23 September 2008

Homeownership Philosophy Americans Believe In Deeply Flawed





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.


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.


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.


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.


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.


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.


  1. Brown Man: U da Man! - Again!!
    This is great information!! I'll use it to help my grown children!


  2. This was very interesting. BTW, I haven't had a cell phone in years. I think $100 a month for one is outrageous, and unnecessary unless you're on the road all the time. My late parents were a lot like your tradesmen clients who didn't go for big mortgages either, and I share their values. It's just common sense which isn't been all that common since the 80s. As a nation, we got too greedy and too fat.

    Lemme ask you this. Do you think the country will go so bankrupt that people with their money in state and county government retirement funds will lose it? I've been digging around for this answer since Friday, but yesterday had to work all day and didn't have time to dig some more.

  3. I know I've been ranting here about this bailout for a few days, but my opposition isn't whether or not to do it, but the methodology under which all this borrowed cash is going to ostensibly be deployed.

    The state retirement funds shouldn't have a lot of exposure to it directly, but indirectly, almost every part of the economy is connected to each other. A lot of the county and city pension funds are likely to be underfunded - we have that here in Atlanta, where the market returns over the last twenty years have helped to mask some of this shortfall.

    The state of Florida has had recent problems - you might want to check into what's going on in your state - some of the money managers in this arena got mesmerized by the big returns and rationalized the risk, changing their investment rules specifically to get a piece of these profits.

    But for the most part, state retirements are plain vanilla and conservatively invested.

  4. Greed, all around, is to blame. I blame Congress for wanting every earmark in the book all the while knowing we don't have the funds. I blame the president for starting an unnecessary and costly war. I blame individuals for wanting a McMansion (see this monthh's Conde Nast's Portfolio magazine for a story) and I blame lenders for devising these packages so they could make more money off of gullible homeowners and prospective homebuyers.

  5. Brown Man, I'm glad I found your blog. You are talking real sense in a down-to-earth way.

    I liked this one from another post.

    Blaming the government sponsored entities (GSE's) for the mortgage crisis was like blaming the U.S. Mint for your gambling losses in Vegas because they printed up the money. Subprime lenders went under because the default rate on the paper they were holding was ten times higher than the GSE's.


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