Is Henry Paulson The Next Bernie Madoff?

Palm Beach pawnshop

It seemed like everybody in Palm Beach over the age of sixty was on the evening news this week. If you’re like most Americans, I’m sure you felt a little smug as you watched these shell shocked people stand in front of their million dollar homes and tell the world that they had invested their life savings with Bernie Madoff. This resentment of the rich lingers deep inside our collective psyche, a mean-spirited reaction to the misfortunes of the affluent that is out of step with our nation’s official “grow rich and prosper” credo.

Its times like these when a lot of Americans revel in their ordinariness, in their stripped down lifestyles, in their modest homes and apartments. Many watch these elderly, formerly well-to-do people confess total ignorance of Madoff’s deception and feel a certain sense of superiority because they don’t need to have three tuxedos, or eat $300 dinners, or drive an expensive luxury car. In times like these, there is a renewed sense of devotion to frugal living, as if decency, honesty and humble circumstances are an indivisible trio.

Ordinary Americans shouldn’t start patting themselves on the back just yet, though.

Right now, the only difference I’m seeing between your faithful Treasury Secretary Henry Paulson and confessed swindler Bernie Madoff is the size of their playground. And in the wake of the Madoff scandal, where he has simply stolen the largest amount of cash ever from the investors who put money into his investment fund, we the American people continue to rely on the assurances of Henry Paulson that we need to simply quit worrying about how much of our money he has handed away, or who he has handed it to, because he knows what he’s doing.

Right.

The offices where Madoff cooked his books so well he could be a contestant on Iron Chef were locked tighter than…well, almost as tight as the books at the U.S. Treasury. At least Madoff gave the SEC complete reports with all the blanks filled in, even if the the numbers themselves were made up. Your humble Treasury Secretary Mr. Paulson, on the other hand, has a penchant for submitting documents to the bailout oversight committee with the names of the banks and the amounts they got blacked out. Even Madoff knew that you had to show the people something if you wanted them to believe you.

Which is why, if you’ve done a bit of private gloating about the misfortunes that have befallen the ostentatiously wealthy, you might want to think about the situation we are all in a little more carefully. In a normal economy, we’ve pretty much established that there are the “have’s” and the “have nots”. A bad economy changes those labels to the “have less” and the “have nothing’s”.

The gray-haired people in those news reports can sell their real property, even at fire sale prices, and move from a million dollar home to a modest older home or an inexpensive condo. They are likely to draw the maximum in Social Security benefits, and you would be surprised at the number of them who receive pension checks or have small annuities they purchased back when they were all the rage in the eighties. There will be food in their refrigerators. They will be able to put gas in their cars.

But if you are an ordinary American, who is already struggling to make ends meet, who is already living in a modest home, or an apartment, where will you go if Henry Paulson turns out to be doing as bad a job as Bernie Madoff? What will be in your refrigerator? Will you be able to put gas in your car?

Big Spenders Forget To Tip The Help

S. and I were in the car yesterday, headed to the airport. For us, the Atlanta airport is a forty five minute ride to the south side of town - when traffic is good. It's the longest time we spend together in the car outside of long trips. So the conversations are a round robin, a mix of "don't forget" instructions, recent events in the lives of our friends, and current events.

Somehow, there was a segue from The Real Housewives of Atlanta (I know, I know, I've been talking about this all week) to the testimony the executives from the Big Three automakers gave to Congress the last couple of days.

"So what do you think about this bailout?" I asked. "Every place I've been this morning, all the people are saying the same thing - its not going to happen."

"They've got to do it." S. said, her voice flat as she watched the 75 South traffic begin to merge with the 85 South traffic.

"What I can't figure out," I said, "is what a Chapter 11 bankrupcty filing is supposed to fix if they end up with the same people running the company. The private jet thing is just noise. They're already paying for the jets anyway. Not using six thousand dollars worth of jet fuel this week isn't going to save any of these companies from going under."

