Thursday, April 03, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 8 - The Appraisal Game

In the arena of subprime lending, though the borrower’s ability to repay a mortgage was reviewed, underwritten per the subprime lender’s guidelines, the value of the borrower’s property, the property’s appraised value, played a more prominent role than the borrower’s ability to repay the mortgage.

Subprime lending risk assessment was heavily weighted to what is called the loan-to-value ratio of a borrower’s property.  The loan-to-value ratio is simply illustrated this way.  If you own a home that is appraised at $100,000.00, and you borrow $80,000.00, with your home as collateral, your loan-to-value ratio is eighty percent (80%).  If you borrow $90,000.00 against your $100,000.00 home, your loan-to-value ratio is ninety percent (90%).

Though appraisals have always played an integral part in any mortgage loan application, whether for a prime loan, or subprime loan, the lack of creditworthiness on the part of subprime borrowers made the appraised value of a property in the subprime lending field, much more important than in the prime lending field.  In fact, in the subprime lending field, the appraised value of a property could hold the golden key to make or break a potential deal, and this fact led to the distinct possibility of a property appraisal being manipulated, so the golden key could turn in the lock to release cash which could be dropped into a subprime borrower’s pocket.

Why was the appraisal so integral in the subprime lending industry?  Because subprime borrowers’ loan- to-values, how much they can borrower against their homes, were limited by the borrower’s individual credit score and grade.  If a borrower’s credit score was high, basically 620 or above in subprime lending, they could borrow up to one-hundred percent (100%) of the value of their home.  If the borrower’s credit score was exceedingly low, a credit score of 500 was the cutoff point in subprime lending, they could only borrow sixty-five percent (65%) of the value of their property.  Thus, the lower the borrower’s credit score, the higher the probability an appraisal with a possibly artificially high value would be required to put together a deal that the subprime borrower would be willing to go for.  Remember, the promise of cash in a borrower’s pocket was one of the biggest motivators for borrowers in subprime lending, and if an artificially high appraisal was at times required to make this happen, well, then it could happen.

But how could this happen, isn’t a property appraisal typically an independent evaluation of the value of a given property?  Yes it is.  And don’t appraisal guidelines typically require the value of a given property be calculated based on the three comparable properties?  Yes they do.  Well, how is the value of a given property then manipulated?

One of the ways a property appraisal could be manipulated was by utilizing comparable properties that actually were not comparable to the borrower’s property (the subject property).  For example, typical appraisal guidelines state that comparable properties utilized in an appraisal report should be properties similar to the subject property in style, square footage, and geographical area.  Of course this is not always possible, so an appraiser may select properties that are larger in square footage, or smaller in square footage for that matter, which are then “adjusted” to come up with a value for the subject property.

Another way a property appraisal could be manipulated was by utilizing comparable properties which were not actually in the same type of neighborhood as the subject property.  For example, a borrower’s property is located in one geographical area in a given city, and the comparable properties utilized in the appraisal report are located in another geographical area, but in the same given city.  Well, wouldn’t those properties still be comparable properties?  Probably not.  Drive around your own city, neighborhoods can change dramatically from block to block, as can appraised values, and utilization of properties such as these could lead to an erroneous value being applied to a borrower’s subject property, and national subprime lenders may not be fully cognizant of this.

Additionally, in real estate markets where demand was seemingly insatiable, sudden economic downturns could lead to property values stagnating, or, even worse, dropping so precipitously the value of homeowners’ houses eroded to the point where the borrower owed more on their home than its current value.  Properties such as these were also utilized as comparable properties in appraisal reports, which of course would result in an inaccurate value for the subject property.

Manipulation of appraisals was not necessarily systematic in the subprime lending industry.  Most national subprime lenders had controls in place to limit the possibility of manipulated appraisals being utilized when evaluating lending risk.  Where manipulation of appraisals was most apt to occur was in the mortgage brokering industry, but the subprime loans which may have been written based on these inaccurate appraisals still ended up in national subprime lenders’ servicing portfolios.

As mentioned earlier, the appraisal was of utmost importance when evaluating risk in the subprime lending industry.  Though the impact of a manipulated appraisal for the subprime borrower would be felt much closer to home.

If a subprime borrower had received a loan where a manipulated appraisal had been utilized; and appraisal manipulations which transpired occurred without their knowledge; the consequences could be dire.  In numerous cases, a current subprime borrower with an adjustable rate mortgage (ARM), who had relied on assurances from a subprime lender that “this loan will get you on the right track to be a prime borrower,” and who had reapplied for a new subprime refinance a year down the road based on these assurances, could very well find that the value of their home had not increased in value; which subprime lenders and borrowers had been betting on in order to facilitate the next refinance; and quite possibly the value of the home had declined.  Top this with no change in the borrower’s credit rating, due to no credit problem corrections being required by the subprime lender in the previous refinance, and the borrower could very well find themselves stuck in their existing ARM and staring down an imminent increase in their mortgage payment which they would be hard pressed to contend with.

Another scenario where the consequences of a manipulated appraisal came into play is when a current subprime borrower approached a different subprime lender to refinance their current subprime loan.  Often, when this new subprime lender appraised the property, the value came in substantially less than the appraisal that had been completed by the borrower’s current lender a year, or even less, ago.  This was a scenario that I saw acted out many times, and for the subprime borrower it was devastating news.

Even if a subprime borrower did not fall prey to a manipulated appraisal, the appraisal of their property could still have a huge impact on their immediate future.  This is because the majority of subprime loans written on subprime borrowers were high loan-to-value loans, gambling on continued increases in property values to mitigate the risks associated with the loan.  When this aspect of subprime lending is tied to subprime borrowers’ hopes of becoming a prime borrower in one year’s time, as intimated by subprime lenders as part of the sales pitch, unless the subprime borrower’s home was located in a high appreciating real estate market, their home’s appraised value would have, at best, only appreciated in value approximately three or four percent.  An increase in appraised value which would not even cover the costs associated with refinancing again, or, allow the lender to supply the borrower with that “cash in the pocket” which was so integral to the sale of subprime loans.

Because the vast majority of subprime loans written over the years were high loan-to-value loans, the importance of the appraisal cannot be downplayed.  Both prime borrowers and subprime borrowers desire that appraisals completed on their properties come in high, but this was most assuredly so for subprime borrowers whose low credit scores and credit grades limited the amount they could borrow due to loan-to-value restrictions.  A manipulated appraisal may have unlocked the golden cash drawer initially, but in the future, as is so evident today, they simply became another weight pulling the subprime borrower, and the industry, into the depths.

Posted by John Venlet on 04/03 at 11:47 AM
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Wednesday, April 02, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 7 - Churning in the Equity Threshing Machine

As I noted previously, many subprime refinance solicitations were simply haphazardly scattered in the hope that a new mark would be induced to call the offered 800 number for a “free” mortgage analysis.  And why not cast these solicitations far and wide?  Individuals’ personal financial situations are changing daily, whether due to personal financial and credit mismanagement, or deteriorating economic conditions.  Individuals who may have been flush with cash just months ago, may all of a sudden become strapped for cash, weighed down with credit obligations they are no longer able to honor, leaving their credit score plummeting, and turning them into candidates ripe for a subprime loan, and the equity threshing machine.

