The Financial Crisis Inquiry Commission is currently interviewing bank CEOs in order to examine the cause of the current financial crisis. So far, it sounds like the bankers are very concerned about their bonuses and are shirking off the cause of the financial crisis as a nothingburger.
We keep hearing the bankers say “We need to pay out big bonuses in order to recruit and retain the most talented and brightest workers.” If indeed that is true, then why didn’t these talented and bright workers lead their banks into the biggest financial crisis of our time? I’m guessing the bank CEOs need to pay bonuses to the hired help in order to justify receiving their own bonuses.
Dr. Krugman and CalculatedRisk do a nice job of analyzing day one. CR says the Commission needs to interview the regulators in private and the comission must understand the originate-to-sell model of the mortgage lending business.
If the Commission really does want to learn WHO knew what, when, then they’re interviewing the wrong people.
They need to interview the line workers. Mortgage loan processors, managers, escrow closers, underwriters from the banks, private mortgage insurance companies as well as wholesale lending, loan servicing default and loss mitigation workers and even consumers. Seasoned mortgage industry veterans who have proof in the form of saved memos or emails, that they informed senior management of the red flags, predatory lending, and the insane relaxation of underwriting guidelines that started to pop up as early as 2001 and 2002 yet were ignored or whose concerns were dismissed.
I am willing to bet that if the commission opened up a public comment period for testimony, they would have all the evidence they need to prove all these hoocoodanode banksters definitely did know but their own pay and bonus structure set up an external incentive to keep the dice rolling. Who wants to be a Debbie Downer CEO and be the first banker to take away the punch bowl when the money party is still going full on? Anyone? Anyone…Buehler?
Whoever moved first would have run the risk of watching their company lose billions of dollars in revenue at the tail end of the bubble, while their competitors gobbled up the last of the subprime, Pay Option ARM, stated income time bombs and all the bonus income that came with it. Imagine what it would be like to lose millions, perhaps billions in revenue as your “best and brightest” loan originators (debatable) quit and moved to a competitor because the competing lenders were still selling the subprime/Alt-A/Option ARM drugs to the LO drug dealers who were selling them to the consumer and Realtor junkies. Imagine having to face the board and face the stockholders, trying to explain why you were tightening underwriting guidelines. The only reason to cut the cord was if consequences started overshadowing the revenue and by then, the damage had been done. If we continue to reward the bankers for risk taking with no personal consequences we get what we deserve. I’m sure there will still be plenty of people willing to take the helm at corporations; even with more personal liability at stake.
What would the commission do with hundreds of thousands of comments from mortgage lending industry workers from around the United States? I’d like to find out.
The bank CEOs apparently pre-arranged their stories and flipped a coin to see which one of them would take the Hurricane Katrina angle, and who would say “this stuff happens every 5 to 7 years.” The thing to do now is to put them in separate rooms and interview them alone. The Prisoner’s Dilemma teaches us that they will break their agreement if separated and at least one will cave.
The bank CEOs win if they can pretend like this whole mess is nobody’s fault. This case is not unlike the Space Shuttle Challenger Disaster. There was one person, an engineer, Roger Boisjoly, who warned that the O-ring seals would fail when temperatures were too low. He was ignored by people in senior positions and the commission decided the accident was nobody’s fault.
There is no reason to ignore the thousands of people out there who warned management.
Predatory Lending is a major contributor to the economic turmoil we are currently experiencing.
Here is an example of what I am talking about:
Scott Veerkamp / Predatory Lending (Franklin Township School Board Member.)
Please review this information from U.S. Senator Jeff Merkley regarding deceptive lending practices:
“Steering payments were made to brokers who enticed unsuspecting homeowners into deceptive and expensive mortgages. These secret bonus payments, often called Yield Spread Premiums, turned home mortgages into a SCAM.”
The Center for Responsible Lending says YSP “steals equity from struggling families.”
1. Scott collected nearly $10,000 on two separate mortgages using YSP and junk fees. 2. This is an average of $5,000 per loan. 3. The median value of the properties was $135,000. 4. Clearly, this type of lending represents a major ripoff for consumers.
http://merkley.senate.gov/newsroom/press/release/?id=A09C6A80-537A-4EB1-83C5-31925F046B6F
Hi JMB27,
Thanks for stopping by. I don’t have any doubt that payment via YSP to brokers as well as to consumer loan company LOs will continue to be challenged by many in the years to come.
YSP in itself is not the problem. The problem is not honestly, cleary and fairly disclosing YSP, and not just stopping there but exmplaining what it is….going further, the LO should have a duty to make sure the homeowner understands YSP.
This was not done during the predatory lending days and because of YSP’s mis-use, the industry shouldn’t be surprised when regulators and politicians, after listening to consumers, start to question YSP.
Please check back with us and keep us posted on Senator Merkley’s bill.
I cannot count the number of times in the past several years that I have said “I cannot beleive this person can qualify for this loan (sub-prime or ALT-A)”. As a commissioned originator, if I have a client that is of sound mind but poor credit and marginal income BUT there was a sub-prime loan taylor-made for them, what am I suppose to do? Deny the loan based on my knowledge that this loan is crap and will only get them in trouble later? If so, then I run the risk of violating fair credit laws. It’s a catch 22.
