Wednesday, April 16, 2008

Economic Stupidity

While economic stupidity is not the sole provenance of the professional jobholders in the State of Michigan, based on my state’s economic condition, they are at the head of the class nationally.

The most recent example of the State of Michigan’s economic stupidity is exemplified by the professional jobholders supposed solution to a forecasted drop in tourism for the coming season.  The projected downturn in tourism has been predicted due to the following.

Michigan’s unemployment rate, 7.2 percent in February, was the nation’s highest…

The housing crisis has hit Michigan harder than many states, which will cause some consumers to cut back on travel. And gasoline prices are relatively high, a factor in travel prices that are projected to be about 3 percent to 4 percent higher this year.

The tough economic times likely will lead to reduced travel as people cut back on discretionary spending, the report said.

So what does the State of Michigan propose to boost tourism?

The state may attempt to counteract some of the economy’s negative effects on tourism through more advertising.

Gov. Jennifer Granholm has proposed increasing funding for business and tourism marketing by $60 million over two years. Current funding is about $15 million per year after an increase in 2006.

Spending tax dollars, money filched from every Michigan individuals’ pocket, on advertising the State of Michigan as a tourist destination is NOT a solution.  If the State of Michigan professional jobholders actually wanted to increase the possibility of individuals traveling to Michigan, instead of spending filched money on advertising, they should eliminate the state’s gasoline tax so the individuals they propose to advertise to could instead afford to get in their cars and drive to the Great Lakes State.

Report: Michigan Tourism to Decline

Posted by John Venlet on 04/16 at 09:25 AM
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Subprime Wholesaler Tells All?

It appears that I am not the only individual who has been writing about the subprime lending industry follies from the inside.  An individual by the name of Richard Bitner has self-published a book titled Greed, Fraud & Ignorance: A Subprime Insider’s Look at the Mortgage Collapse.

Bitner was a partner in a subprime mortgage wholesale company, and, while I have not read his entire book, and do not own it (even at a used price at Amazon they want $19.95), I have read Chapter 1, which you can also read here (see link at this site for pdf format download).

I stumbled upon news of Bitner’s book via The Dallas Morning News.

Maybe individuals who are reading Bitner’s words on this subject, will be interested in reading my input which begins here in 14 parts.

Posted by John Venlet on 04/16 at 08:47 AM
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Tuesday, April 15, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 14 - Full Disclosure

As I mentioned when I first started posting this series on subprime lending, I first got into the mortgage business in 1987.  The corporation I began with was a small, four (4) man mortgage broker shop, writing strictly “A” paper, prime, mortgage loans.  In 1989, I became a partner in this closely held corporation, and we grew the company into a full FNMA/FHLMC seller/servicer.  Meaning, instead of selling our loans off to larger lenders, brokering, we now held our loans and our customers made their monthly house payments to our corporation.  Additionally, we created a wholesale lending division wherein we marketed our corporation to mortgage brokers who now sold their loans to our company, we also serviced these mortgage loans.

I sold my interest in this corporation in January 1995.  At that time we had over one-hundred and twenty (120) employees and sales of just under one billion.  It was a profitable venture.

After selling my interest in this company, I originated loans for a short period of time for a smaller mortgage lender which folded not long afterward.

Upon the closing of the previously mentioned shop, in 1997 I marketed my mortgage talents to an individual with no mortgage experience who desired to startup a new mortgage broker business, on a contract basis.  I remained with this small broker for two and one-half years.  The first full year with this company was dismal, but in the last year we had sales of forty-one (41) million.  It was when I was with this company that I first originated and closed a subprime loan.

After this venture, I spent the years of 2001 through 2003 in the banking software industry.

In 2004, I joined Countrywide’s Full Spectrum Lending Division, Countrywide’s subprime lending behemoth.  I initially filled the position of assistant branch manager for this organization, and six months later I was made branch manager.  It was while with this national company that I saw just how deep the rabbit hole went in subprime lending.  Though I was initially impressed with Countrywide’s ethical statements regarding lending to subprime borrowers, I soon formed the opinion that this was mere window dressing.  I did not mesh well with this organization.  I attempted to have my staff facilitate prudent subprime lending, i.e. making my people correct bad debt issues which the company’s underwriting guidelines stated did not need correction, not pushing borrowers’ debt income ratios, etcetera.  Because this conflicted with the company’s volume goals, I was asked to resign in mid 2006.  Which I did.