But what about those individuals who were currently in a subprime loan and who were often bombarded with daily offers to refinance their home once again?  Individuals who had already bargained away five percent (5%), ten percent (10%), or more, of the equity in their homes just to cover lender fees in exchange for a subprime loan bailout of their precarious financial situation.  Why were these current subprime borrowers being solicited to refinance, again and again, into another subprime loan?

Do not get me wrong, here, being solicited to refinance your home is not, in and of itself, a bad thing.  The issue here, was a large percentage of the individuals being solicited to refinance again and again, by subprime lenders, were current subprime borrowers whose credit history and scores had not improved since their last refinance, and who had already traded good percentages of their home equity for a false sense of financial security.

Unfortunately, for the majority of current subprime borrowers, due to both a lack of elapsed time since their last refinance, and more importantly, due to the fact that most subprime lenders did not require that borrowers’ delinquent, or “bad” credit references, be corrected or repaired in order to be approved for a loan, remained subprime borrowers.

The subprime lender’s stance, in regards to borrowers’ delinquent credit obligations, was, if a delinquent credit account did not affect Title, meaning, if the delinquent credit account did not have the ability to become a lien on the property, the subprime lender, in most instances, would not require the bad credit account to be paid off, or brought current.  Thus the delinquent account remained as a blemish on the borrower’s credit history, which in turn continued to weigh the borrower’s credit score down, maintaining them as subprime borrowers.  Ignoring these current delinquent credit accounts benefited not the borrower, but the subprime lender, in the form of, basically, “captive” subprime clients who were considered as nothing more than possible future sources of revenue for the lenders.

Many current subprime borrowers were extremely interested in the possibility of refinancing and subprime lenders exploited this fact.  In fact, most current subprime borrowers would jump at the chance to refinance, again, because they had been led to believe, by the lender’s sale pitch, that the subprime loan that they took out twelve months ago, eight months ago, or even as little as six months ago, would assist them in getting back on track as a prime, or “A” borrower, in addition to eliminating their current financial pickle.

Another reason so many current subprime borrowers were interested in going down the subprime refinance road once again was because they had become fully aware that the mortgage loan they had so recently taken out was not that great of a loan; in most cases an adjustable rate mortgage (ARM); and the borrowers were very interested in exploring refinance options in the hope that the risk of future payment adjustments could be eliminated, or at least postponed, even at the expense of tapping their home equity once again.

In reality, though, subprime lenders were fully aware that most borrowers’ credit scores/grades would not have improved enough, since their last refinance, to allow them to qualify for a prime mortgage loan, and they profited from this.  Did this matter to the subprime lender?  Not in the least.  The lender’s aim; regardless of the “feel good, cash in your hand, lower your total monthly payments, this loan will get your credit back on track and transform you into a prime borrower” sales pitches utilized; was simply to add another unit (loan), and more importantly the revenue gained from the loan, to their bottom line.  Though subprime lenders’ advertisements oozed with friendliness and salve for subprime borrowers’ financial woes, if the lender could not make any money off of the “deal,” they would simply, and facetiously apologetically, turn down the loan, and then contact the borrower again, perhaps a month later, sometimes even sooner, and attempt to generate a deal once again.

For example, during the year and one-half I was actually employed in the subprime lending industry as a Branch Manager, I was working for one of the largest subprime players in the United States.  This lender typically provided between seventy-five and one hundred “leads” per week to each account executive.  These “leads” were simply the most recent mortgage loan servicing data, and of course a contact phone number, on borrowers currently making their payments to the lender.  Of these seventy-five to one hundred leads, twenty-five (25%) percent of them were usually leads that had been previously contacted and analyzed as “turn downs”, or “no sales,” less than thirty days ago, many times less than thirty days ago, by the lender’s own account executives.

Though the lender’s own employees had contacted the borrowers, reviewed the borrowers’ credit and available remaining equity, and determined that the borrower did not have enough equity, or their credit had not improved enough to allow them to qualify for another refinance (a turn down), or, the borrowers expressed no interest in refinancing, due to their dissatisfaction with the loan they had just recently taken out (a no sale), or the borrowers did not want to forfeit any more of the equity in their home (also a no sale), the lender simply recycled the “lead” to another account executive, or another branch office, as a “new lead.” The borrower would then be contacted once again in the hope that possibly a different account executive’s voice, or a more emotionally nuanced sales pitch, could induce the borrower to jump into the equity threshing machine once again.

In addition to the “captive” leads mentioned above, the lender also provided, on a daily basis, “warm” call-in leads to account executives.  The majority of these leads were borrowers who had seen, heard, or read one of the willy-nilly scattered refinance solicitations previously mentioned, and then dialed up the lender supplied 800 number in order to explore the easy-as-pie refinance opportunity being pitched via the various advertising mediums utilized by subprime lenders.

But, at least twenty (20%) percent of these “warm” call-in leads were current borrowers of the lender who had simply called in to what they thought was the lender’s servicing call center.  Utilizing the 800 number obtained directly from their subprime lender supplied monthly mortgage statement, these borrowers were calling in to ask a question regarding their current mortgage payment due date, their upcoming payment change, or other general questions.  Unfortunately, for these latter mentioned current customers, who only desired to ask questions about their current mortgage rather than being solicited to refinance again, the call they made was not actually routed to the lender’s servicing call center, but to a sales lead dispatch center.  Thus, the lender’s current borrowers, who were under the impression they were calling the lender’s servicing center to be serviced, would not be transferred to the servicing center for answers to their questions, but instead would have their call routed to an account executive in a branch office, in the hope that a new sales pitch could be made.

Perhaps the most egregious examples of borrowers being churned through the subprime equity threshing machine were those borrowers who were currently in a subprime loan, who only qualified for another subprime loan, and who had already mortgaged between ninety and ninety-five percent of their homes’ equity.  There was not a subprime lender in the country who did not consider these high loan-to-value borrowers as potential revenue sources again until the borrower had no more equity left to exchange for a little bit of cash in their hand, or a small reduction in their monthly payment.  Subprime lenders had little concern for a borrower’s equity position in their home.  The less equity the borrower had in their home, the higher the interest rate the subprime lender could charge to the borrower, and, typically, the higher the profit margin on the loan for the subprime lender.

Though subprime lenders’ advertising presented a picture of easy does it refinancing and credit repair, no matter what your credit situation might be, the subprime lender’s concern was with revenue, and revenue alone.  As long as the subprime lender could make money from the loan, meaning strip equity from your home to obtain revenue for their bottom line, the lender would continue soliciting current subprime borrowers to refinance until they had no more equity left to strip.  Once a subprime borrower reached this point, with their credit still in a subprime status, subprime lenders’ easy does it refinance friendliness evaporated.  The borrower simply became another delinquent mortgagor who must contend with ominous sounding letters threatening foreclosure, payment increases due to payment arrearages or ARM adjustments, or other dire actions while still receiving multiple solicitations to refinance, which, of course, the borrower would be unable to do.

Posted by John Venlet on 04/02 at 10:25 AM
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Tuesday, April 01, 2008

Fraud or Simply Unethical and Foolish Subprime Lending

According to Reuters, the FBI is currently conducting approximately 1,300 mortgage fraud investigations, and it has established a new mortgage fraud website to facilitate their investigations, and in response to “public demand,” which of course is just another hey we’re doing something about it knee jerk response to the total collapse of the subprime lending industry.

