MORTGAGE COLLAPSE
The exact day and time when the mortgage industry collapsed is open for debate. Some reputable publications including the “Heritage Foundation” said that it happened in late 2006. My best recollection tells me it was more like April 2007. When it occurred I was still a mortgage professional and was oblivious to what was happening in Wall Street and other financial centers that the mortgage industry relied upon to get their money. There were certainly smaller events that were ripples before the one great quake that brought the massive collapse. To me, that great quake came by way of television when the news announced that “New Century Mortgage” the Irvine CA based sub-prime lender was seeking bankruptcy protection. When the dust settled, it was evident that the incidence of loan default and foreclosures of sub-prime loans were significantly higher than they had expected.
The news created a panic and predictably investors pulled out of mortgage related investments, particularly sub-prime products, first slowly and then finally en masse. Over a span of a few days the money dried up on certain types of home loans. The news that came out of news outlets and investor relations departments of lenders were not very precise or forthcoming that even high-grade mortgage investments were affected. In those days, we used to receive multi-page rate sheets daily from lenders with all sorts of products on it – Jumbo, Conforming, Lines of Credit, 2nd Mortgages, FHA, Fannie Mac, Freddie Mac, Alt-A, B & C Paper, No Income Qualifiers, Construction and other exotic loan products. When the “Mortgage Tsunami” hit, the rate sheets had dwindled down from the usual 10-15 pages to about 3 pages. All that was left were the FHA, Fannie Mae and Freddie Mac products that had lower loan limits. At that time conforming loan products had a loan limit of $417,000. In Southern California, where most of the deals required Jumbo loans, the game was about over. We could not finance a house even if we had a gun trained on the lender’s head.
A NEW MORTGAGE INDUSTRY
It is not clear how many people were employed in the mortgage industry in 2007, but it seemed like every person had a relative who was a mortgage professional. One of the objections I used to get was a fast quip about how their cousin Aaron can get them a better loan even if I gave them a 0% loan. In Orange County, there were a lot of talented mortgage professionals that made it extremely competitive but also lucrative. Mortgage Brokering in those days was more of a lifestyle than a job and required a lot of schmoozing and all the accoutrements – a nice car, nice clothes and money to take your clients or potential clients out for some socializing and entertaining.
When the “Mortgage Tsunami” hit, most of the mortgage professionals I knew were up to their eyeballs in debt, to borrow a famous line from a commercial. The interest rates were historically low and property values kept going higher and higher. Everyone thought that the good times would never end. At the time, I was driving a Mercedes Benz C230 and still I was at the bottom of the totem pole. My colleagues at work drove exotic cars – Ferraris, Porches, Lamborghinis. And those who didn’t have exotics had top dollar SUV’s or other expensive toys. Expensive toys also meant expensive homes and expensive distractions. There were memberships at country clubs of all sorts – golf, tennis and everything in between. So when the funding dried up, it was time for another gimmick, one meant to continue financing the lifestyle.
In 2008, there was an attempt to pass new legislation called the “Emergency Loan Modification Act of 2008”. Because of the appearance of the word “loan” in the legislation, someone made the connection – what seemed like a sensible way to bridge their now dwindling income until things came back to normal. It seems like every mortgage professional with a license made the exodus thinking that they can just call a note holder, usually a bank, and tell them that their clients were upside down and demand that their loan balances be changed to a lesser number. It was a combination of naiveté and old fashion positive thinking at work. The math went like this: If the loan was already in default by a few months, the cost of a foreclosure and the hassle of selling a house during a down market should convince the bank that lowering the principal was the most rational thing to do. That way they didn’t have to go through the messy process of taking back the property. The punch line was, “The banks don’t want to take your property”. It turned out that they didn’t have a choice and they did. That’s when all the problems started.
If you’ve ever done business with a mortgage broker, you’ll know what an optimistic bunch they are. “We specialize in turn-downs. If you’ve been turned down by a bank, we will get you a loan”, they used to say. Some even had a mini-department that did nothing but fix your credit rating – the IO Department – Identity Overhaul Department. When I first started in the industry, it seemed like all you had to do was prove that you were alive to get a loan. If you can fog up a mirror with your breath you’ve got a loan.