I still think subprime lending could be a viable and profitable business concern, if done ethically, and with sound underwriting.

Posted by John Venlet on 04/15 at 11:20 AM
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Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 13 - Self Inflicted

The collapse of the subprime lending industry was self inflicted.  It did not have to be that way.  For many subprime borrowers, the preceding statement is also valid, except the end result was personal financial collapse.

The stage was set for the collapse of the subprime lending industry with the origination of the individual subprime loan underwritten to foolish; one could say incompetent; underwriting guidelines.  As more and more of these structurally deficient loans piled up in lenders’ servicing portfolios, to be mined again and again for any remaining equity subprime borrowers may have retained in their homes, the swiftness of the final collapse lacks any astonishment.  The subprime lending business model was fundamentally flawed and myopic.

Subprime lenders had an opportunity, when lending to subprime borrowers, to build long term lending relationships, and sound, profitable performing loan portfolios, but instead subprime lenders chose to follow a path of what could be considered as mutually assured destruction.  Subprime lenders, investment houses which purchased subprime loan mortgage backed securities, and subprime borrowers, opted for quick cash rather than sound, long term financial stability.

It does not require a degree in economics, or personal financial, to understand that when you write mortgage loans, to marginal borrowers, and do nothing to but give lip service to the necessity of paying your creditors on time, or satisfying past due debts, that you are simply applying a rotten bandage to an already festering wound, thus facilitating further infection.

These risks could have easily been mitigated by the subprime lending industry by requiring subprime borrowers to adhere to stricter lending standards, i.e. by requiring subprime borrowers credit issues to be corrected, rather than ignored, and by utilizing sound debt to income ratios.  Instead, subprime lenders took the short view, throwing good money at bad borrowers in order to book loans.  And as subprime lenders continually stripped subprime borrowers’ home equity, while allowing subprime borrowers to remain high credit risks, with debt to income ratios which were beyond their financial means, the industry collapsed.  If the subprime lending industry would have practiced sound lending and underwriting, actually correcting subprime borrowers credit issues, while at the same time lowering subprime borrowers monthly debt expenses, which was possible, subprime lenders could have built strong loyalties with their borrowers, and sound mortgage loan portfolios.

Would subprime borrowers have complained about the need to pay off bad debts, rather than receiving some cash in their pockets?  No doubt they would have.  Would the over the top profit margins subprime lenders grossed on each subprime loan been reduced by sound underwriting guidelines which would have required bad debts be satisfied as a condition to lend new money.  Without a doubt.  But requirements such as these would have been short time losses in exchange for long term investment profitability.  Both parties would have gained.

Instead, today, the foolishness of the subprime lending industry has spilled over into all aspects of the credit lending industry as a whole, and into individuals’ homes.  The goose which many thought was laying the golden egg was actually defecating, and the mess which this has created is not easily cleaned up.

Posted by John Venlet on 04/15 at 11:16 AM
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Thursday, April 10, 2008

Subprime, Subpar, Sunk

Roger Schlesinger has a subpar opinion piece up at Townhall.com titled Fannie Mae and Freddie Mac Are Here to Help? which needs torpedoing, right out of the gate.  Roger begins his piece this way,

Out of nowhere, or so it seemed, the United States of America developed a mortgage and credit crisis. It is now and will be forever known as the “Subprime Mortgage” crisis. The fact that very little of it had to do with the Subprime Mortgage Business is irrelevant and will not be delved into in this column.

Roger, from his “front row seat,” seems to think the subprime mortgage industry had “very little” to do with the current very tight and limited availability of credit.  That statement is just wrong.  The foolish lending standards which had been utilized in the subprime lending industry was the catalyst for the collapse of the industry, which then bled over into the prime lending industry.

Roger then throws out this digressive statement, because he couldn’t resist.

One small note: (I can’t resist) the option arm is not a subprime loan. The two biggest lenders featuring the option arm were Countrywide and Washington Mutual. Although both had subprime division I do not believe that the option arm was offered by either of these divisions. But I digress.