"They've got to do it," S. repeated, "because a Chapter 11 will wipe out all the employee stock those people have in their retirement accounts."

And just like that, I realized why Congress doesn't get it. Why Henry Paulson, the great protector of almost anybody with a pulse on Wall Street, doesn't get it. And why, as heartfelt as their pleas for help were, the Big Three CEO's just don't get it - because all of them have reduced all of us from a mass of living humanity to a column of impersonal numbers.

Back when you used to eat nicer meals in nicer restaurants, you used to tip fifteen to twenty percent of the bill, routinely, because the meal didn't serve itself, the water didn't appear out of thin air, and you had no idea what the cook even looked like when you left. The wait staff brought your order to the kitchen and delivered your food to the table, among other things. The tip was a small cost of being in such a nice place to begin with, but a big part of the wait staff's income.

Let the wait staff of this same restaurant walk out of the door en masse and you will see the owner of the business pull his hair out until he can hire a new staff, because he can't deliver all that food by himself.

I don't know what Paulson thinks Wall Street really is. They don't make anything in those glass towers in downtown Manhattan but big phone bills. The auto industry not only employs over 10 million people - its products literally take America back and forth to work, delivering the productivity industries around the country need so the thirty year old guys Paulson is so fond of, who have never had a job that didn't involve a financial calculator and a computer screen, can bet a healthy slice of this year's Gross National Product against a hunch that the Thai baht will fall in value against the U.S. dollar.

And for all that bringing to and fro every day of laborers and teachers and farmers and painters and machinists and yes, waiters and waitresses, all across the country, in order to let his guys keep playing with our real money like it came from Parker Brothers, these guys can't throw another 25 billion on the table, after getting a bill for 350 billion? It is the equivalent of a tip after a big meal - in this case, a big meal that very, very few members of the American public got to taste.

Now I'm sure, if you were able to see a copy of Paulson's American Express bill, you could see that this is a man who understands the concept of tipping. Your people in Congress might not be as familiar with this custom, since they are just now learning how to pay for their own dinners.

So for all the Christian Righters, right wingers, left wingers who skipped history class, and Fair Taxers whose blinders keep them from seeing anything else but that damn flat tax - this is how you get to the communism you claim you hate so much, when there are too many people who are broke, hungry and homeless.

Because if you ever go to a high end restaurant, Mr. and Ms. Congresspeople, and don't leave a tip, you really don't need to go back there.

I would hate to think what might show up in your food.

Homeownership Philosophy Americans Believe In Deeply Flawed

"NON-reviewable"

"Non-REviewable"

"Non-reVIEWable"

"Non-reviewABLE"


This is what you would see today if you could look inside my brain. This is the most ridiculous, most incredible part of the Treasury Secretary's proposed bailout plan that has seared itself deep into my synaptic nerves.

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

It wasn't until I clicked my mouse on one of my archived folders last night that I realized demonizing Treasury Secretary Henry Paulson's desire to operate a bailout fund was obscuring another part of the problem -that some of the fundamental philosophies American citizens believe in were also a huge contributor to this problem. The excerpts below were originally written between the spring of 2005 and the spring of 2007, just before the mortgage industry slump started, back when I was still an optimistic loan officer.

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I spoke to a woman in Birmingham yesterday [April 2007] who was interested in obtaining a mortgage loan for a home she wanted to purchase.

She worked for the Social Security administration. She made $37,000 a year (if I remember correctly, I am rounding this number up).

She wanted to know if she could purchase a condo that was about to come on the market at a below market price - $240,000.

I don't know if any of you own a mortgage calculator, but a $228,000 loan at 6.375%, which is a tad below par on a eight story condo carries a principal and interest payment of $1,421 if it is amortized over 30 years. Kick in the mandatory HOA payments of $250 per month and the payment jumps to $1671. Add the escrow for property taxes of $150 per month and you get a grand total of $1821.