While the FBI may find a few prosecutable mortgage lending fraud cases, what will mostly be brought to light by their investigations will be the foolishness of the underwriting guidelines utilized by the subprime lending industry, and the unethical, but not illegal, methods which were utilized to suck subprime borrowers in.

FBI says targets major insiders in mortgage probe

Posted by John Venlet on 04/01 at 01:17 PM
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Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 6 - Boiler Room Marketing

As I previously mentioned in Chapter 4, Bombardment of Easy Dollars, one of the most profitable marketing methods for subprime lenders was telemarketing to their own current customers (mortgagees).  The least expensive method of accomplishing this was simply for subprime lenders to utilize their own account executives as not only account executives, but as the telemarketers, and subprime lenders developed their own telemarketing methods which were almost textbook boiler room for their account executives.

Boiler room techniques have been described as high pressure sales, where as many sales people as possible are crammed into one space, and hundreds of phone calls per day are made to prospective clients.  Additionally, many boiler room sales operations randomly record many of the calls made to prospective clients, and, the performance of each telemarketer is closely monitored.  Just as was done in the subprime lending industry.  Two of the most closely monitored performance keys, in the subprime lending industry, were the number of calls made per day by each account executive, and, did the account executive follow the prescribed script.  If an individual account executive fell short on the number of prescribed calls per day, or failed to follow the script, dismissal was sure to closely follow.

Though many individuals associate boiler room techniques with the fraudulent sale of securities, the sale of subprime loans to less than credit worthy borrowers was by no means fraudulent.  Neither was the making of phone call, after phone call, after phone call, in search of a sale, fraudulent.  In fact, nothing about subprime lending, in and of itself, was fraudulent, though individual account executives working within the subprime lending industry could be prone to utilizing less than scrupulous practices to make a deal.

A typical subprime lending account executive’s day began with a sales meeting, just as is done in a typical boiler room operation.  The sales meeting agenda usually covered the previous day’s activity, reviewing each account executive’s call history; did he make those one hundred (100) phone calls?; the number of actual sales made, and some cajoling; so and so put together three deals, why haven’t you?; hyping of the current most popular loan product; this loan program seems to be selling better at the moment so let’s push it; and then ended with the rah, rah, rah get out there and hit those phones pep talk.  Classic boiler room activities.

After the sales meeting, of course, the dialing began.  The subprime lending account executives began the daily dialing grind, contacting prospective customer, after prospective customer, mouthing the scripted sales lines in the hope of landing a deal.

Is the prospect not at home?  Well, don’t bother leaving a message, because they probably will not call back anyway.  Does the prospect only desire to talk about what interest rates are available?  The account executive mouthed the scripted line that “we have many loan programs and interest rates to choose from,” but he needs to gather additional information so the best rate can be quoted.  Does the prospect not have time for this?  Then the account executive will end the call as quickly as possible, because there is no money to be made politely chit chatting.  Has the prospect been contacted previously and informed that there is no loan program available based on his credit score or other factors?  Well, things might have changed since that last contact, the prospect will be informed, and then asked if he minds if the account executive pulls their credit report, again.

If a prospect was initially eager to hear the entire sales pitch, and provided all the necessary data for an analysis of his credit and income, and was then presented with a loan option but hesitated to commit with the account executive, then a sales team leader would pick up the phone, dial the prospect up once again, and extol all the benefits of the loan, both actual and supposed, in an attempt to get the prospect’s commitment.  If the sales team leader struck out, then the sales manager would pick up the phone and once again extol the benefits of the loan to the prospect in the hopes of making the deal.  This is also a classic boiler room technique.

What if a prospect called into the boiler room atmosphere of a subprime lender, instead of being contacted by the lender?  So much the better, as far as subprime lenders were concerned.  But what if the prospect was calling in and referencing an offer supposedly made via a mailer received in their home, which specified a specific loan program, and also stated that they were “pre-approved” for the loan program, as presented in the mailer?  “Excellent,” the prospect would be told, “but first,” the account executive would say, “I need to verify some basic income and credit information in order to proceed with your loan.”

But what happened if the basic income and credit information revealed the prospect did not qualify for the loan program as specified in the “pre-approved” mailer the prospect received?  No problem, the subprime lender’s account executive would simply inform the prospect that the mailer the prospect received, which had been sent out by the thousands, was good only for only a short time after the mailer had been sent out, and that borrowers who met the criteria for that program had filled all available openings for the program.  But, based upon the income and credit information the prospect currently has on file with the lender, which of course will need to be re-verified, they may qualify for another loan program.  Would the prospect like to review the details?  Of course they would, because the prospect is in need of debt relief, cash, or both.

But is that not considered a classic “bait and switch” technique?” Not in the lending industry, where prior to being approved for a loan the prospect must first lay his cards on the table, so to speak, by allowing a full review of the prospect’s income and credit information.  But what about that mailer which had stated that the prospect had already been “pre-approved” for the loan?  The fine print buried at the bottom of the mailer covered just such a contingency, providing an “out” to the subprime lender with a disclaimer which stated that the loan was contingent upon credit approval, verification of income, underwriting approval, or language to that effect.

Just as in boiler room sales operations, the key to success in the subprime lending industry was to call, call, call.  It was a numbers game.  If an account executive was not on the telephone with a prospect, there was not going to be a sale.  If a prospect was asking too many questions, and the account executive was not able to follow the prescribed sales script, it was time to end the call and dial up a new prospect to make a fresh pitch.

Has a prospect declined to move ahead with an offered loan program?  Pass the prospect along to another account executive, or a sales team leader, or the sales manager, and let them take a whack at the prospect because they may just be able to sell the prospect on the pitched loan the account executive has been unable to move, and then get on the phone to the next prospect on the list.

As in most boiler room sales operations, the turnover rate of account executives within the subprime lending industry was quite high.  Though this caused some upper management concern, because new potential account executives were constantly being interviewed, replacing an empty desk with a fresh body to dial the phone was not difficult.  All that a new account executive really had to learn was the sales script, and once this was accomplished, they were on their way.

Posted by John Venlet on 04/01 at 12:04 PM
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Monday, March 31, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 5 - The Pitch

The emotionally charged bombardment of easy dollars advertising campaigns utilized by the subprime lending industry did bring potential borrowers in the doors, or more accurately, caused subprime lenders’ phones to ring.  But, the emotions which ignited the ringing of the phones alone was not sufficient to seal a deal.  Subprime lenders needed an easy to hit, homerun pitch to win subprime borrowers’ confidence, and secure their signatures.

The subprime lending industry was exceptionally adept at making the refinance pitch to borrowers with credit problems.  Whether the borrower was hearing the pitch for the first time, the third time, or the fifth time, subprime lenders knew exactly what borrower buttons to push to induce borrowers to refinance, even if the benefits to the borrower of refinancing were few and lackluster.

All individuals, whether purchasing a car, a refrigerator, or, in our case, a mortgage, are susceptible to emotional cues, and the emotional cues, or buttons, for borrowers who only qualify for subprime financing are many.  Subprime lenders knew this, and they regularly plied these emotional buttons with virtuosity.

