Thursday May 24, 2007
Excerpts from Reuters Article
(My Comments in Italics)
Angelo Mozilo, the butcher's son who built Countrywide Financial Corp. into the largest mortgage lender in the United States, was in no mood for soul-searching over the sub prime home crisis. Mozilo, who made $387 million in pay and stock options over the past five years, disavowed blame for the collapse, pleasing his audience of fellow mortgage-banking industry leaders and foot soldiers.
"You've got to be careful here about blaming ourselves too much," the deeply tanned and sharply dressed chairman of Countrywide told the Mortgage Bankers Association this week. The real culprits, he argued, are the Federal Reserve with its series of interest rate hikes, crooked real estate speculators, falling housing prices and regulators' attacks on interest-only and other risky sub prime loans.
( Mozilo will not take any responsibility unless a court of law forces him to. I know a former underwriter and branch manager for Countrywide who after many years in the business and several years with Countrywide was forced out of her job because she wouldn’t sell or “push” the “Pay Option Arm” loans. She knew as an experienced mortgage underwriter these were not good loans for the consumer. She recounted to me the training sessions and how false the representations were. How they were “taught” to sell them in a misleading way. Although she was harassed relentlessly by her supervisors she refused to “go along” with the corporate culture. Those who “went along” and sold these loans were rewarded handsomely. Others who stood on ethics were forced out. I’m encouraging her to come forward and be a whistle blower against Countrywide. She is now with the company she started out in the mortgage business with fifteen years earlier. This statement is offensive on so many levels. Crooked real estate speculators are a very small fraction of the foreclosures. The regulators should not attack risky sub prime lending practices and loans like the Pay Option Arm? Outrageous.)
His take contrasts starkly with the view of those who blame loose lending policies and oversight, and a get-rich-quick culture in the mortgage industry. Many consumers felt misled by the industry, lured into borrowing at sub prime, the loan category for higher credit risk borrowers who pay higher rates. But calls for a reappraisal of the industry's practices have been met by protest. More red tape and bureaucracy would only make things worse, the lenders say, and few expect any major changes to be carried out. Regulation ... is better for the crooks because only the good people have to comply," Mozilo said to a reporter before taking the stage.
"So I'm against it. In fact, it's regulators, in my opinion, that have caused part of the problem when they attacked the pay option and interest-only loans."
( This is outrageous, I want five minutes in a room with Mozilo for him to justify the benefits of a “Pay Option Arm” loan. Just yesterday I listened in via web cast to a meeting in New York of industry mortgage lenders who when pressed for answers on Pay Option Arms stuttered and stammered trying to explain why this loan would be good for a consumer. When pressured for an answer about why anyone would choose this type of loan, they flip- flopped back and forth. On one hand they said it is for borrowers who need the flexibility of making a lower payment sometimes due to bonuses or commission based employment and issues like that. Then they were asked, why then do so many people always make the minimum payment. They replied because they need the affordability. That affordability comes with a tremendous cost. Then when pressured about the accurate statistics of how many were making the minimum payments they said they didn’t know. The truth is they don’t want to answer. But someone better find the answer and soon. This is going to blow up like no other loan program we’ve ever seen. This is pay day loans, and credit card compounding interest, phantom profits and loan sharking all rolled into one. If the regulators think Mozilo is a man who will make changes voluntarily, they are sadly mistaken. Are regulators going to take this from him and all of his peers in this industry? Let him walk away from this crisis with his $387 million and leave everyone else including the government holding the bag. The attitude is don’t mess with us, we are doing fine. And that he is! He is making millions at everyone’s expense. Stay out of his sandbox. I’m sorry but the attitude is that of a little boy, not a $387 million dollar executive. That’s what children do, blame others for their actions and defend their actions no matter how irrational.)
Countrywide is hiring, picking from the best of the companies that went under, and Mozilo sees a better future for the big players like Countrywide, Wells Fargo & Co. and Citigroup now that the upstarts are gone.
(The best of the companies that went under are the same people who deceived and prospered in the first place. This has been part of the problem, same players-different day.)
Alan "Ace" Greenberg, chairman of the executive committee at Bear Stearns Cos. Inc., the No. 1 U.S. issuer of mortgage-backed securities, downplayed the impact of sub prime lending woes on U.S. capital markets. He called the last few months a weeding-out process.
"I think the sub prime (problem) has been blown completely out of proportion," Greenberg said.