$37,000 divided by twelve gives you a gross monthly paycheck of $3083. This is before Uncle Sam, Uncle FICA and Auntie Healthcare get their cut.

The front end ratio on this scenario, which is the amount of the mortgage payment divided by the income, is a whopping 59% The back end ratio for this particular borrower would have been 80 plus percent.

To put those numbers in perspective, the traditional qualifying front end/back end ratios for conventional mortgage loans is 28%/36%.

FHA, which is a little more aggressive, states that it prefers ratios of 29%/41%.

Do you think this borrower cared about that?

Now in all honesty, there is more to her story. She has been promoted to a new job, which starts next week. She has two other sources of income, although there is no way to prove that she actually earns an additional $14,000 a year selling real estate and cleaning office buildings.

If we could show this income, her ratios would fall to a more sensible, although still high, 38%/53% ratio with a total income of $4800 per month.

Three weeks ago [March 2007], I could have canned the Suze Orman schtick, stated her income, and gotten her a 97% loan to value loan, even though her credit score is only 553.

The rate would have been somewhere around 8.5% to 9.0% - but only for two years. Then it would start to adjust, and adjustable rate mortgages practically never adjust downward.

So someone who could only put down $8000 would be struggling to make a $2203 house obligation - the new principal and interest payment at 8.5% is $1783 - mostly because the lenders who make subprime stated income loans had been pretty good at gauging how much we were fudging the income numbers to make deals work.

She doesn't sell a house one month - or two - or loses the cleaning contract, or gets sick and can only work at her desk job, and she is fucked. The lender is screwed. Her neighbors are screwed.

The upshot of all of this? My email box is full of emails from her, lambasting me for the "cautionary tone" I took with her regarding the challenges she faced, especially in today's lending climate.

Why does a woman who has been out of bankruptcy less than four years ago want to do this to herself? She is not alone - I have stacks of files on my desk of people who want to buy houses they can't pay for, with - what else - no money down. And credit that is anywhere from shaky to downright shitty. But do they take my counteroffers, good solid pre-qualification letters that show them what they can qualify for and get 6 or 7 percent fixed rate loans?

Hell no.

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My best borrowers, believe it or not, are redneck men. Tradesmen, men who do the kind of work we'll always need, the kind of men who expect to work at least six days a week. They tell you up front, "hell naw, ain't no damn way I'ma pay more'n eight hunnert dollars a mont' for no damn houwse nowte."

These are guys who make 60K, 70K, 80K a year, and sometimes more, a whole lot more if they can get unlimited overtime. They don't dicker over a quarter point, so long as you lock them in at the rate you told them you would. And if you look at every mortgage they've ever had, even if they've been divorced, they are almost never late.

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In the mortgage business, one of the newer products [Mid-year 2005] is an "emerging markets" loan, that overs 100% financing to people with marginal credit histories who have no savings if they have had a job for the last two years. Its very similar to the original FHA home loan, except FHA used to require borrowers to contribute at least 3% of the purchase price. At least, until someone came up with the idea of creating a quasi non-profit organization for the sole purpose of "gifting" the 3% to the buyer if the seller was willing to pay an administrative fee that essentially made the FHA loan a 100% product.

The emerging markets product goes FHA one better in is guidelines - if you have a borrower who claims to have a part-time job, you can simply write down the job title and are allowed to add secondary income in an amount up to 25% of the borrowers verified income, which is essentially a license to qualify an already marginal buyer for more house than they can afford.

Do you know who calls within six to twelve months of closing a loan to do a cash out refinance? These same people, who now have little or no equity, if they're lucky and the purchase appraisal wasn't puffed, who had no reserves to speak of when they bought the house, are now fucked - who can they call to help them out? If they knew anyone with any money, they wouldn't have needed a 100% loan in the first place.

