Skip to comments.House Buyers Stung
Posted on 08/21/2010 1:16:35 PM PDT by fightinJAG
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As an attorney working for one of the 5 largest lenders in the nation, I specialize in reviewing the documentation of failing banks, which we consider purchasing. I also review all our loan sales and buys in the bulk markets. Straight up facts leading to this huge increase are these 3 and in this order.
First, the government tells us, we MUST make bad loans. We have our credit rules, and many loans just are not good investments and we know it. When we do the worksheets, it screams off the screen. DO NOT LOAN! But, by law, to even be allowed to loan, we MUST make bad loans for certain demographics, which include sex, age, race, and geography. If we “profile” we are going to go out of business by law. Most of these laws were done under Democrat Presidents, the worst of them, during the Clinton Administration.
Thus, we know it’s bad paper, and we tag it internally as such, but do the loan anyway, tossing it in with a bundle of VERY GOOD paper to spread the loss and risk.
Investors to whom we sell the notes, but usually retain the servicing, that is we take the payments, make the collection calls, and do the “work” for a small up front fee, while the investor has a safe and moderate long term profit, know this. They usually allow for a 3% failure rate in any bundle. Anything more than 3% and they LOSE money. The bank doesn’t. We made our money three ways. Upfront fees for closing, and upfront cash for the “loan bundle sale” and “servicing”.
Second, because the investors, not the banks, got screwed when many banks made many more bad loans than the minimums required, basically because of all those front loaded fee profits, these investors demand a LOT more info before they will but them. They have to buy them. No bank actually has the money to loan any more. We buy and sell bulk loan groups every day. If we did not, we’d run out of cash to lend in a few days and be done. The banking system is just like a grocery store, miss one truck shipment, and you are OUT of business and inventory.
Thus, these fees are higher because the investors want us to actually TELL them about the loans in far more detail than previously. Now, honestly, it’s not THAT much more work, so banks ARE jacking the fees, which is why you see the rates wildly ranging. How much do you think we can charge today, is the rule. And as much as we can is the answer.
But, it is simply because the bank doesn’t have the money to actually lend, which is the reason why the fees exist in the first place.
Lastly, banks are getting less in the fees from the investors. These investors HAVE the cash. They can buy or not buy any damned loans they wish and after this asskicking they took, they are picky SOBs. They just won’t pay what they used to pay and tell the banks “hey, you don’t like our lowball offer, go find someone else to buy them”. Which of course, would wipe the bank out to hold these notes more than 30 days. Most loans are sold to investors the week after the closing and right of rescission has expired.
So, there we are. You want a loan, you are a good risk, the bank would LOVE to have you, the investors want to be sure the bank is not lying to them, but you are covering for the bad loans the government DEMANDS the banks make. And the only way the bank makes any money at all, is to over charge YOU the good credit risk.
All of us in the banking industry would love to see these laws changed. We lobby and spend billions to protect our rights and see true fair lending laws enacted. But, not all banks. There is a war going on between the big 20. Some, who I cannot mention for obvious reasons, do NOT want to see these rules changed and actually supported the bad loan rules. Because they not only got to make out like thieves when they charged fees for bad loans, but they lobbied for the tax payers to cover them if the defaults went beyond 3%. Which, of course, all happened.
The bottom line is this: Until those laws are repealed. Until banks are free to say “you suck and we won’t lend to you” without being racist, profiling, Fill-in-the-blank-Phobes, bad loans are going to be made and YOU the good customer, are going to pay for them. One way or the other.
So, there are BAD banks, good banks, and banks stuck in the middle trying to just not go under today.
Bravo Sierra. A lender commits fraud every time they knowingly write a bad loan, and commits fraud again when they knowingly bundle it up with good loans and sell them to investors on the street.
There is no law that 'forces' a bank to make bad loans. If you're advising them otherwise you should be disbarred.
Easy to say BS.
Impossible for you to even articulate some other conjecture.
I see it every day in loans by the thousands. Loans we buy and resell servicing, and loans we make and sell outright.
I oversee LDA policy. POLICY. That is our internal standards by which we conform to the lending laws, and still try and make a profit.
Those laws are the problem. And yes, when the law changes the credit worthiness of a borrower based upon outside demographic and geographic criteria, that is forcing us to make bad loans. Loans we would not have made 10, 20, 30 years ago. Loans we would not willingly choose to make today. If we were able to set our own independent standards.
So your “bs” post is based on what? Wishful thinking?
You need to post an alternate description of the events if you wish to be taken seriously.
Otherwise, my reply to your Bravo Sierrra is Delta Uniform Bravo Mike Alpha Sierra Sierra.