( Let’s weed out the borrowers who can’t pay. Good riddance. Lets hook some new ones who can pay for awhile to keep this train rolling. They’re not going to fix what they don’t view as broken. Problem is during the weeding out process of foreclosures billions in equity and personal financial wealth is being lost to oblivion. Bear Stearns, Lehman Brothers, and others don’t want changes. They profited handsomely as well while putting the whole country’s financial backbone, the American family, at risk. I want to know how many of them have a Pay Option Arm loan. If this is such a fabulous product, and not just an extreme money making machine for Wall Street, then justify it. Forget the fancy packaging and come forward and explain how this is a good loan with no lies or misrepresentations. If this loan product continues to proliferate, they are putting the entire country economy at risk in the name of GREED. When this generation is ready to retire and no one owns his or her own home, they will be homeless well before then, who will pay then?)
DEPENDING ON THE MARKET
The industry wants the marketplace to make any necessary changes in its lending practices on its own. That may indeed turn out to be the only response to the crisis, with no congressional legislation yet passed. Calls for bailout plans have been dropped and any National plans to license brokers or requires education programs for borrowers have been ignored.
(The cries will become so loud and clear, no one will be able to ignore it. You can take Katrina, 911, and the cost of the IRAQ war and it won’t bail the country out of the mess this is creating. As homeowner’s become more and more stressed financially and in ever increasing numbers are being sold this pay option arm loan, financial devastation looms. As more and more defaults occur, and real estate continues to slide, all areas of the economy will suffer. Crime will increase as people lose their homes. Social service needs will increase. A privileged few that created this mess will walk away from it with millions and billions of dollars.)
That gives little comfort to consumer advocates dealing with the human detritus of the crisis.
“If we're depending on the market to protect the consumer ... we're in trouble," said John Taylor, chief of the National Community Reinvestment Coalition. "What we have learned is the industry is very clever and very inventive," Taylor said. "They redesign and restructure products to maximize profit, and at the same time try to be in line with the laws and regulations."
( This is clearly demonstrated in the Pay Option Arm loan and the use of a YSP. Both are clearly designed to evade HOEPA triggers. The Pay Option Arm loan may technically not be a HOEPA loan at inception; it quickly turns into a HOEPA loan with rapid rate increases and negative amortization creating compounding interest on increasing balances. The YSP avoids any points or broker fees being added into the HOEPA triggers for APR and closing cost, but in fact costs the consumer much more in interest rate, terms of loan and prepayment penalties. Again prepayment penalties are not in the HOEPA triggers but would cost the borrower plenty if they try and get out of a loan.)
A recent Harvard study recommended national laws to license the brokers who originate most loans, extending new lending guidance, and urged the industry to better police itself. Banks have tightened lending standards, but the system still works very much like it did before. A vast, though smaller, force of independent mortgage brokers sell consumers loans from a variety of lenders, profiting the most from the most expensive products. Consumers often wrongly assume that brokers have a legal obligation to borrowers.
(This is the argument that a YSP is a bribe, a kickback in fact, to brokers for delivering certain loan products for the lender. It is a widely misunderstood fact that brokers do not work for the borrower but in fact for the lender. Add in the incentives a lender offers and the borrower is really in the hands of an adversary, not an advocate. A Harvard Law Professor has written a 152 study dedicated to just YSP. This has been debated, argued in courts, and has been only addressed somewhat by regulations.)
The lenders send loans they've made onto Wall Street, which repackages them as securities to be sold to investors, spreading out the risk. Homeowners don't have the luxury of sharing their risk. The cost of loans they cannot afford is seen in "for sale" signs that line streets in cities like Corona, California, a bedroom community east of Los Angeles. It has one of the nation's highest rates of people late on their mortgage payments.
(Lenders have all the advantages including picking the laws they which to lend under. They can choose the laws of the state of incorporation or the laws of the state they made the loan in. Whichever is more favorable to them. Homeowners can’t pick the laws of which state they wished to be foreclosed in. Wall Street is in turn hurting more people as individual investors, retirement funds, and mutual funds unwittingly bought into this crisis.)
Among the forest of for-sale signs are fliers touting too-good-to-be-true mortgages. One offers 100 percent financing, loans for people with no proof of income or rock bottom credit scores. The offer heralds a 1 percent payment rate for five years, though not underscoring how a borrower would sink deeper into debt under such a plan.
(The loan programs offering the 1% rate, is totally misrepresented. Look at the ads which say 1% interest rate, 1% fixed for 5 years, and 1% rate can cut your payment in half. Visit web sites touting this mortgage and view the loan calculators, look at the advertisements and see the outright fraud in them. )
"The conditions are still out there for consumers being taken advantage of, particularly in the sub prime market," said Allen Fishbein, director of credit and housing policy at Consumer Federation of America.