The majority of subprime lenders provided a sales script, what many of us would think of as a playbook, to their account executives.  These sales scripts, which have been psychologically refined for optimization of profitability, provided the subprime lender’s account executives with the exact sequencing of emotional buttons to push at specific points in their conversations with potential subprime borrowers.  In fact, the sales script were so well fine tuned that a subprime lender could take a reasonably intelligent and personable individual, with no mortgage experience what-so-ever, off of the street and have them signing up borrowers for subprime loans in five (5) weeks or less.  Which was quite important as the turnover rate of account executives within the subprime loan industry was quite high.

The primary emotional button for buyers; though as buyers we may not want to admit it; of any product or service, is enthusiasm.  This was especially true in subprime lending, and here is why.  Most individuals, who are experiencing credit problems which affect their ability to borrow, are embarrassed by this issue and are not necessarily willing to speak about the problem, whether to their family, their friends, or the unknown subprime lending account executive at the other end of a telephone line.

The most successful subprime lending account executives were those who took the provided sales script, memorized it frontward and backwards, and then enthusiastically delivered the scripted lines to the potential borrower beginning with the word hello.  The initial enthusiastic greeting and emotional cues, scripted by subprime lenders, and delivered word for word by the lender’s account executives, were designed to suck borrowers deeper into the sales script where the homerun pitch could be made.

After the initial greeting and introductions had been made, the sales scripts were designed for seamless gliding into the actual sales pitch.  One of the most effective initial sales pitches in the subprime lending industry ran along these lines, “Mr. Borrower, or may I call you Joe?  Okay Joe, we’ve just completed a review of your recent mortgage payment history, and based on your history it looks like we could very well put together a new mortgage for you and save you a bit of money every month, and put some cash in your pocket.  Do you have a few minutes to talk with me about this opportunity?”

Sounds promising, does it not?  Of course it does, and who wouldn’t have a few minutes to talk about a potential “opportunity” to save some money and obtain some cash at the same time?  The vast majority of subprime borrowers who heard the above words, especially the words “cash in your pocket,” delivered enthusiastically of course, breathlessly waited for the next line of the sales pitch.  Of course the borrowers may have been well aware that they had not been paying their mortgage payment, or other credit obligations, in a timely manner and had little chance to actually improve their current financial situation.  But why would a subprime lender contact them, state that they could save them some money, and possibly put some cash in their pocket, if what the subprime lender said was not true?  For one reason, and one reason only.  To profit from the borrowers’ beleaguered situation.

Another favored, and effective, sales pitch of the subprime lending industry was, “Mr. Borrower, your current mortgage loan is due to have an interest rate increase, and now would be a good time to beat that potential increase by refinancing while rates are still low.” Whose ears would not perk up and pay attention if they were under the gun of a potential interest rate increase?

Less effective, but just as compelling to subprime borrowers, was the sales pitch of, “Mr. Borrower, I’ve recently refinanced quite a few people in your area,” (whether true or not) “and with interest rates about to increase,” (whether true or not) “now would be a good time to review your current mortgage to take advantage of existing rates, and possibly put some cash in your pocket.”

Of course not every sales call made necessarily followed the sales script.  The borrower may ask what interest rate is available right after the initial greeting.  Or, the borrower may offer up some other objection to continuing the call.  This did happen, and quite frequently, but the subprime lending sales script provided the answer to interest rate question, and every other offered objection to the call, in order to keep the prospect on the line and the account executive in charge of the pitch.

For example, if a borrower interrupted the sales pitch with a question in regards to the interest rate charged, a typical scripted reply was, “Mr. Borrower, we have many interest rates to choose from, but the only way I can quote you an interest rate is by completely reviewing your credit and income information, which, by the way, is free of charge.  Are you interested in reviewing this information with me so that we can provide you with the best possible interest rate?”

Another effective and emotional sales pitch utilized in subprime lending preyed on subprime borrowers’ constant dealings with disgruntled creditors requesting payments owed.  Where these creditors may have been brusque with the borrowers, the subprime lender was soothing and full of optimism.  The subprime lender may have promised immediate relief from the constant creditor calls by consolidating all of the borrowers’ current outstanding debt into one, low, monthly payment.  Or, the lender may have informed the borrower that their connections to the credit monitoring agencies may assist the borrower in having negatively reporting credit lines cleaned up, which, in turn, may allow the borrower to qualify for a better interest rate.  Needless to say, both of the above mentioned offers, made by subprime lenders, offered an emotional, and actual, relief which subprime borrowers were quick to grasp.

What happens, though, after the sales pitch has been made to the borrower, and the loan terms offered to the borrower did not induce the borrower to proceed with the loan?  Did the subprime lender simply chalk it up to the vagaries of doing business and move on to the next potential borrower?  Not likely.  In many instances subprime lenders practiced a technique which is known in the industry as “second voicing.”

Second voicing was the practice of handing off an unsuccessfully sales pitched borrower to a more seasoned subprime lending account executive, or preferably the sales manager, within the same subprime lending branch.  What typically happened in a second voicing was the borrower was contacted once again, ostensibly as a simple courtesy call to check up on the performance of the account executive who originally made the sales pitch.  The second voicing individual usually said something along the lines of “Mr. Borrower, my name is Joe the manager, and I wanted to touch base with you today to evaluate Mike the account executive’s performance and ensure that Mike the account executive adequately answered all of your questions and addressed all of your lending needs.  I also want to ensure the Mike the account executive recommended the correct lending program for your financial needs.  Do you have a few minutes to talk with me about that?”

This second voicing approach, once again, appealed emotionally to subprime borrowers.  It provided borrowers with another opportunity to talk, to provide input, and possibly voice objections, which the second voicing individual would politely listen to and take notes on.  More importantly, it provided the subprime lender, under the guise of performance monitoring, via the individual performing the second voicing, an opportunity to pitch the subprime loan to the borrower once again.

Though second voicing may have only converted one (1) out of ten (10) potential borrowers who had refused the initial subprime loan pitch, that ten percent (10%) second voicing conversion rate brought in thousands of dollars in profit to the subprime lenders’ bottom lines.

But the pitch which produced the most homeruns in subprime lending was the monthly payment, cash in your pocket pitch.  If a borrower had allowed the account executive to gather all their pertinent financial and credit information, the account executive would take that data and massage the borrower’s current credit obligation numbers in an attempt to ascertain how to most effectively present a monthly payment to the borrower which was less than what the borrower was currently paying per month.

In most instances, if a monthly payment number could be presented to the borrower which saved them fifty dollars ($50.00) or more per month, as compared to what they were actually currently paying per month for all their monthly debts, and put cash in their pocket, like a trophy for a job well done, another subprime loan deal was inked.

Posted by John Venlet on 03/31 at 07:48 AM
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Sunday, March 30, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 4 - Bombardment of Easy Dollars

At the height of the subprime lending boom, how often did you receive a phone call from a nationally known mortgage lender, or, for that matter, an unknown mortgage lender, soliciting you to refinance your home?  Two times per week?  Three times per week or more?  How many pieces of mail did you receive per week soliciting you to refinance your home?  Five pieces, six pieces, more?  How many television or radio spots did you view or listen to per week soliciting you to refinance your home?  Ten, a dozen or more?  And let’s not forget about the internet.  Were there any internet pages that did not display some mortgage lender’s solicitation to refinance your home, credit problems notwithstanding?