I 100% believe in the article when it says the “front line” people should be interviewed. We understand the “real world” or the “streets” as most people put it. The creator of these programs are only looking at hypothetical numbers that don’t alwasy hold true (such as the belief that property values will continue to escalate). The loan officers, processors and underwriters see the complete profiles of each loan file instead of just a closed loan. Much is put into analysis and consideration when working on a prospective loan so they are able to give a more thorough overview it and formulate better opinions as well.
Unfortunately in a commissioned environment, if a loan program is available to my client and I don’t close the loan(and a competing lender does) not only am i jeopardizing my current income, but also my future income. Both Realtors and buyers rely on my ability to find a loan program that the buyer qualifies for. These loan programs were available to me, and if a willing and able adult buyer meets the criteria, it is my obligation to provide him with the proposal. If all terms were disclosed then I have met my moral obligations, because how can I determine their risk adversion?
Are the wrong people being interviewed? Probably not. The bottomline is that when I began in this business 20 yrs ago, the VA and FHA loans were the best game in town -if not the only game. Conventional loan got written once in a while, but they required a big down payment and frankly, no one had it. As property values began to rise, more and more loans were needed and FHA/VA guides were slow to change their maximum amounts. Conventional loans were in more demand and as a result, the risk thresholds were adjusted. Now you could get a convnetional loan with 5% down as long as you could get MI. That fueled more buyers into the market and increased home values along the lines of supply and demand. As a result, guess what? We had another shift in risk threshold. Now we could do some very tenative sub-prime stuff. But it wasn’t called sub-prime back then. It was call Alt-A loans. Borrowers that looked good but couldn’t prove it on paper could now get a loan close to the same rate as those with full doc. You’re classic self-employed borrower. Of course, those decisions put more buyers into the market and what happen was predicatable.
Unfortunately, the people in charge never really slowed down in widening their risk thresholds. Eventualy, it came to the point that if you had a pulse and a decent credit score, or a pulse and horrible credit but 10% equity, you could get a conventional loan. Funny, but in that time, the government loans didn’t really change all that much. They were slow to take up FICO score requirements and even today, don’t have some of the basic overlays in place that lenders are requiring to protect themselves. It’s no wonder that over the last 24 months, FHA loan foreclosures were shy high. No more sub primes, banks didn’t have overlays for credit scores, so what did most people do? Throw thier crap loans into FHAs. Now they are in trouble.
So who is to blame? Who should be interviewed? Who passed the laws making these types if loans alright? Who wrote them on the front lines? Who packaged them and sold them off? HEck, who BOUGHT them looking for the big ROI? Pointing a finger at who is to blame is like trying to plug the leak in the dike with that same finger. It’s not going to change much and certianly wont fix anything. So who cares? The lesson here isn’t who was to blame; Rather, it’s seeing what took place, understanding the underlying issues and implications, and making sure that it doens’t happen again.
I started at the tail end of all the subrpirme melt down. I actually feel foprtunate that these programs were not readily available to me to offer my clients. From wha tLittle I did see I was astounded by. I do agreee with my collegue Bryce that if he did not offer the product that was available then they the clients would just go to another lender. As long as all parties are aware and dislcosed of the entire process then the lender was doing there job.
I don’t know where to start and I certainly can not come up with a creative comment that one has not already posted. I do not have much experience with Sub Prime Lending as I worked for a retail bank which did not offer the ability for me to broker. That doesn’t mean I denied it existed. I like Chris’s comment that if you didn’t offer what was available then you are discrimminating!
I have been in the industry many years and in the beginning it was Just basic prove it loans. Then with the subprime loans anyone could get a home wether they could afford it or not. I have done lots of the sub prime loans. At one point doing a stated income loan was no different that a fulll doc loan so we all did them. The difference with me is I followed myt clients along the usual 2 year prepayment period to be sure we could get them into a better loan. I have done one loan in my history that kept me up nights, they refied and got a small amount of cash but missing 1 pmt was the whole reason. I tried in vain to get them not to do the loan but was told they wanted to use me (I did the purchase) but would do it without me. I did the loan to controll the bleading another lender would have done to them. All I can say is I am glad the subprime is gone, it makes us be better loan officers and clients get better deals now. Again, not all clients get a home when they want it, they have to work for it. I sure sleep easier at night knowing everything is black and white, very thin lines of grey, before the mortgage world was shades of grey. I welcome the sanity of FHA/VA!
I remember when I first started in the mortgage business. I was previously in the auto industry where I was in sales and finance. There were so many co-workers that had gone into the mortgage industry and suggested I do the same. I could not believe there was such a loan that allowed you to “state” your income. It seemed ludicrous. Turns out my initial thought was correct…
They big guys making the big bucks are definatlly a big part to blame, as well as LO’s presenting these preditory ideas, and lets not forget the clients who went along with it all too knowing full well they might be able to make the payments-