices were skyrocketing so it seemed reasonable that $10,000 worth of equity would be there in two years) for a 30 or 15 year fixed rate at much lower interest rate than they would have been set into had they done that from the beginning. I never sold anyone on this idea because I thought it was too risky, but he did. Quite a few believed this was a very safe idea.


#19

No. I would say he is right on the money. Take some time and read up on what is going on in the Eurozone right now. Now that is a clusterfuck that we are ass-deep in as well and it should all start coming undone in the next 2 to 4 months.


#20

You know, the same thing was going on in the automotive industry at the same time. There the lenders were often even worse than the dealers.

I can remember rehashing many applications with loan officers where the conversation went like this...
Me, "No, he does not have a second job and there is no other source of income."

Loan officer, "Ok then, lets go over it again. He makes $4200.00 a month and .."
Me, "No, he only makes $3000.00 a month and..."
Loan officer, "Listen! You are not listening to me! He makes $4200.00 per month and that raises his internal score to a B+ tier. Congratulations! You now have a deal with zero stips (stipulations or prof of anything) and you can write the contract for 75 months and three points retention. Just make sure that "incorrect" first application gets out of the deal jacket and the corrected one in. Send me more deals!"

The worst lender of all for this was one called Americredit Financial. They had an up and down relation on Wall Street for years. Their claim to fame was a "proprietary" scoring system that could just see into the future how different loan tiers would perform. Can you say bullshit?

Well as it turned out, when loans would start to fall behind they would call up the customer and offer then a friendly deferral for a small fee and just roll the payment to the back of the loan. They eventually started to offer lots of opportunities for deferral. I also seem to remember some other hijinks with the methods in which they accounted for reposession losses, etc. Of course if a loan was deferred, then it was not delinquent and never showed up in their reports and 10k's.

The story gets more interesting. Along the time that the shit starts to hit the fan in 2007 and 2008 Americredit is on the ropes. They securitize their loan portfolios much like the other bastards were doing with the mortgages. Except now with the shorter terms shit was coming to a head quickly. Guess what happens next?

Obviously they go under right? Yeah, right.

Along comes General Motors in the form of Government Motors and buys the rotten fuckers out. Ever hear of a little company called GM Financial? This is what GM decided to rebrand Americredit as after they bought it for approx $3.5 billions in funds that they got from, oh I don't know, maybe the American tax payer.

God bless America and God bless the Obama administration.