A large percentage of these solicitations, no matter what the advertising medium, begging for your business with promises of easy cash, no matter what your creditworthiness may be, were simply shotgun pellet scattered, in the hope that a new mark would be induced to call the offered 800 number for a “free” mortgage analysis.  There was no need for rifled advertising, as the subprime lending target was huge.

What about those individuals who were currently paying on a subprime loan?  How often were they bombarded with offers to refinance their home?  Current subprime borrowers were often solicited almost to the point of harassment.

Borrowers currently paying on subprime loans, in many instances, were solicited to refinance their homes on an almost daily basis.  In addition to the unsolicited shotgunned solicitations noted above, and the solicitations which arrived with each monthly mortgage payment coupon, current subprime borrowers typically received a minimum of one phone call per week, and possibly more, from the subprime mortgage lender to whom they were currently submitting their mortgage payment (the Servicer).  The call from the lender may have come into their home as simple “courtesy” call, or a “friendly reminder” to make your payment call, or simply a “mortgage checkup” call, but the end game of the subprime lender was to induce the homeowner to speak with an account executive in order to solicit (encourage) the homeowner to refinance once again.  And subprime lenders did do everything in their power to make it easy for you to refinance, again and again, even if you last refinanced less than six months ago, your credit was still sub-par, and you had little remaining equity in your home.

The impetus behind this advertising bombardment of “easy dollars” was the profitability of originating subprime loans on a volume basis.  And when you consider the net profit per subprime loan, which was anywhere between four percent (4%) and seven percent (7%), the dollars spent on subprime solicitation advertising were dollars well spent.

As noted in the previous chapter, the profits being made by mortgage brokers, in the subprime lending side of the mortgage business, did not miss the gaze of traditional “A” paper national mortgage lenders.  Like mortgage brokers, traditional “A” paper lenders were also feeling the pinch of declining profitability on the “A” paper side of the business in the early 1990s, due to mortgage brokering’s meteoric rise.  Once the profits being made by mortgage brokers in subprime lending were noted, these traditional “A” paper national lenders brought their formidable marketing machines to bear on the general public, trumpeting messages of “easy” mortgage money.  And once traditional “A” paper national lenders began advertising subprime loans nationally, the stigma previously attached to subprime lending faded into the past, and an aura of respectability took its place.

Where previously advertisements for subprime mortgage money had been buried in the classified ad section of newspapers, they now appeared right out in the open.  Subprime mortgage advertising began blaring from national television, radio, and internet advertising.  Like a new fad, subprime mortgage financing swept across the country, and began devouring the equity in high risk credit borrowers’ homes.

The advertisements played, and preyed, upon peoples’ emotions.  Are your creditors hassling you about past due payments?  Call 1-800-EZMONEY!  Has your car broke down and you cannot afford to repair it?  Call 1-800-EZMONEY!  Are your bills piling up and are you losing sleep at night?  Call 1-800-EZMONEY!  Have you been turned down for a home mortgage by a traditional, tight fisted mortgage lender?  Call 1-800-EZMONEY!  Do you have bad credit?  No problem, call 1-800-EZMONEY!

All of this advertising did drive a substantial amount of mortgage business, and profit, to subprime, and the traditional “A” paper lenders who tapped into this profitable lending vein.  But, the thirst for additional profits, at the expense of homeowners’ equity, created a need for even more effective advertising methods.  Aggressive telemarketing filled this need.

In addition to the shotgun marketing of subprime loans noted previously, many mortgage lenders also utilized “hired guns” to fill their subprime telemarketing needs.  Lenders would contract with seasoned telemarketing firms, provide a detailed script for the firm’s telemarketers, and then pursue the leads the telemarketers provided them.  And though this also did drive a lot of subprime business, there was still room for
improvement.

The weakness lenders found in this “hired gun” telemarketing method was time lapse.  The more time that passed between the time of the telemarketers’ initial contact with a potential subprime borrower, to the follow-up call by the lender, after the lead had been received, the less likely it was that a borrower would be willing to apply for a subprime loan.  The lenders were not striking while the “iron was hot.”

Subprime lenders corrected this time lapse problem in a number of ways.  Some created their own telemarketing departments, which enabled the telemarketer’s call to be transferred immediately to a loan officer just waiting for the phone to ring.  Others fined tuned the telephone technology which would allow “hired gun” telemarketers’ calls to be transferred immediately to a loan officer, with the borrowers totally unaware that the telemarketer they were speaking with was not an employee of the lender. 

Some subprime brokers/lenders simply handed out sheets torn from their local phone book and simply directed their account executives to dial, dial, dial, until they located a hot prospect.  And why wouldn’t they?  Even if it took thirty (30) or more phone calls to land one deal, the deal was going to profitable.

Another marketing method utilized in subprime lending was for lenders to comb through their own list of current borrowers (mortgagees), tallying up those who were behind on their current mortgage payment, and then handing out these borrowers names and phone numbers to their stable of account executives.  This particular marketing method, known as “churning,” was probably the most profitable for the subprime lending industry.  There were no “hired gun” telemarketing expenses, no lender staff telemarketing expenses, and most advantageous of all, the lender retained their current subprime borrower rather than potentially losing them to another subprime lender’s servicing portfolio who was telemarketing just as aggressively.

Like so much penny candy, thousands of these types of lead were handed out each week to subprime lenders’ account executives.  Though eighty percent (80%) or more of these leads were worthless, the profits which were garnered from the remaining twenty percent (20%) more than made up for the eighty percent (80%) of fruitless leads.

One reason eighty percent (80%) or more of these what I would call “captive” leads were worthless, was that the borrowers’ credit situation may have actually degraded since their last refinance, and the lender could not figure out a way to provide any “financial benefit” to the borrower while at the same time profiting from the loan.  And proof of so called “financial benefit” for the subprime borrower was considered as a gold star for the loan if regulatory agencies sniffed around, or disgruntled borrowers contacted a lawyer.

Another reason eighty percent (80%) of these leads were worthless was because many borrowers may have only had five percent (5%), or less, equity remaining in their home, due to previous refinances, and refinancing yet again would have actually increased the borrowers’ interest rate and mortgage payment, not to mention eaten up their remaining equity.  Much to the chagrin of the lender who had hoped to pluck additional profits from the borrower’s remaining five percent (5%) equity.  Even so, these worthless leads were recycled over and over and over to account executives, just in case a “deal” could be made and receive the “financial benefit” gold star.

One final reason to note for the eighty percent (80%) of these “captive” leads which were worthless is that some current subprime borrowers simply became sick and tired of being solicited to refinance.  Though even if this fact was noted in the lender’s database, the lead was often recycled through to an account executive once again.  Additionally, some borrowers finally figured out that even though the lender was still willing to refinance their mortgage once again, their financial situation was little improved each time the lender reached out their supposedly cash filled helping hand, and their credit worthiness had actually gotten worse.

There is only one true escape for subprime borrowers from this bombardment of easy dollars, and that is to bite the bullet in regards to misuse of credit and living beyond their financial means.  If individuals are unwilling to bite the bullet, they may soon find themselves with little or no remaining equity in their home, and quite possibly in real danger of losing their home through foreclosure proceedings.  Though in all likelihood, even in this direst of financial circumstances, they will still be receiving multiple offers to refinance their home, no matter what they credit situation may be.