Trillions of dollars of adjustable-rate mortgages will reset at higher monthly payments this year and next. Some 1.1 million foreclosures with losses of about $112 billion will occur over the next six to seven years, estimated Christopher Cagan, director of research and analytics at First American CoreLogic Inc., a provider of business information. Cagan said in a study sub prime borrowers will be hit hardest. He estimated 12 percent of sub prime loans will default because of resets at higher rates.
(It will not be only the higher rates that will kill people, with pay option arms loans the layering of risk will increase the amount of defaults. The houses will not be worth what the borrower owes when the resets happen. I know people who are sitting on multiple properties they bought for investments. They didn’t take risky sub prime loans, but now they can’t sell them due to all the inventory on the market and foreclosures. I asked a few, who are doctors, lawyers, real estate developers, realtors, and even teachers; How long can you float these properties? Most replied, not much longer. So former high credit score, professionally employed individuals will be facing ruin. Not due to them taking risky loans, but due to market conditions and personal life changes.)
Marvin Von Renchler, a veteran mortgage broker in Oregon, isn't ready to shed a tear for consumers.
"I run into very few people who can legitimately say, I didn't know what I was getting into."
But Jim Campen, an economics professor at the University of Massachusetts in Boston, describes buying a house with a sub prime loan to stumbling onto a used car lot. The price and other charges often are negotiated individually with each customer. And salespeople often have financial incentives to obtain the highest price possible.
(Just the sheer lack of compassion in the industry is overwhelming. The attitude is shut up and let us keep on keeping on. If this veteran mortgage broker took even one YSP in exchange for charging a higher rate or prepayment penalty, or put someone in a loan he knew wasn’t the best choice for them, then he can’t justify his statement. Borrowers do not know what they are getting into or what the incentive structure for brokers is.)
"People on Wall Street live in their own world," Campen said. "They don't understand what's going on the other end. If these (sub prime lenders) couldn't sell these loans to Wall Street, they couldn't do what they do."
WALL STREET BULKS UP
Wall Street's role in the mortgage industry is only growing. The crisis has attracted bargain hunters to the vast American housing market.
"I was happy to be one of the last guys to buy as opposed to the first guys to buy because I think assets were a lot cheaper at the tail end," said Michael Marriott, co-head of Credit Suisse's mortgage business after buying Lime Financial. The newer players could pick and choose the best properties that paid the best returns with less risk of bad loans. "Look at how much capacity was removed with the big stand-alone sub prime guys being basically evaporated. So the market will be right-sized, and when its right-sized I think (profit) margins will come back," he said. Other Wall Street players have bulked up, too. Citigroup's CitiMortgage ranked as the No. 1 subprime lender in the first quarter, originating an estimated $8.1 billion in loans. That's a 29 percent jump over the year-ago quarter, according to Inside Mortgage Finance. Countrywide was a close second with $7.9 billion in subprime originations. Bear Stearns and Merrill Lynch & Co. each have acquired subprime operators to feed investment banking machines that repackage mortgages into securities for pensions, hedge funds and overseas investors. Wall Street executives say investment banks would lose clients quickly if they knowingly packaged bad loans into mortgage-backed bonds. It's in their best interest to weed out the subprime lenders who have lax underwriting standards or use unscrupulous sales tactics to place their riskiest mortgage products with borrowers who can't afford them.
(I strongly disagree, they are only thinking about risk vs. rewards. If the risk can be minimized and the reward is great then they’re in. They have created extensive repurchase agreements with lenders to protect themselves. So they are now holding limited risks and potentially great rewards with little consequences. They will reap huge rewards as stressed homeowner’s struggle harder and harder to keep up with debt. Others sectors of the economy will suffer. Government social services will be stressed. Crime will increase. But Wall Street executives, when the parties over, they’ll be living off their accounts in the Cayman Islands. )
But many say they just do what the market wants. Peter Paul, considered a pioneer in bringing loans to well-off borrowers with untraditional financial histories, likens mortgages to clothing.
"We're somewhat amoral about this kind of stuff," he said. "If we were fashion designers and they wanted purple polka dots, we might have our own opinion, but we'd probably give them purple polka dots."
(This is the final blow, Wall Street, the buck stops there. So if there is a buck to be made, the market will find a way. It is a game to them. Pure and simple. To the borrowers it is not a game. It is their home, their life, and in some cases the only thing they have to create any future security. We are in the beginning and many homeowners are just working harder and harder trying to pay the enormous debt they’re under, but there will come a breaking point just as it did with real estate prices, where the party will be over and everyone except the few who are getting wildly rich will suffer the consequences.)
