As the light from the torches gleans from a million pitchfork tines after Rick Santelli’s bizarre, gasket-blowing performance on CNBC yesterday, the Los Angeles Times finds an excellent story illustrating how the homeowner bailout is dividing otherwise like-minded Americans.
The LAT’s William Heisel finds two people who live on the same street in Long Beach, California, and are both underwater on their homes. One supports the bailout in part because it may help her stay in her house. The other opposes it. It’s a well-done exploration of both sides of the issue.
But what I really want to point out is how mortgage fraud rears its ugly head even in this story, where the homeowner isn’t exactly walking away from her note . That’s not surprising—it was an epidemic, but it’s one that many just don’t want to see.
Halloran blames herself for spending money she did not have, but she also says her mortgage broker and the bank that gave her the loan — the now failed Downey Savings & Loan in Newport Beach — promised lower payments. The loan documents she signed show an initial payment of $2,900 a month. Her first bill was for $4,200 a month.
That’s fraud point-blank. And this is a woman with a good job, hardly a subprime borrower. Imagine the wreckage unleashed by banks and brokers on actual subprime borrowers, who are much less wealthy and less educated. Don’t believe me? What about George W. Bush’s FBI? Here’s a story from nearly two years ago. And here’s the Seattle P-I’s good effort last month on mortgage fraud.
We know that some half of all subprime borrowers actually qualified for prime mortgages, with better terms, lower interest rates and lower payments, but were fraudulently put into more expensive ones by brokers who were incentivized with bonuses by the Countrywides of the world. But the vast majority of people, and I’ll bet you just about every last one of the commenters on my Santelli post yesterday, don’t know that.
Here’s the late Tanta, writing at Calculated Risk in May 2007, about why that is:
If you’re a reporter or editor who uses “ration” instead of “ratio” and “appraisal value” instead of “appraised value,” it is possible you haven’t had enough exposure to the industry and its lingo to know when smoke is being blown in your direction. And if I say you have no one to blame but yourself for printing nonsense from an industry shill, you better not start trying to explain to me why people who read CNNMoney are at fault if they don’t know more about their mortgage eligibility than their lender appears to. You are a reporter. You could have called Fannie and Freddie and asked them on what basis they have made these estimates. You could have asked Mr. Hardester about the exact nature of the “file review” he performed. You could have identified Guaranteed Rate as a mortgage banker who buys loans from brokers, not as a broker itself. You could have had a V-8.
What you did, though, is give us another “he said/she said” piece of tripe.
Here’s Gretchen Morgenson of The New York Times on why people were put into bad mortgages on purpose (she’s talking about Countrywide here):
The company’s incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan’s value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A, former brokers said. For years, a software system in Countrywide’s subprime unit that sales representatives used to calculate the loan type that a borrower qualified for did not allow the input of a borrower’s cash reserves, a former employee said.
A borrower who has more assets poses less risk to a lender, and will typically get a better rate on a loan as a result. But, this sales representative said, Countrywide’s software prevented the input of cash reserves so borrowers would have to be pitched on pricier loans.
Here’s the LA Times story again:
“The ugly part of it is that many of those people who were steered to loans that were not fixed-rate loans or not prime loans could have qualified for better loans,” said Los Angeles County Supervisor Mark Ridley-Thomas, who as a state senator last year introduced a bill that slowed the foreclosure process. “They were eligible for good loans, but there was more money to be made in the bad loans.”