Posted by John Venlet on 03/30 at 11:48 AM
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Saturday, March 29, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 3 - Vanilla Ice Cream, or Big Chicken Dinner?

When I first began working in the mortgage industry, in 1987, I strictly worked with “A” (prime) borrowers who were looking to purchase a home.  This was also true for the majority of “A” paper mortgage lenders in 1987.  The borrowers we worked with on the “A” side of the mortgage business were borrowers with good credit, decent jobs, and in most instances, the borrowers also had at least ten percent (10%) of the value of the home in cash as a down payment.  The vast majority of mortgages written for these “A” borrowers were thirty (30) year, fixed rate mortgages, which were called “vanilla ice cream” mortgages.

This does not mean that there were not borrowers out there in 1987 that had bad credit.  Nor does this mean that there were not mortgage lenders out in the marketplace that wrote “B,” “C,” and “D” paper (subprime) mortgage loans at this time.  “B,” “C,” “D” paper borrowers, and lenders, were out there in the marketplace in 1987, though the subprime lenders willing to risk lending to subprime borrowers in 1987 were operating on the margins of the mortgage industry, and the number of subprime lenders doing business in 1987 was minimal.  “A” (prime) paper mortgage lenders just did not, or would not, work with these subprime lenders.  We called these “B,” “C,” “D” mortgages (subprime loans), and borrowers, “big chicken dinners,” for reasons which will soon be related.

In 1987, the overwhelming perception of “B,” “C,” “D” (subprime) mortgage lenders, held by “A” paper lenders, was that subprime lenders were “sharks,” preying on the financially unfortunate. There was a distinct, slimy stigma associated with subprime lenders, and most “A” paper lenders wanted nothing to do with these subprime lenders, or the borrowers they tended to feed on.  And why would they?  The “A” paper side of the mortgage business was more than profitable, with gross margins per loan averaging around three and one-half percent (3.5%).

In 1987, subprime lenders were averaging gross margins any where between ten percent (10%) and twelve percent (12%) per loan, at the expense of borrowers’ equity, and they were gloating about this.  In fact, the few “B,” “C,” “D” mortgage lender representatives who were calling on “A” paper mortgage lenders in search of subprime business in 1987, proclaimed these gross profit numbers with pride, wondering aloud why any lender would work with “A” borrowers when so much money could be made off of borrowers who have no other recourse for mortgage financing due to their poor credit.  Why settle for vanilla ice cream, when you can have a big chicken dinner?

“A” paper lenders continued to perceive subprime lenders as “sharks” into the early 1990s.  But, this perception began to give way to a perception of envy of subprime lenders, as profit margins for “A” paper lenders gradually began to erode.  What was the impetus for the erosion of “A” paper lender profits?  The phenomenal growth of the mortgage broker business.

Though mortgage brokering had been around for many years on a small scale, it really began to take off in the late 1980s after the deregulation of the mortgage industry as a whole.  This rapid expansion of mortgage brokering brought so many players into the “A” paper mortgage loan origination market profits could do nothing but be squeezed.  “A” paper lenders saw their gross margins drop from three and one-half percent (3.5%) per loan, to three percent (3.0%), then to two and one-half percent (2.5%), then to two percent (2.0%), and even lower.  In 1992 there were even small one and two man mortgage broker shops who would work for a one percent (1.0%) gross margin per loan, operating as if they were in the grocery business.

Though this rapid growth of mortgage brokering was good for “A” borrowers, in the form of more competitive interest rates and lower fees, and fewer overrides for the lender, it also spurred the growth of subprime lending.  But this growth spurt in the subprime lending industry was not so much a benefit for subprime borrowers, as it was for the “A” paper lenders who were looking for ways to stem the loss of their profitability, which brought a new found legitimacy to subprime lending which previously it had lacked.

Unfortunately, it was a shady legitimacy.  As more and more “A” paper lenders, who previously had shunned subprime lending, began pursuing subprime borrowers, the excesses which had been whispered about the subprime lending industry, became mainstream.  No longer would subprime lending’s notorious profit making, at the expense of marginal borrowers’ home equity, be operated on the margins of the mortgage industry.  In fact, subprime lending would become the fastest growing segment of the mortgage industry.

Initially, many “A” paper lenders only would do three or four subprime mortgages per month.  Just enough subprime loans to pad the bottom line, but this would not last long.  As the easy profits which had been intimated to “A” paper lenders by subprime lenders began to roll in, many “A” paper lenders jumped feet first into the “easy” money mode of subprime lending and simply let their “A” paper business languish.

Other “A” paper lenders setup subprime lending DBA’s (doing business as) entities, not wishing to tarnish their “A” paper lender reputations with subprime lending’s previously noted stigma.  But, as larger and larger nationwide mortgage lending corporations jumped into this very profitable segment of the mortgage business, the stigma previously associated with subprime lending soon received wholesale legitimization.

Though the “A” paper side of the mortgage industry continued to grow; just look at the stock performance of the Federal National Mortgage Association (Fannie Mae) over the years; in comparison, the growth of the subprime loan industry rocketed into the stratosphere.  Subprime lenders became more and more visible, and rapacious, across the nation.  This is turn led to “A” paper lenders; who previously would not have considered advertising the fact that they participated in lending to subprime borrowers; to begin saturating the market with myriads of advertisements targetted specifically to subprime borrowers spouting “easy” mortgage money availability, no matter what borrowers personal credit circumstances may be.

Though the phenomenal growth of the mortgage broker business was initially the main catalyst for the rapid growth of the subprime lending industry, the national mortgage lenders soon became the major players, and legitimizers, of the subprime lending industry nationwide.  These national mortgage lenders brought a whole new meaning to the term “easy” money.

Posted by John Venlet on 03/29 at 07:29 AM
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Friday, March 28, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 2 - Make a Pile of Cash

Two years after I purchased and financed my first home, I was presented with an opportunity to be employed in the mortgage industry.  I was presented with the opportunity by the very same individual who assisted me through my first mortgage application.  Because my knowledge of mortgage lending had not greatly increased since I purchased my home, I was a bit hesitant to explore the opportunity.  But, since I was offered a free dinner, and whispered promises of earning two to three times what I was currently earning, I went and listened attentively to the opportunity mortgage lending had in store for me.

The dinner I had that evening was excellent, but I was somewhat surprised that the entire conversation regarding the opportunity to pursue employment in the mortgage industry seemed to be dominated by how much money I could make, rather than the mechanics of how the business worked.  Each answer I received to my questions about the mechanics of the industry seemed to rotate around the money to be made, rather than the service to be provided.  There was no conversation regarding the “American Dream” of homeownership, or the mortgage industry’s role in fulfilling the dream.  There was no conversation regarding how one develops the necessary contacts to become successful in the mortgage industry.  There was no conversation about how to deal with borrowers, or their apprehensions, when in need of financing for a home purchase or refinance.  The entire conversation was dominated by the money to be made.

Do not get me wrong.  Making money at your job is a good thing.  The income we earn allows us to purchase the necessities we require, and the luxuries we desire, in life.  More importantly, it can allow us to take that step of fulfilling the “American Dream” of homeownership.  And, isn’t earning good money also a large part of the “American Dream?”