I had an acquaintance who wanted to recruit me into the loan modification business. He showed me some boilerplate forms that appeared legitimate. The idea was to file a federal action and when in court take advantage of a statute that specifically required parties to bring the actual “wet copy”, the original signed documents, as evidence. Since most banks store all the documents digitally and have the hard copy stashed remotely or even purged, they were counting on the banks not being able to bring the documents to court. That’s a quick win, they would boast. The problem is the banks also have other legal games as part of their arsenal including waging a paper war that the client could not respond to or could not afford. So now, the mortgage broker is acting as the attorney because they are both broke and neither one can afford counsel. So by the time this whole ordeal is over, the broker had spent many hours on the deal acting like legal counsel and the client is out of a processing fee of about $2500 and is homeless. There was a unified cry of outrage from these victimized homeowners that reverberated and was heard all the way to the state capitol in just about every state.
CALIFORNIA SENATE BILL 94
The California State Senate passed a new law this week protecting homeowners from being bilked by unscrupulous companies who demand advanced fees to modify their home loans. The new bill, called SB 94, is the legislator’s answer to what has become a wave of complaints against loan modification and loan forbearance companies who ask for money up front but never deliver on the promise. The victims, mostly owners of distressed properties, pay advanced fees of anywhere between $1200 to $3000 hoping to lower the principal balance of their loans or change the terms of the loan to reduce the monthly payments. Many of the complaints also state that the providers of the services were not clear about the cost of the services.
The new law has two very important consumer protection elements. First, it is now a misdemeanor to ask a homeowner any fees upfront for “loan modification” or “loan forbearance” services to be performed and delivered in the future. Second, the provider of the loan modification or loan forbearance program has to provide a statement that itemizes the fees for the services written in 14-point bold type to ensure the homeowner understands the cost of the transaction before entering into it. The new law will be effective until January 1, 2013.
The exact day and time when the mortgage industry collapsed is open for debate. Some reputable publications including the “Heritage Foundation” said that it happened in late 2006. My best recollection tells me it was more like April 2007. When it occurred I was still a mortgage professional and was oblivious to what was happening in Wall Street and other financial centers that the mortgage industry relied upon to get their money. There were certainly smaller events that were ripples before the one great quake that brought the massive collapse. To me, that great quake came by way of television when the news announced that “New Century Mortgage” the Irvine CA based sub-prime lender was seeking bankruptcy protection. When the dust settled, it was evident that the incidence of loan default and foreclosures of sub-prime loans were significantly higher than they had expected.
The news created a panic and predictably investors pulled out of mortgage related investments, particularly sub-prime products, first slowly and then finally en masse. Over a span of a few days the money dried up on certain types of home loans. The news that came out of news outlets and investor relations departments of lenders were not very precise or forthcoming that even high-grade mortgage investments were affected. In those days, we used to receive multi-page rate sheets daily from lenders with all sorts of products on it – Jumbo, Conforming, Lines of Credit, 2nd Mortgages, FHA, Fannie Mac, Freddie Mac, Alt-A, B & C Paper, No Income Qualifiers, Construction and other exotic loan products. When the “Mortgage Tsunami” hit, the rate sheets had dwindled down from the usual 10-15 pages to about 3 pages. All that was left were the FHA, Fannie Mae and Freddie Mac products that had lower loan limits. At that time conforming loan products had a loan limit of $417,000. In Southern California, where most of the deals required Jumbo loans, the game was about over. We could not finance a house even if we had a gun trained on the lender’s head.
A NEW MORTGAGE INDUSTRY
It is not clear how many people were employed in the mortgage industry in 2007, but it seemed like every person had a relative who was a mortgage professional. One of the objections I used to get was a fast quip about how their cousin Aaron can get them a better loan even if I gave them a 0% loan. In Orange County, there were a lot of talented mortgage professionals that made it extremely competitive but also lucrative. Mortgage Brokering in those days was more of a lifestyle than a job and required a lot of schmoozing and all the accoutrements – a nice car, nice clothes and money to take your clients or potential clients out for some socializing and entertaining.
