The Mortgage Meltdown: Stop Blaming the Banks!

"I'm a cleaning lady who makes $200,000.00 a year.  I want to buy a 2 family investment property home for 450,000.00 so I can collect the rent.  I do not want to put any money down, and I cannot verify my income (because I'm self employed?)."

This was a potential client sitting in front of me in a top 3 bank in the United States, wanting to apply for a mortgage.  My first reaction was, I should quit my job and become a cleaning lady, because I do not make that much money.  Aside from the fact that I am not a woman, I do not believe I could become a cleaning lady, at least one that makes $200,000.00 a year.  I do not clean that well.

Unfortunately, her credit score was actually very good (well over 700), and she would qualify for what we called an 80/20 stated/stated loan.  What this means is that I could give her a first mortgage of 80% of the purchase price, and a second mortgage of 20% of the purchase price, and just state her income and assets on the application.  When reviewing her credit, she had her current mortgage (for about a year) and 4 other accounts (a store card, and a few small credit cards) with minimal balances and limits, with about a 2 year history.  She banked with us, and had minimal money in the bank (hundreds of dollars, not hundreds of thousands).  In over 10 years of reviewing credit reports, she did not make enough money to qualify for her current home, let alone another one.  The rent she could possibly receive would only cover two thirds of the new mortgage payments, not counting property taxes and insurance.

I declined the loan.

A year later she comes back to the same bank, sits in front of me, and demands I help her refinance this mortgage she has with our bank?  I remember her and told her I declined her mortgage.  She said we have the mortgage, and sure enough, it is in the system.  The realtor who sold her the home referred her to an "in house" mortgage broker who brokered it to a subprime lender, and subsequently sold it back to the bank I worked for.  She could not make the payments, she did not make 200,000 dollars a year, and she was not receiving any rent.  Her current home's mortgage payment (her primary residence) was also not being paid.  She demands that I (we) help her, to which I replied, "I did, when I told you that you did not qualify a year ago".

How did she get this mortgage, and this house?  The government said she HAD to, because she is no different from the random doctor (who is self employed and states that he/she makes 200k/year) with a 10 + year credit history and a demonstrated capacity of paying larger, longer term debts, all on time, because her credit score is the same as his/her credit score.

 No, actually, they are not the same, but the government told me they were, and I could lose my job if I do not make the loan.  I could be personally fined as well as the company I worked for and even worse, lose my career.  All because I refused that loan when she first applied.  I was right, but that did not matter. 

Fast forward three years and that same cleaning lady cannot get a mortgage, and neither can the doctor.  Not unless they show all of their income and assets, pay taxes on their income (it has to show on their 1040s), and we will pull our own copy of the 1040s direct from the IRS to verify it was the tax return they filed.

Who created these stated/stated loans?  The banks, to cater to those with higher credit capacities, and a low tolerance for disclosing 1000's of pages of personal documents.  Who was placed into these loans?  Everyone, because it was easier to qualify, and the government said that everyone should be equally placed into them, regardless of my ability to ACTUALLY analyze and interpret a credit report and credit capacity.   Who made these loans?  Unscrupulous loan officers and mortgage brokers who didn't even need a high school education to complete one of these mortgage applications and figure out that "there was money to be made".  Who bought these loans?  FNMA and FHLMC, those same private government agencies claiming they did not know.  In fact, the goverment monitoring processes in place forced lenders to give these loans equally to people who really did not qualify.  I (and the experience and ability I have) were taken out of the equation. 

And as for the subprime loans and the mortgage backed securities associated with them that collapsed:  These loans began life as "subprime" and the banks that made these loans were forced to buy them back by the investors who pooled the loans into mortgage backed securities (MBSs) because of "early payment default".  The people who were given these loans had a history of credit that was in past and present default, and that is why they had a high rate of return.  Why would investors expect a secure rate of return that high?

 If you have a pool of loans that are subprime, made at a higher rate due to a higher associated risk, yielding a higher rate of return, and only 5 or 10 percent of the loans are experiencing an early payment default (not foreclosure) out of a group that is made up with 100% of people with some sort of past and present defaulted credit, 90 to 95% of your portfolio is performing, isn't it?  Why would investors demand you buy back the bad loans?  I would demand the good ones too, and all the profits that came from them as well.

What most people seem to forget is the word "investment", which normally means "RISK".  If you want a guaranteed rate of return, put your money in the bank and make .2% interest.  You want 10%+ returns, you can lose your investment, or not.  Just don't cry about it, because now, no one gets a loan, except the people who do not need one.  They are the only ones that qualify, and guess who's buying those loans?  The government.

The BIG FU SCREW goes to us, the people, who cannot get a loan, unless we do not need one, and the government, who wants to blame the meltdown of the economy on banks and Wall St, when their regulations are what forced banks into "bad lending policies and guidelines" which they decided and determined.  If they can't balance a budget, what makes them think they can understand finance and investing? (Just google government deficit)


Next week, why are all of our high ranking politicians people from "nowhere".  I still cannot get over the fact that they cannot pronounce words like "nuclear" (its not "nucular" George, if you had the power to push the button, you should have been able to read what it says), and we rarely have heard of them.  For example, take a poll, and ask a person who the mayor of NYC is, and then one of the two senators of their own state.  9 out of 10 will know the mayor of NYC, and 1 out 10 will know the name of their senator.  And why do we allocate homeland security dollars to protect:  national treasures in Indiana? (What is it, the first popcorn factory?  http://www.centerforinvestigativereporting.org/files/homelandsecurity/priceofperil.html)