Wednesday, June 15, 2011

Mortgage broker & lending professional: How banks profit on bad mortgage loans

RUSH: Fred in Homer, Alaska. Fred, I really appreciate you holding on. You're going to help me to explain to people how people in the mortgage business make money with dead-end loans.
CALLER: I will do my best, sir.
RUSH: All right.
CALLER: When I was in the business, we would originate a loan. So I would find a borrower.
RUSH: Are we talking conventional, subprime? What kind of loan are you talking about?
CALLER: Well, I'm gonna talk about both. It kind of applies to both.
RUSH: All right.
CALLER: But the subprime is where it really got out of hand because they allowed the lending parameters to expand to such a degree that anybody could get a loan.
RUSH: Right.
CALLER: They could state their income, they could say whatever they wanted, and they would get the loan as long as there was a way -- you know, you'd look at the amount of money they're bringing in each month to see if -- they could actually make the payment.
RUSH: No, you didn't even look at that, did you?
CALLER: Well, I did, because --
RUSH: You didn't look at the past. You tried to guesstimate the future?
CALLER: Well, I wouldn't allow someone to take a loan that was not in their best interests but there were others who did and that's a story for another day.
RUSH: Well, but some of those people were forced to by government policy.
CALLER: Well, that's on the bank side.
RUSH: Yeah.
CALLER: But as an originator, still being in the free market, I had the choice whether or not I would work with somebody or not. Does that make sense?
RUSH: No, not to me. I don't know what you mean. How do you differ from a bank?
CALLER: Well, because I'm an originator, and I would find a client. Someone come to my office and say, "I want to buy a home" or "I want to refinance my home," and if --
RUSH: Okay, what kind of...? Are you a savings and loan, or what is it?
CALLER: I'm a private shop. I have my own little mortgage company, and I would --
RUSH: Okay.
CALLER: -- place my loans with the Lehman Brothers or the Wells Fargos or the Countrywides.
RUSH: I got it. So you're a mortgage broker, essentially.
CALLER: Exactly.
RUSH: All right.
CALLER: So what happens is -- I'm gonna use the figure of $150,000 to keep it simple -- someone wants to come in and take out a loan for $150,000 at the 7% interest. Principal and interest on that payment, rounding it up, is right about $1,000 a month. So as an originator I would charge a 1% origination fee so I would make $1,500. Now, that 7% loan, if I would place that loan to the lender, that would be a "par pricing loan," meaning they don't pay me anything to give that figure -- or that interest rate -- nor do I charge my borrower anything for that interest rate. Now, if someone wanted a lesser interest rate, they could pay more money against it, but if I wanted to give them a higher interest rate, the lender that I was placing the loan with would actually give me what they call a "yield spread premium." Does that make sense so far?
RUSH: Yeah.
CALLER: So, if I wanted to place that 7% loan at 8%, the lender would actually pay me another $1,500, so I could make $3,000 on that loan.
RUSH: Before anybody made a single payment?
CALLER: Exactly. Now, the bottom line is most people that take out mortgages would make their payments for six months, a year, two years, three years, four years. Because property values continued to go up, people kept pulling more money out of their houses and refinancing and putting that money into their pocket. So they would continue to make this thousand-dollar-a-month payment of which 97% of it, approximately, was interest only.
RUSH: Right.
CALLER: So let's just use a 12-month time frame. So if the lender pays me $1,500, I charge the borrower $1,500, well, the lender gets his money back in a month and a half; and then for the next ten and a half months, he's [the lender] making $1,000 a month on that loan. So they didn't lose any money. Plus, they still have the actual real property as collateral. So if and when the borrower defaulted, they still had the real estate. But it really didn't matter because Fannie and Freddie ultimately were the ones that would buy these bundles [of bad loans] that were speaking about previously, so the government would not allow the banks to get hurt. They wouldn't allow people like me to get hurt because the government was buying up all the paper, but it gets back to this: The government's out to help the little guy get into a property, and they put the burden of payment on the little guy; and they get fleeced because they pay out all this money, and then they lose their home and they're out all this money, and the brokers and the banks and all the intermediaries that sell these loans back to Fannie, make money on the back of the American people again. That's how it gets paid for.