Earning good money is, without a doubt, part and parcel of the “American Dream,” and I also desired to realize this part of the dream.  Little did I realize, at that time, how easy it would become to focus only on the money to be made, rather than the service I was providing, to those in need of mortgage financing.

About two weeks after the above mentioned dinner, I accepted a position as a loan originator with the mortgage banker who had arranged my first home mortgage.  I approached this new opportunity with zeal, and naïveté.  Even though the carrot held before me was the money to be made in the mortgage industry, at the time I first began working in the industry, I was more inclined to think of the position I accepted as a chance to help people realize their dream, the homeownership dream, rather than simply a chance to make a pile of cash.

One of my first tasks upon starting this new job was to read everything I could that was available on mortgages.  I read underwriting regulations, loan program guidelines, mortgage sales technique manuals, and anything thing else I could get my hands on that had to do with mortgages.  I wanted to be the most knowledgeable, and informative, mortgage loan originator in the market.

After thirty days of intensive reading, and a few sales calls with an experienced loan originator, I hit the streets on my own.  The only problem was, I still didn’t fully understand how I was to be paid for the work I was performing.  Sure, I knew I was going to be paid a commission on each loan I was able to put together for a borrower, but the numbers based on the commissions to be paid per loan did not seem to add up to the dollars I could earn that had been whispered in my ear.

In nineteen eighty-seven (1987), the standard commission rate per loan was one-half (1/2) of one percent (1%) of the mortgage amount.  Thus, if I put together a one hundred thousand dollar ($100,000.00) mortgage, I would earn five hundred dollars ($500.00).  Not a bad commission rate.  As I mentioned though, that commission rate did not seem to add up to the dollars whispered in my ear which I could potentially earn.  You see I had been told that the top loan originators in the market I was working were putting together almost one hundred fifty (150) mortgages each year.  If the average mortgage loan balance was one hundred thousand dollars ($100,000.00), and the commission on that mortgage was five hundred dollars ($500.00), and the top originators, on average, put together one hundred fifty (150) mortgage loans per year, my earnings would be approximately seventy-five thousand dollars ($75,000.00).  The earnings that had been whispered in my ear, for a top originator, were one hundred thousand dollars ($100,000.00) a year.  Where was the missing twenty-five thousand dollars ($25,000.00) going to come from?

It did not take me long to find out where the additional twenty-five thousand dollars ($25,000.00) was going to come from.  It was coming from the borrower.

How is that, you ask?  It was relatively simple.  When an individual applies for a mortgage loan, they are typically quoted an interest rate, and a certain number of points (points being that fancy mortgage term for one percent (1%) of the mortgage amount).  For example, if I quote you an interest rate of six percent (6.0%) with one (1) point, the cost of your interest rate would be one percent (1%) of the mortgage amount.  If the mortgage amount is one hundred thousand dollars ($100,000.00), the cost of the one (1) point would equal one thousand dollars ($1,000.00).

But that does not answer where the additional money comes from, you say, and you would be correct.  So where does the money come from then?  The money comes from what is termed, in the mortgage industry, as overrides, of which the borrower is typically unaware.

In the example, above, I noted the interest rate of six percent (6.0%), with a charge of one (1) point quoted to the borrower, which seems pretty straightforward, and it is.  But, is this the best interest rate and points available to the borrower?  Not necessarily, though the document the borrower signs to lock in the quoted interest rate will lead the borrower to believe that it is the best interest rate and points currently available.

But here is what actually happens.  The borrower’s interest rate is indeed guaranteed to be six percent (6.0%) with one (1) point.  The lender, though, unbeknownst to the borrower, actually has the mortgage money available at an interest rate of six percent (6.0%) and one-half (1/2) point because of market improvements.  So the lender, in this example, gains another one-half (1/2) of one percent (1%) in income on the loan, or five hundred dollars ($500.00), which the lender then splits with the individual who originated the loan.

So without the borrower being aware of it, the originator of the loan, and the lender, both gain two hundred and fifty dollars ($250.00) in income because of their inside knowledge of the mortgage market.  The borrower has received a good interest rate, and though the lender was making a good profit margin on the loan at six percent (6.0%) interest and a charge of one (1) point, the lender has additionally profited from the borrower’s ignorance regarding the points associated with the guaranteed interest rate.

Initially, I was hesitant to employ this inside knowledge for my personal profit, but I was soon beyond this hesitation and actively pursuing every override I could.  There were times, when the market was especially working in my favor, that I was able to make one (1) to two (2) percent overrides.  This increased my commission per loan from one-half percent (1/2%) up to one and one-half percent (1 ½%) of the mortgage amount.  The earning potential whispers in my ear had been correct.

Today, individuals who are interviewing for loan originator positions in the mortgage industry still hear the same whispers in their ears regarding how much money can be made in the business.  The money is the primary recruiting tool.  One major difference should be noted though.  In nineteen eighty-seven (1987), when I first got into the mortgage business, the majority of the mortgages being written were “A” paper (prime) mortgages.  Subprime mortgage lending was barely a blip in the industry, and a certain stigma was associated with lenders who actually wrote subprime loans.  Today, a large percentage of mortgages being written are “B,” “C,” and “D” paper (subprime/non-conforming) mortgages, and the amount of profit to be garnered from originating these type of loans can be two (2) to three (3) times, or more, than the profits earned on the “A” (prime) mortgages.

Posted by John Venlet on 03/28 at 06:50 AM
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Thursday, March 27, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 1 - Purveyors of the “American Dream”

For many years, now, the pinnacle of the “American Dream” has traditionally been sold to individuals as owning their own home.  Today, if you type “homeownership+American Dream” into the Google search engine, you will receive over one million possible results to review which offer various interpretations on this dream.  Most mortgage lenders, whether prime lenders or subprime lenders, also actively advertise this dream on their corporate websites, with promises that they can easily help you live the dream.

The dream of homeownership is a good dream, though the dream is not necessarily without its frightening moments.  Especially for those individuals who are purchasing their first home and applying for a home mortgage for the first time.  A fact I can attest to myself.

When I took the step of fulfilling the “American Dream” for myself, back in 1985, when purchasing my first home, my rudimentary knowledge of financing a home purchase was glaringly revealed.  Even though I was working with an individual I knew personally and trusted, and who was a certified mortgage banker, I still walked away from the mortgage application process in a somewhat dazed and confused manner.  Today, many first time homebuyers still can attest to this.

When a first time homebuyer sits down with a mortgage lender, they will be bombarded with questions, unknown lending terms, and stacks of official documents requiring their signature.  The questions required to be answered delve into the individual’s work history, education, savings history, and credit use.  Highly personal questions, to most individuals, which are rarely discussed with even their closest personal friends.

Terms like amortization, points, buydown, ARM (adjustable rate mortgage), Balloon, escrows, to name but a few, come at the first time homebuyer in rapid-fire succession typically with only the most rudimentary of explanations, or, the terms are glossed over by the mortgage lender as being of little relative importance.  Unfortunately, many first time homebuyers will simply accept these most basic of explanations, or glossed over lender interpretations, rather than exhibiting to the lender their inexperience with the mortgage process.