While the option ARM was technically not a subprime loan, I can state, unequivocally, that Countrywide’s subprime lending division, Full Spectrum Lending, did indeed offer the option ARM to borrowers.  I cannot state this unequivocally about Washington Mutual, but, my money would wager that their subprime division offered the option ARM also.

Further into Roger’s piece he notes Congress’ push for FannieMae and FreddieMac to get in there and assist in stablizing the mortgage market and writes the following.

They were given the area between $417,000, the current conforming loan limit, and $729,750 to work their magic with the new loans that now and forever more will be known as jumbo/conforming loans. Everything was in place to bring us out of the “Subprime Mortgage” crisis.

This supposed assist from Congress was also just foolishness.  Look at those loan limits noted above.  Less than five percent (5%), and most likely less than that, of individuals living in this country could/can afford mortgages of those amounts.

Towards the end of his piece, Roger states this.

We have a serious problem stemming from the crisis caused by a multitude of bad loans and now being fueled by ever growing pessimism in the lending industry.

We do have a “serious problem stemming from the crisis caused by a multitude of bad loans,” and the vast majority of those loans originated in the subprime lending industry.  Sure, government meddling in the lending industry as a whole, has exacerbated the problem, but, the root of the problem, the kernel from which it grew, was the subprime lending industry.

Posted by John Venlet on 04/10 at 10:36 AM
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Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 12 - Prepayment Penalty Box

The majority of subprime loans, eighty percent (80%) or more, written over the years were written with prepayment penalty clauses.  In the prime lending industry, less than two percent (2%) of mortgages written were/are subject to prepayment penalties.  During my over ten years of writing prime, “A” paper, mortgages, I never once encountered a prime loan with a prepayment penalty.

These prepayment penalty clauses required borrowers who had taken out a subprime loan to pay a penalty fee of anywhere from one percent (1%) to five percent (5%) of the mortgage amount if they paid off, refinanced, their subprime mortgage early.  There were also prepayment penalty clauses written which required up to six (6) months of interest be paid to the lender if a subprime loan was paid off early.  Prepayment penalty clauses of this type were the most onerous for subprime borrowers.  On a mortgage amount of $100,000.00, at an interest rate of eight percent (8%), the prepayment penalty for early payoff would amount to almost four thousand dollars ($4,000.00).

Prepayment penalties could run anywhere from one (1) year to five (5) years on subprime loans.  Since the majority of prepayment penalty terms ran concurrently with the type of subprime loan written for borrowers; i.e. if a subprime borrower financed with a 2/28 adjustable rate mortgage (ARM), the prepayment penalty was in effect for two (2) years, if the loan was a 3/27 ARM, the prepayment penalty was in effect for three (3) years; most subprime borrowers who desired to refinance out of their current subprime ARM, prior to their payment adjusting, and payments in most cases would adjust upward, paid a prepayment penalty.

Prepayment penalties could also be either “hard” or “soft,” though most prepayment penalties were hard.  “Soft” prepayment penalties were associated with those subprime loans which were being paid off due to a refinance.  If the property was being sold by the borrower, no prepayment penalty would be assessed.  “Hard” prepayment penalties were due whether the mortgage loan on a property was being paid off due to the sale of the property, or a refinance.  Needless to say, the majority of subprime loans carried hard prepayment penalties.

Prepayment penalties were assessed on subprime loans as a disincentive to borrowers to refinance.  This of course was somewhat contrary to the sales pitch most subprime borrowers heard from subprime lenders, that pitch being the “this loan is just a short term loan to get your credit back on track to be a prime borrower and we will refinance you again in twelve (12) months.”  Additionally, subprime prepayment penalties were assessed as an incentive to the secondary market; think institutions such as Bear Stearns; to purchase large blocks, known as mortgage backed securities, of subprime mortgages.  Another reason prepayment penalties were assessed on subprime loans was the penalties were a means of offsetting the loss of interest revenue servicers incurred from the oh so frequent refinancing of subprime loans.

Subprime borrowers who were refinancing out of one subprime loan and into another subprime loan, prior to the expiration of the prepayment penalty term on their existing mortgage, frequently asked for prepayment penalties to be waived.  Rarely would such a request be granted.  Even when a subprime borrower was refinancing a current subprime loan within thirty (30) to sixty (60) days of the expiration the prepayment penalty, rarely would the subprime lender waive the penalty.  Even if the subprime borrower was refinancing their current subprime loan, with their current subprime lender, chances of the prepayment penalty being waived by the subprime lender were virtually nil.