When the “Mortgage Tsunami” hit, most of the mortgage professionals I knew were up to their eyeballs in debt, to borrow a famous line from a commercial. The interest rates were historically low and property values kept going higher and higher. Everyone thought that the good times would never end. At the time, I was driving a Mercedes Benz C230 and still I was at the bottom of the totem pole. My colleagues at work drove exotic cars – Ferraris, Porches, Lamborghinis. And those who didn’t have exotics had top dollar SUV’s or other expensive toys. Expensive toys also meant expensive homes and expensive distractions. There were memberships at country clubs of all sorts – golf, tennis and everything in between. So when the funding dried up, it was time for another gimmick, one meant to continue financing the lifestyle.
In 2008, there was an attempt to pass new legislation called the “Emergency Loan Modification Act of 2008”. Because of the appearance of the word “loan” in the legislation, someone made the connection – what seemed like a sensible way to bridge their now dwindling income until things came back to normal. It seems like every mortgage professional with a license made the exodus thinking that they can just call a note holder, usually a bank, and tell them that their clients were upside down and demand that their loan balances be changed to a lesser number. It was a combination of naiveté and old fashion positive thinking at work. The math went like this: If the loan was already in default by a few months, the cost of a foreclosure and the hassle of selling a house during a down market should convince the bank that lowering the principal was the most rational thing to do. That way they didn’t have to go through the messy process of taking back the property. The punch line was, “The banks don’t want to take your property”. It turned out that they didn’t have a choice and they did. That’s when all the problems started.
If you’ve ever done business with a mortgage broker, you’ll know what an optimistic bunch they are. “We specialize in turn-downs. If you’ve been turned down by a bank, we will get you a loan”, they used to say. Some even had a mini-department that did nothing but fix your credit rating – the IO Department – Identity Overhaul Department. When I first started in the industry, it seemed like all you had to do was prove that you were alive to get a loan. If you can fog up a mirror with your breath you’ve got a loan.
I had an acquaintance who wanted to recruit me into the loan modification business. He showed me some boilerplate forms that appeared legitimate. The idea was to file a federal action and when in court take advantage of a statute that specifically required parties to bring the actual “wet copy”, the original signed documents, as evidence. Since most banks store all the documents digitally and have the hard copy stashed remotely or even purged, they were counting on the banks not being able to bring the documents to court. That’s a quick win, they would boast. The problem is the banks also have other legal games as part of their arsenal including waging a paper war that the client could not respond to or could not afford. So now, the mortgage broker is acting as the attorney because they are both broke and neither one can afford counsel. So by the time this whole ordeal is over, the broker had spent many hours on the deal acting like legal counsel and the client is out of a processing fee of about $2500 and is homeless. There was a unified cry of outrage from these victimized homeowners that reverberated and was heard all the way to the state capitol in just about every state.
CALIFORNIA SENATE BILL 94
The California State Senate passed a new law this week protecting homeowners from being bilked by unscrupulous companies who demand advanced fees to modify their home loans. The new bill, called SB 94, is the legislator’s answer to what has become a wave of complaints against loan modification and loan forbearance companies who ask for money up front but never deliver on the promise. The victims, mostly owners of distressed properties, pay advanced fees of anywhere between $1200 to $3000 hoping to lower the principal balance of their loans or change the terms of the loan to reduce the monthly payments. Many of the complaints also state that the providers of the services were not clear about the cost of the services.
The new law has two very important consumer protection elements. First, it is now a misdemeanor to ask a homeowner any fees upfront for “loan modification” or “loan forbearance” services to be performed and delivered in the future. Second, the provider of the loan modification or loan forbearance program has to provide a statement that itemizes the fees for the services written in 14-point bold type to ensure the homeowner understands the cost of the transaction before entering into it. The new law will be effective until January 1, 2013.