The stacks of documents, requiring a homebuyer’s signature when applying for home financing, can also be intimidating.  The documents are full of fine print and cautions of prosecution for falsification, which are rarely read by the homebuyer, and the documents are typically paraphrased by the lender’s sales staff, to facilitate fast, question-less signatures.  Is it any wonder, then, that purchasing a home for the first time is a bit frightening?  Additionally, all the parties involved in the transaction; seller, Realtors, and lenders; seem to desire that the transaction be completed at the fastest possible speed.  Rush, rush, rush and get this deal done before the buyer gets too nervous to proceed.

Though applying for a mortgage for the very first time can indeed be a bit frightening, it does not need to be intimidating, or completely nerve wracking.  Though it can be difficult to remember, as an individual financing a home purchase for the first time, you are actually in control.  The processes which must be completed, as they say in the mortgage business “to close the deal,” cannot, and more importantly should not, be completed until you, the borrower, are fully informed and satisfied with your understanding of what is actually taking place in the transaction.  This is also true if you are simply refinancing a mortgage on a home you already own.

If, as a borrower, you have any questions regarding the mortgage loan, ask them!  If you do not understand what points are; a point is simply a fancy mortgage term for one (1) percent – one (1) point equals one (1) percent; ask for a thorough explanation from the lender.  If you do not understand what escrows are; escrows are monies you pay ahead of time in your monthly mortgage payment to cover yearly property tax bills or homeowner’s insurance bills as they come due; ask for a thorough explanation from the lender.  A good mortgage lender will ensure you receive a complete, and thorough, answer.

I know that when I went through the mortgage application process for the first time, I made my share of the mistakes mentioned above.  I did not want to exhibit my lack of knowledge about the mortgage process, so I accepted less than thorough answers.  I nodded my head in agreement, when I should have been shaking my head no and asking more questions.  I signed documents with only a cursory review, or a glossy lender explanation, instead of reading the fine print.  I looked at the list of fees charged by the lender, and simply swallowed hard, rather than inquiring into whether the costs could possibly be less.  In other words, I acted like I was a fully informed individual, when in reality I was bluffing both the mortgage lender, and myself, in regards to my grasp of the mechanics of mortgage lending and the effects such a commitment had on my daily life.

As the primary purveyors of the “American Dream;” mortgage lenders have the money you need to purchase the home you want; and they should be working diligently to make the mortgage loan process clearly understood.  Especially for first time homebuyers.  First time homebuyers, though, also have a responsibility.  Their responsibility as homebuyers, whether first time purchasers or sixth time, is to not let embarrassment at their lack of knowledge regarding the mortgage process get in the way of learning the process and understanding it.

Owning a home is a large responsibility, a long term financial commitment, and at times a financial challenge, not simply a warm and fuzzy dream.  After you sign on the proverbial dotted line, you will no longer be dreaming, you will be living the reality of owning a home and having to pay off a mortgage.  The reality of the dream of homeownership does not always mesh well with the “American Dream” as it is sold, or your current financial situation.

Posted by John Venlet on 03/27 at 12:40 PM
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Disillusioned by the Delusioned, Etcetera

Since August 2007, I have not posted much here, or anywhere else for that matter, mainly because I have become more and more disillusioned by the delusioned masses who believe, rather than think, that the solutions to all their needs will be met, or somehow achieved, by the machinations of the state.

Much has gone on, think fifteen minutes of fame on a grand scale, since August 2007, and has been well documented and commented on within the blogosphere.

In my life also, much has occurred, both positive and negative, since August 2007, which I will not bore you with.

What I will share with you is some writing I have done, and possibly naively thought would be of interest to a wider audience, and hoped to have published, regarding the mortgage industry, my experiences in said industry, with an emphasis on the debacle of subprime lending.  Alas, my attempts at bringing this writing to the market have failed.  Maybe it’s my writing, I don’t know.

Be that as it may, I will, over the next four weeks or so, be posting that writing here.  The title I christened this writing with is Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending. Which may be a bit too much of a mouthful for a book title.

Anyway, I shall begin posting this immediately after this short explanatory post.  If you care to comment on it, please do so, whether your comments are constructive, negative, or positive.

Posted by John Venlet on 03/27 at 12:15 PM
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Friday, January 11, 2008

The Bell is Tolling, Unabated

The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said yesterday.

The warning over the future of the triple-A rating - granted to US government debt since it was first assessed in 1917 - reflects growing concerns over the country’s ability to retain its financial and economic supremacy.

US’s triple-A credit rating ‘under threat’

Posted by John Venlet on 01/11 at 09:42 AM
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Friday, January 04, 2008

Interesting Headline

This headline caught my eye at “Goggle News”:  “Last of rogue cops sentenced to prison.” But the following headline, in regards to the exact same events is much more interesting:  Former Chicago officer who cheated drug dealers gets 25 year sentence

Consider that headline for a moment.  Should an individual be outraged because said “Former Chicago officer” cheated drug dealers?  Or should an individual simply chuckle at the disconnect such a headline displays.

Posted by John Venlet on 01/04 at 07:57 PM
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Sunday, December 30, 2007

Ya Think?

"The general trend is that privacy is being extinguished in country after country,” said Simon Davies, director of Privacy International.

Individual privacy under threat in Europe and U.S., report says

I cannot think that reading such a report is actually required to comprehend this.

Posted by John Venlet on 12/30 at 07:52 PM
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Thursday, September 06, 2007

You'll Get Exactly What You're Voting For

Micro managed lives.

"I’ve passed more bills I’m sure than either of them --certainly in the state legislative level."

Barack Obama could not have uttured a more dubious distinction about himself.

For Obama, It’s Now or Never

Posted by John Venlet on 09/06 at 06:42 AM
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Thursday, August 30, 2007

Just Steal Our Stuff, Please

So, if an individual is employed by Home Depot and said individual happens to note another individual misappropriating Home Depot property shouldn’t the Home Depot employee act to prevent said misappropriation?

A reasoning individual, with a sound understanding of property rights and respect for private property, would think so, but in the case of Home Depot, if an employee notes an individual misappropriating Home Depot property, Home Depot policy dictates that the employee should simply let the thief walk away, though of course Home Depot dictates that the employee report the theft to the appropriate authority.

But what happens if the Home Depot employee acts, and apprehends an individual misappropriating Home Depot property, rather than letting the thief walk away?  Why, the individual is fired.

Dustin Chester is job hunting this week, after The Home Depot fired him and the general manager for thwarting a thief from running away with a pocket full of stolen cash.

Last week, the 24-year-old department manager confronted a man who was standing by a soda machine in front of the Murfreesboro store off Old Fort Parkway holding a crowbar and a wad of cash. When the suspect started running, Chester said his instincts took over.

He was fired Monday for violations of company policy in the incident.

“When he ran, I ran after him,” he said. Chester caught the thief and restrained him in the parking lot until police arrived.

Chester was shocked to find out that for managers and most employees, catching and detaining thieves is against company policy.

Of course Home Depot states that their just steal our stuff, please, policy is in place for the safety of their employees and customers, but this policy simply reflects just how far the principle of property rights, and protection and respect of this right, has been subverted by the rise of the culture of nannyism in the United States.  Pitiful.

Home Depot employee looking for job after stopping alleged thief

Via Claire Wolfe.

Posted by John Venlet on 08/30 at 06:48 AM
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