Though subprime loan prepayment penalties were disclosed to borrowers in written documents, legally stipulated disclosures, they were infrequently discussed verbally.  When prepayment penalties were discussed verbally with subprime borrowers, and usually only because the borrowers inquired about any prepayment penalty, it was not uncommon to hear subprime lending account executives informing prospective borrowers that the prepayment penalty was of minimal concern, and then quickly change the subject over to how much cash the borrower would receive at the closing, or, how much money they would be saving each month if they moved ahead with the refinance.

In situations where prepayment penalties had not been verbally discussed with subprime borrowers, it was not unusual for borrowers to contact the subprime lender during the actual loan closing to inquire about the prepayment penalty.  This occurred because the borrowers were once again required to sign another document stipulating they were aware that the loan they were currently taking out was subject to a prepayment penalty during the closing process.  In cases where this happened, the objection to the penalty was handled by informing the borrower that the penalty had been disclosed to them via the stack of documents they had received, and signed, acknowledging receipt of said documents and their contents, when they initially applied for the loan.  If borrowers continued putting up a fuss about the prepayment penalty after receiving the preceding explanation, they would simply be informed that the prepayment penalty was not negotiable, and, if they did not want to contend with the prepayment penalty, they should walk away from the closing.  This, of course, very rarely occurred, it was too late, the borrowers needed the cash, or debt relief, and signed on the dotted line.

Prepayment penalty clauses could be avoided when taking out a subprime loan, for an upfront fee.  But this rarely happened.  This rarely happened because subprime borrowers were already paying a large amount of fees to subprime lenders, and adding one more fee, usually one percent (1%) of the mortgage amount, to avoid a prepayment penalty in the future, would eat into the cash subprime borrowers were counting on dropping into their pockets when they closed.

Posted by John Venlet on 04/10 at 08:41 AM
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Wednesday, April 09, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 11 - Cash in Your Hand, and a Hook

Subprime lenders’ advertising typically trumpeted the following message to borrowers – Bad credit, no credit, no problem, we can refinance your home, lower your monthly payments, and put cash in your pocket to boot.  The fact of the matter was, subprime lenders usually could do exactly what they were advertising they could do.  Pay off some of your debt, and put cash in your pocket too.

Borrowers who had a low credit scores (see Chapter 10), or low credit grades (see Chapter 9), or both, and at least ten percent (10%) equity in their current home, in all likelihood could qualify for a subprime loan.  The dilemma for borrowers considering such a deal was would there be more than just a short term benefit to them?  Or, would the benefit of refinancing with a subprime loan simply evaporate before the new mortgage was recorded at the local county clerk’s office?

There were real and quantitative benefits to utilizing a subprime loan to refinance your home, if you were in troubled financial straits and had sufficient equity in your home which a subprime loan would allow you tap.

It was not unusual for a subprime lender to reduce borrowers’ monthly outgoing payments by two to three hundred dollars ($200.00 - $300.00) per month, and an extra $200.00 to $300.00 dollars in your hand each month could and can go a long way.  Additionally, in many subprime loan refinance transactions, the borrower would walk away with money in their pocket.  What’s not to like about that?

One of the issues not to like about the above scenario is what was not being said to subprime borrowers.  What, in the vast majority of cases, was not being said to subprime borrowers was that they were going to remain subprime borrowers unless they got off the misuse of credit gravy train and began living within their means, and subprime lenders only gave the merest of lip service to this fact, because this fact did not sell subprime mortgages.  But what was not being said, and what was being ignored by subprime lenders, did set the hook for the possibility of future refinances.

As I intimated previously, subprime lenders were adept at selling the sizzle aspect of subprime loans.  The sizzle of course being the cash in your hand so often and so broadly advertised by subprime lenders.  The sizzle also emanated from the consolidation of subprime borrowers’ debt messages in subprime lending advertising, which would result in increased monthly cash flow for subprime borrowers, and this was also a money driven draw for less than creditworthy borrowers.  But the real hook which allowed subprime borrowers to be reeled in again and again to be refinanced, until many had no remaining equity in their homes, were the overly generous underwriting guidelines set by the subprime lenders themselves.

