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 09:48 AM
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