This is just a good story by Carrick Mollenkamp in the Journal this morning, showing one more trapdoor in the mortgage products sold during the bad old days.
Mortgage-Index Quirks Prove Costly
That’s putting it mildly.
Apparently, adjustable rate mortgages sold during the period, besides their many other well-documented defects, also were pegged to different indices, and now some people, the Journal finds, are watching their payments rise 25 percent or more, while others’ payments stay the same or drop on loans that are otherwise identical.
This of course can be the difference between solvency and default.
Few homeowners have heard of or understand these indexes, which have acronyms like Cosi, Codi and Cofi, along with the better-known Libor. And few know how they are calculated or what they mean for borrowers.
Never mind what the acronyms mean or what they’re based on; you can read all about it in the Journal. But here’s the dilemma faced by one borrower (my emphasis) in a good anecdote:
Joseph Henning, of Huntington, Mass., borrowed $215,250 in January 2006 from Golden West unit World Savings Bank and was one of the customers who received a letter from Wachovia in August 2007 telling him he needed to choose between the Wachovia Cosi, which was replacing the Golden West Cosi, or Codi. “You scratch your head—OK, how do I make a wise choice?” said Mr. Henning, a heating and air-conditioning system salesman.
The Journal shows it would take more than a passing familiarity with the mortgage markets to choose between Columns A and B.
“In a rational environment, all of these indices, and especially Cosi and Codi, should be fairly closely correlated,” said Ed Craine, the chief executive of Smith-Craine Real Estate Financing, a mortgage broker in San Francisco, in an email. “However, as you can see, Cosi has gone ‘off the tracks.’ “
Cosi is off the rails, ladies and gentlemen.
Mr. Craine said borrowers that opted for a loan tethered to Cosi are dismayed to find their mortgage costs are substantially higher than loans taken out by their friends that are tethered to other indexes.
I’m not sure how they could have known. Think about it. They would have first had to understand the fine print—then run to their Bloomberg terminals to crunch historical patterns of CD rates, which is what Codi is based on, versus their particular bank’s own savings rate, which is what the Cosi is based on. But even then they would have had trouble:
“Wells Fargo does not publish proprietary details of CD rates for competitive reasons,” Wells Fargo spokeswoman Mary Eshet said. “But the Cosi index is audited by a third party and has been approved by our regulators.” She added: “Historically, Codi has been higher than Cosi at times and Cosi has been higher at times than Codi depending on the interest-rate environment and trends.”
This is not a transparent market. Then there’s the government, not being helpful.
A spokesman for the Office of Thrift Supervision said the agency must review and approve any index that isn’t national or regional. The spokesman declined to comment on specific institutions.
The Journal story speaks to wild informational asymmetries that marked the mortgage market during the frenzy. The seller does this for a living; the buyer is an HVAC salesman. (I guess the asymmetry is also true when the roles are reversed and the HVAC salesman is selling an air conditioner to a mortgage broker. That must be why we have a Consumer Products Safety Commission. Hmm. This all gets very political very quickly.)
In the great free-for-all over the causes of the financial crisis, some, like me, believe that mortgage market changed fundamentally in the ’00s, while others—the everyone-was-in-on-it school—believe there was a big cultural shift that toward irresponsibility that led people to take unreasonable risks.
The story doesn’t prove anything, but it does add good information. I’ll chalk it up as one for my side.
Dean Starkman Dean Starkman runs The Audit, CJR’s business section, and is the author of The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.