Perhaps the most overly generous subprime underwriting guideline was what is known as the debt to income ratio.  The debt to income ratio is simply the percentage of your monthly gross income that you are spending on your house payment and other monthly long term debts.  For conforming prime loans, meaning “A” paper loans which are underwritten to FannieMae (FNMA) and FreddieMac (FHLMC) guidelines, borrowers are typically limited to spending thirty-eight percent (38%) of their monthly gross income on their house payment plus their long term debts (long term debts are any credit cards or lines of credit with outstanding balances, and any installment loans with over ten (10) months of payments still outstanding).  Bear in mind that his 38% debt to income ratio was set by FNMA/FHLMC for solid, good credit borrowers.

In the subprime lending industry, weak, poor credit borrowers were allowed to spend up to fifty-five percent (55%) of their monthly gross income on their house payment plus monthly long term debts.  Subprime lenders were allowing the highest risk borrowers to carry debt loads which even the most creditworthy prime borrowers were not allowed, and which are not, realistically, financially advisable for any individual.

Some subprime borrowers, who were fortunate enough to have enough equity in their homes to pay off all their credit card debt and any installment debts they may have had, actually ended up with house payments alone which ate up 55% of their monthly gross income.  In circumstances such as this, any new credit card debt or installment loans taken on by borrowers could quickly push them over the edge.  And many subprime borrowers, after refinancing to pay off existing debts, went right out and took on new debts.  Unfortunately, when they reached out to a subprime lender once again for a bailout, in most instances they were out of luck.  Their debt to income ratios were further out of line than the initial out of line 55% subprime guideline for debt to income.

Another overly generous, and foolish subprime underwriting guideline, which I have previously mentioned, was not requiring subprime borrowers who currently had outstanding collections, credit card charge offs or auto repossessions with outstanding balances to pay off these debts.  In effect, subprime lenders were rewarding subprime borrowers for being credit abusers.  Is it any wonder, then, that the subprime lending industry ended in such disaster, and that so many subprime borrowers have ended, and are ending, up in foreclosure?

Why didn’t subprime lenders inform borrowers of the continued negative effect unpaid delinquent accounts have on borrowers’ credit ratings, and then recommend to the borrowers to correct them?  Why did subprime lenders’ account executives only inform borrowers that, if they made their mortgage payments on time for twelve (12) consecutive months, everything would be good, and that they would be transformed into prime borrowers.  Why did subprime lenders allow subprime borrowers to spend 55% of their monthly gross income on their house payments plus long term debts rather than utilizing a more realistic debt to income ratio?

The answer to these questions is subprime lenders told borrowers only what they wanted to hear to overcome borrowers’ objections to the terms of the subprime loans they were offered, approved for, and closed on.  And what did most borrowers want to hear after they applied for a subprime mortgage refinance transaction?  They wanted to hear that even though they had poor credit and did not pay their bills on time, they were approved for the loan they had applied for, that they were going to receive a bit of cash in their hand, and that their total monthly payments were going down as compared to their current total monthly payments.  The borrowers’ other delinquent credit issues, which should have been addressed and corrected to actually assist subprime borrowers in becoming a prime borrowers, were simply left unmentioned, unresolved, and delinquent, thus maintaining their negative influence on the borrowers’ credit ratings.  After the loan was closed, and the subprime lender had pocketed their profit from the equity in borrowers’ homes, the borrowers were left on their own, under the impression, with strong encouragement from the subprime lender, that all they had to worry about after the closing was making their mortgage payments on time for the next twelve months (12) and they would be transformed into prime borrowers.  Which of course infrequently happened.

But more tellingly, subprime lenders did not address borrowers’ credit collection accounts, or other underlying delinquent credit issues which hold down borrowers’ credit scores, requiring these accounts to be satisfied, because the profit margins on prime borrowers are three to four percent lower than the profit margins on subprime borrowers.  Additionally, and just as important as the profit margins mentioned above, if subprime lenders required all subprime borrowers’ delinquent accounts and collections to be paid off, which actually would have benefited subprime borrowers, subprime lenders would have forfeited their most powerful motivating sales tool.  The cash in your pocket incentive which hooked so many of the subprime borrowers in such dire financial straits today.