RUSH: Even with people who aren't making the monthly payment though?
CALLER: Well, that didn't happen right away.
RUSH: I know it didn't happen right away.
CALLER: People would get in and they would honestly make their effort, and my experience was that very few people defaulted until the economy got to where it is today. You see? Back then... I've been out of the business for four years, and I told my wife when we moved here to Alaska, "You think that the savings and loan bailout back in the eighties was something? You haven't seen anything yet. You wait to see what's coming around with this group," and they're getting ready to do it again. So, it's crazy.
RUSH: Well, but at some point people did stop making payments on their loans, and you're right: At the height of that, I remember the number that was bandied about was that 95% were still making their payments on their mortgages.
CALLER: Exactly.
RUSH: Yet the whole industry was being tarnished by the 5% that had just checked out and were not making their payments.
CALLER: As is almost always the case, they shine the light on the bad apple to spoil the whole bunch, and that's how they did it. It's always the small percentages -- whether it's in mortgage or money or gay rights or against religion, they shine the light on that little teeny percentage -- to run and govern this country, and it's wrong.
RUSH: You make a great point. Fred, thanks for the call. I appreciate it.
RUSH: Robert, Lakeland, Florida. Great to have you on the EIB, sir. Hello.
CALLER: Rush, what a pleasure, what a pleasure.
RUSH: Thank you, sir.
CALLER: I'm a lending professional here in Lakeland. I've been in the business for about eleven years, and really appreciate everything you're doing for us. Don't run for office, Rush.
RUSH: No. No way.
CALLER: You're the only solid voice in the system, so thank you.
RUSH: You bet.
CALLER: But I just wanted to throw something out here. There's quite a few changes that have occurred, and I wanted to go on the back of three points back with the gentleman who was the mortgage professional and to kind of add where he was. He said the last time he was in the business was four years ago, and I want him to know -- and I want everybody in the country to know -- the changes that have actually occurred in the lending practices and what has been perpetrated on the back end of the so-called little guy. FHA is under a greater control; changes have occurred. You know, in the Fannie Mae debacle that we've had, Frank and Dodd supposedly stood up and they brought all of these wonderful processes forward to restrict lending and to change the way that we actually lend to the people of America.
RUSH: Right, all for "the benefit of the consumer."
CALLER: Exactly, and that is not what has happened. What has actually happened and what people do not understand is, Rush, if you go and buy a house, what kind of lending do you use?
RUSH: Well...
CALLER: Conventional, right? If you were to buy a house with a loan -- which you don't need money, but if you were to buy a house with a loan -- you would use a conventional-style loan, correct?
RUSH: Yeah.
CALLER: Because it's the cheapest. It's [the conventional loan] the least amount of money out of pocket --
RUSH: Right. Exactly.
CALLER: -- and so forth with the fees that are associated with it.
RUSH: Yeah.
CALLER: Well, recently the small guy has had an increase on the amount of money that is required down. They increased it in the fall of last year.
RUSH: To how much?
CALLER: 3.5%.
RUSH: That's not bad. It used to be 20%.
CALLER: That's right. Well, now let's talk about FHA.
RUSH: Oh, you're talking FHA.
CALLER: I want to talk FHA with you and what I want you to understand is the small guys -- who were these small individuals who were in the country -- they're not able to buy the larger size homes. They don't have that 20% down. So what Frank and Dodd has tried to convince the American people of is that they're out here giving greater consideration to all these people that were taken advantage of during the subprime lending.
RUSH: I know, and it basically restarts that [the subprime lending bundles].
RUSH: I know. You know, not everybody's intended to be in a house. This is why the 20% mattered. The 20% mattered to have skin in the game so that it would be something that you would approach responsibly.