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 08:25 AM
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