Posted by John Venlet on 04/09 at 08:30 AM
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Monday, April 07, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 10 - What’s the Score?

In addition to credit grades, which were discussed in the previous chapter, credit scores were also considered in subprime lending, though subprime borrowers’ credit scores were not as heavily weighted as the credit grade when subprime lenders set loan-to-value limitations.

What, exactly, is a credit score?  A credit score is a computerized, statistical method of reviewing an individual’s credit usage.  The computerized review of an individual’s credit trade lines generates a credit score for each individual credit user, and the most commonly recognized credit score is known as the “FICO” score.

Both prime and subprime lenders consider credit scores to assist them in making either a yes I will lend to this person, or no I will not lend to this person, decision.  Credit scores can range between three hundred (300) and nine hundred (900), though the lowest credit score I personally ever noted was 417.

Needless to say, the higher your credit score, the more apt you are to be approved for a loan, and the more attractive interest rate you will receive from the lender.  If your credit score is below five hundred (500) though, don’t bother contacting any subprime lender, because with a credit score below 500 you will not qualify for a mortgage.

The credit scoring technology utilized today is attributable to Fair Issac and Company; this is where the term “FICO” arose from; and the majority of mortgage lending institutions, including banks and other financial entities such as insurance companies, utilize the software and scoring methods developed by Fair Issac and Company to determine individual credit scores, and utilize this score as part of their decision making process.

There are three major credit reporting companies in the United States which generate credit scores.  One is Experian, which utilizes the Experian/Fair Issac credit scoring system, there is also TransUnion, which uses the Empirica credit scoring system, and the third major credit reporting company is Equifax, which uses the Beacon credit scoring system to calculate individuals’ credit scores.  All three of these companies consulted with Fair Issac and Company to develop the scoring methods used to calculate credit scores, though each company has added their own proprietary fine tunings to the scoring methods initially developed by Fair Issac and Company.

Though it is not difficult to find out what your individual credit score is today, only in the past ten years did this become possible.  As for the actual statistical methodology utilized by the big three credit reporting agencies to determine individual credit scores, this information is a tightly guarded, black box secret, though some of the basics for determining credit scores are as follows.

So what exactly does the secretive credit scoring computer look at to determine your score?  A large percentage of the your score, thirty-five percent (35%), is based on your payment histories with your current creditors.  Another large percentage of your score, thirty percent (30%), is based on how much actual debt you have outstanding.  For example, how many car loans do you have, credit card balances, student loans, etcetera.  In addition to these items, the scoring system also considers if you have maxed out your credit limits.

Fifteen percent (15%) of your score is based on how long you have actually been a credit user.  For example, did you first start using credit ten years ago, fifteen years ago, or have you only recently become a credit user in the past year or two?

Another ten percent (10%) of your credit score is based on the number of inquiries on your credit report.  An inquiry is simply a bank, car dealer, insurance agent, credit card company, or other financial institution’s request to review your credit use.  Too many of these credit inquiries will lower your score, and many subprime borrowers’ credit reports showed twenty (20) or more recent credit inquiries.

The final ten percent (10%) of your credit score is based on the types of credit you have outstanding.  Are your creditors unsecured creditors, like credit cards, or are your creditors secured creditors, like boat and automobile loans, or home mortgages?  The mix and match of these different types of credit will affect your credit score.

All of the above listed factors are then crunched through the credit bureaus’ credit scoring systems, and your individual credit score is then spit out for lenders to ponder over whether you are a sound credit risk, or someone they should send down the road with your hat in your hand because you are an unsound borrowing risk.

Most mortgage lenders, whether prime or subprime, require what is called a tri-merge credit report when you apply for a home mortgage.  A tri-merge credit report compiles your individual credit data from all three major credit bureaus, and each credit bureau’s credit score for you as individual based on the factors noted above.  Because each individual credit bureau has fine tuned the initial credit scoring technology developed by Fair Issac and Company, and each credit bureau considers their fine tunings as proprietary, you will end up with three different credit scores showing on your tri-merge credit report.  Most subprime lenders threw out the high and the low credit scores, and utilized the mid-score as your credit score when determining individual borrowing risk.

For example, let’s say that a tri-merged credit report for you shows a high credit score of 700, a mid-score of 665, and a low score of 640.  Most subprime lenders would have utilized the mid-score of 665 when evaluating your individual potential credit risk.