But Nationsbank and Wachovia and Citibank and Wells Fargo and the mortgage business in general gets to wave a banner proclaiming their commitment to helping lower income, credit challenged borrowers live the american dream of home ownership, when they know damn well that these loans will be refinanced at sub-prime rates, which will jack the payments up even higher, turning what was supposed to be a families gateway to future security into a very expensive albatross that they will never actually own.

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I'm in the mortgage business, and the loan I hate to make more than any other is the FHA purchase loan to a young black family who need to use a down payment assistance program to close the deal. Suze Orman is right - they have no business buying a house - the reason they're going FHA in the first place is because their credit was tore up from the floor up until they paid all their collection accounts. Which means they have no money left after making an earnest money deposit of $500 or $1000. NO MONEY. So after they've signed the paperwork and the funds to the seller have all hit the attorney's escrow accounts, they get a key to a house that they can't keep up if anything goes wrong.

Who do you think I hear from a year or two later, looking to refinance? Mr. and Mrs. Down Payment Assistance Program. They are in a jam, they are behind on their bills, the roof needed work, someone got laid off for a few weeks - all the things a cash reserve equal to three months mortgage payments (which is less than the traditional cash reserve definition of three months of household bills) would have probably cured.

If they had friends or family to turn to, they would have, but in most cases, they are related to the same people who couldn't help them put a down payment together for the house in the first place. The little bit of equity they have in their house is all they've got, but no home equity line lender will touch them. So they have to redo the entire mortgage to get their hands on four or five thousand dollars.

At the other end of the spectrum, I've done $250,000 loans at 12% for white people - business owners, no less - who offered me the obligatory bottled water (they had three cases in the pantry) while we filled out the paperwork. They didn't have any money either - just cash flow. And a tax lien only one brave Florida lender wanted to deal with. If they would cut out the trips and the extras, they could have rounded up the $400 a month payment they needed to make for just 12 consecutive months to the IRS to whack 4 or 5 points off that rate with a new mortgage. I guess drinking tap water is more passe than I thought.

The reality is, if you were to give the No Down Payment Family ten thousand dollars, or raise payday loan borrowers incomes by a thousand dollars a month, the same guys who always end up with all the money will soon have it. Mr. & Mrs. 12% only need $50,000 to retire their debt - might as well throw that one in as well - their travel agent has some brand new travel packages to the latest luxury hotspots.

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Every other group in the animal kingdom accepts the fact that some of its members will occupy the low end of the totem pole, or remain at the bottom of the pecking order.

Blaming congress for our personal shortcomings isn't even a shot in the right direction. All of these ways to bleed a borrower dry depend on the borrower feeling the NEED for things they WANT. Nobody NEEDS a $1200 a month car payment, but you would think they gave BMW 745i's away around here the way they pop up at every stop light.

I can't think of one portable electronic device that is a necessity - including cell phones - yet most of us think we can't live without them, that our kids won't be safe if we can't have a way to instantly contact them at all times. Unless you work in the field, which most of us don't, you don't need them. I have a phone on my desk and two at home. When I forget my cell, I don't even miss it.

The most expensive meal I ever ate growing up cost less than ten dollars at the local Western Sizzlin'. My father could take all of us out for steak dinners on Friday nights for less than thirty five dollars. The last time we all ate together the bill was almost a hundred and fifty dollars at a casual dining restaurant - the kind of place we would have dressed up for thirty years ago.

$5 coffee concoctions, $100 athletic shoes, 80 inch TV screens - all of this good living everyday will kill us dead if it doesn't bankrupt us or smother us in our own fat first.

In the meantime, I will be watching Mr. Non-reviewable himself, Henry Paulson, author of "The Audacity Of Debt" proposal, like a hawk. Fixing a ridiculous situation with an even more ridiculous proposal is about as stupid as it gets. If all of these investment bank problems are surprises to the people who who run the banks, how do you even know if $700 billion is enough?

Because as bad as some of the loans were that I and my fellow loan officers made, every step of the mortgage process is, was, and always will be reviewable.