As previously noted, when being evaluated for a subprime loan both your credit grade, and your credit score, were considered by the subprime lender.  If your credit score was high, which typically means you pay the majority of your creditors on time, but your credit grade was low, which means that you typically payed your mortgage payment over thirty days late, it would negatively affect the terms of the subprime loan being offered to you.

The adverse can also be true.  If your credit score is low, say between 620 and 590, which typically meant you were paying some of your creditors late, but your credit grade was high, which means you were making your mortgage payment on time, you would in all likelihood receive better lending terms than the borrower with a high credit score and a low credit grade.

Because all subprime loans were contingent upon your individual credit grade and credit score, and, because each subprime lender could set their own lending criteria, subprime borrowers may have found different subprime lenders offering different lending terms for the same mortgage.  This was not unusual.  But bear in mind, the different lending terms offered to subprime borrowers, by different subprime lenders, may have only been different because one subprime lender may have been looking to profit more from a subprime borrower than the other.

Subprime borrowers’ credit scores could be re-calculated rather easily, and it was fairly standard practice for subprime lenders to request a credit score re-calculation for borrowers considering a subprime loan.  In many cases, it was not unusual for a borrower’s trade line, which was currently being reported on their credit report as being delinquent, or as charge-off or collection, to be incorrect.  In instances where this occurred, if the borrower submitted documentation which proved that an account was in fact current, or that a collection or charge-off had been satisfied, the documentation would be submitted to the three main credit bureaus and an updated credit report would then be requested based on the supplied information.  In many instances where this occurred, the updated credit report would reflect a higher credit score, which could increase borrowers’ loan-to-value limitation by five percent (5%), and this 5% increase in the mortgage amount could in turn make a deal out of what previously had been a dead horse.

Posted by John Venlet on 04/07 at 09:10 AM
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Friday, April 04, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 9 - Making the Grade

The subprime lending industry graded potential borrowers with one of four grades.  Borrowers were either “A” borrowers, “B” borrowers, “C” borrowers, or “D” borrowers, though there were minor variations from subprime lender to subprime lender in this grading system.  “A-” or “C-” grades were also a possibility, and these grades were dependent upon whether the borrower had “rolling” 30 day late payments on their most recent twelve (12) month mortgage payment history.  No matter what your grade was though, the subprime lender probably had a “deal” for you.

A subprime borrower who received an “A” grade had no thirty (30) day late payments in the past twelve (12) months of their mortgage payment history.  “A” grades could also carry a loftier name such as “Premier Plus,” or other feel good title.  Some subprime lenders also gave “A” grades to borrowers who did have one thirty (30) day late mortgage payment in the past twelve (12) months, though the interest charged on the loan would have reflected the fact that the borrower paid one mortgage payment thirty (30) days late.  A subprime borrower who had received an “A-” grade has had two (2) thirty (30) day late payments in the past twelve (12) months of their mortgage payment history, which could include rolling thirty (30) day late payments mentioned above.

Rolling late payments, as defined by the subprime lending industry, were simply mortgage payments made thirty (30) days late a number of months in a row.  For example, if a borrower had made their mortgage payment thirty (30) days late for up to six (6) consecutive months, it only counted as one (1) thirty (30) day late payment when it came time to be graded.

A subprime borrower who had received a “B” grade had one (1) sixty (60) day late payment on their mortgage in the past twelve (12) months.  A “B” grade was also assigned to subprime borrowers who had made three (3) thirty (30) day late mortgage payments in the past twelve (12) months.  For example, if a subprime borrower made their mortgage payment thirty (30) days late for the month of January, and then paid the mortgage on time for the months of February and March, and then made the April mortgage payment thirty (30) days late, but once again paid the May and June mortgage payments on time, and then paid the July payment thirty (30) days late, would also receive a “B” grade.

A “C” grade was assigned to subprime borrowers who had made at least one (1) of their mortgage payments ninety (90) days late in the past twelve (12) months.  Once again, though, a subprime borrower who had made three (3) sixty (60) day late mortgage payments in the past twelve (12) months would also receive a “C” grade.  In many instances, these “C” graded subprime borrowers would also have had other thirty (30) day late mortgage payments in the past twelve (12) months, but these were simply ignored by the subprime lender as the weight of the ninety (90) day mortgage late payment was the key to the grade assigned.

Subprime borrowers could also receive a “C-” grade.  A “C-” grade was assigned to subprime borrowers who had made two (2) mortgage payments ninety (90) days late in the past twelve (12) months.

Subprime borrowers who had received a “D” grade had made three (3) or more mortgage payments ninety (90) days late in the past twelve (12) months, or, one (1) payment or more one hundred-twenty (120) days late in the past twelve (12) months.  A “D” graded subprime borrower could also currently be in foreclosure and still qualify for a subprime mortgage loan, though in very rare instances did a “D” graded borrower have enough equity in their home to qualify for a subprime mortgage due to loan-to-value restrictions based on the “D” grade.

Note that the subprime loan grading system did not take into account late payments made on automobile loans, credit cards, student loans, or other lines of credit.  Though these type of late payments did and do affect individuals’ credit scores, which we will discuss later, the subprime loan industry’s grading system simply ignored them.

The subprime loan industry’s ignoring of late payments, other than mortgage late payments, provided potential subprime borrowers with a valuable lesson.  That lesson was, if you were in any type of financial straits which may have had to be endured for some time, and were contemplating utilizing the equity in your home to bail you out of these straits, pay your mortgage payment on time, and let your other creditors contend with late payments, because it would allow them to receive an “A” grade.

The soundness of the above mentioned lesson, if you were a candidate for a subprime loan, cannot be overstated.  The higher your subprime lending grade was, the lower the interest rate you would receive if you found yourself needing to utilize a subprime loan.  Additionally, the higher your grade was, the higher the loan-to-value mortgage you could qualify for.  Though the more money you borrowed against your home, that is the higher the loan-to-value, the higher the interest rate you would be charged.

Though paying your mortgage on time was the most important factor when a need arose to apply for, and take out, a subprime mortgage, paying your other creditors late did have a negative effect on your credit score.  And subprime lenders did consider your credit score, also, when you applied for a subprime mortgage.  For example, if a potential borrower, with a perfect mortgage payment history, applied for a subprime mortgage, the borrower would be graded an “A” borrower.  But, if this borrower’s credit score, due to numerous outstanding collections, current credit card charge-offs, judgments, and other late payments was below 500, the borrower would not have been eligible for a subprime mortgage loan, due to the below 500 credit score.  Though the above is an extreme example, it is not unprecedented.

Most subprime lender grading systems allowed for the following loan-to-values, i.e. how much you could borrow against your home based on your credit grade.  An “A” borrower, or “Premier Plus” borrower, with no mortgage late payments in the past twelve (12) months could borrow up to one hundred percent (100%) of the value of their home.  In fact, an “A” borrower of this caliber was very often offered a 125 loan.  A 125 loan allowed the borrower, and the subprime lender, to gamble on steady appreciation of the home, allowing “A” graded individuals to borrow one hundred twenty-five percent (125%) of the value of their home.

An “A-” graded subprime borrower was typically limited to borrowing ninety-five percent (95%) of the value of their home.  A “B” graded subprime borrower was typically limited to borrowing ninety percent (90%) of the value of their home.  A “C” graded subprime borrower was typically limited to borrowing eighty-five percent (85%) of the value of their home, while a “C-” borrower was typicallylimited to borrowing eighty percent (80%) of the value of their home.

A subprime borrower who was graded a “D,” would be limited to borrowing sixty-five percent (65%) of the value of their home, and, as I’ve mentioned previously, rarely did a subprime borrower with a “D” grade have enough equity in their home to allow for a subprime mortgage refinance.

Though subprime borrowers’ credit scores also had an effect on the loan-to-value limitations set by subprime lenders, in most instances the subprime borrowers’ credit score only affected their loan-to-value limitations by five percent (5%).

One last thing.  Though all mortgage lenders, both prime and subprime, charge a late fee when your mortgage payment is not received by the 15th of the month, a mortgage payment does not show as late on your credit report, or affect your credit score, until the payment is actually thirty-one (31) days past due.

Posted by John Venlet on 04/04 at 09:40 AM
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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 12:47 PM
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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 11:25 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 02:17 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 01:04 PM
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