All you have to do is look at the paperwork. On multiple pages there are multiple sections and each section requires a full signature. Why? Because each section comes from a different person within the bureaucracy looking to justify their existence. “We’re the department that keeps the bank from losing money from lawsuits by people that claim they never knew they would be responsible for electric utilities payments and added the second section on page 76 that requires people to sign they know they must pay their own electric bill. So, we added that section and audit that the buyer signs it. We not only save the bank from utility lawsuits but also added $25 in fees to each closing and made $780,000 last year.” I kid you not. One bureaucrat after another has plundered the process and tacked on fees using that kind of BS.
“There is no law that ‘forces’ a bank to make bad loans”
The “Community Reinvestment Act” requires banks to provide loans in areas and to people the federal government banking regulatory agencies deem are important. They extort from loans from banks into areas the banks would otherwise not touch. If a bank wants to open a new branch or even be a bank at all, they must meet CRA loan requirements.
This extends to fanny, freddie, and ginnie. They will only take mortgae portfolios that are comprised of at least so many loans to minorities and poor and areas banks otherwise would not lend.
So, yes, there is a law that requires banks to knowingly make bad loans. It is the ‘Community Reinvestment Act’, 12 U.S.C. § 2901.
I believe you articulated the point in your original post. Summary: Banks are required to make bad loans - and they package them with good loans to make them more palatable to investors. However, some (most?) banks sold more bad loans than were required to get the high closing fees and packaged them to unwitting investors who took the loss.
Explain what element of fraud is missing from that description.
I think that RachelFaith would acknowledge that there was a substantial amount of lending which would have been called "fraudulent" in a rational regulatory system with rational lending and accounting regulations; she did say that "Some, who I cannot mention for obvious reasons, do NOT want to see these rules changed and actually supported the bad loan rules. Because they not only got to make out like thieves when they charged fees for bad loans, but they lobbied for the tax payers to cover them if the defaults went beyond 3%. Which, of course, all happened," as well as "there are BAD banks, good banks, and banks stuck in the middle trying to just not go under today."
IMO, she's not saying that some banks, especially some of the biggest banks, are particularly blameless in all of this. (Golf Sierra... cough cough). But I think she is saying that we have a regulatory regime which encourages fraudulent/bad lending, particularly during boom times of "easy money" -- because it's immediately profitable for as long as the party lasts, and they can (and did) get the taxpayers to bail them out anyway; and after all, they're required by law to do a certain amount of "bad lending" anyway, so why not belly up to the trough and make the fees up-front while the sun shines? Do I understand that about right, or no?
Maybe some of these banksters should go to jail; but until we change the regulatory regime, this sort of thing is just going to happen in the housing market again. That is, assuming the markets don't break down entirely this time around, if the recession goes into douple-dip.
I don't care if you're the bank president. If you're knowingly making what you describe as bad loans and knowingly reselling them to investors without their knowledge then you are committing fraud. FRAUD. That isn't conjecture, that is the law.
Those laws are the problem. And yes, when the law changes the credit worthiness of a borrower based upon outside demographic and geographic criteria, that is forcing us to make bad loans.
What laws? There are no laws that do that. You can't name the statute(s) that 'forces' your big five client to make bad loans,(much less hide them in a bundle of good loans for resale), and you know it.
You need to post an alternate description of the events if you wish to be taken seriously.
No, I stand by my remarks and so does the Office of Thrift Supervision . If anyone needs to provide an 'alternate description' of events here it is you.
Don’t know bout that. What I do know is that when I bought my current house in 2002, I almost got raped by a lowball “gfe”. I’d crunched the final numbers a week before closing an they were $3k higher ( iirc) than the gfe. I was told not to worry, but I rolled 5k over into our transition acct anyways. When we went to closing, sure enough there was the 3k diff. They had the paperwork all set to give me a short term high interest loan, and were annoyed when I pointed out that I had 2k more in the account than needed and that the needed to give me back.
The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call “communities of color” that they might not otherwise make based on purely economic criteria.
The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various “neighborhood organizations,” as they like to call themselves, such as “ACORN”
So-called “community groups” like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation.
The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA “protest” is issued by a “community group.” This can cost banks great sums of money, and the “community groups” understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.
Consequently, banks in every community in America have been forced to create a portfolio of bad loans, euphemistically referred to as “subprime” loans. In order to compensate themselves for the added risk of extending these loans, most lenders have increased the lending fees associated with loans. This is simply an indirect way of doing what banks always do and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.
But since they cannot charge too high of rates for these loans, and since many “community groups” would go ballistic, they just pass on this burden to the credit worthy and destroy both markets at the same time, trying to remain solvent.
Thus, if one browses the ACORN web site, one can read of their boasts of having “predatory lending laws” passed in numerous states which outlaw such fees, prohibiting banks from protecting themselves from the added risk involved in making forced loans to “subprime” borrowers.
These ARE price control laws, and price controls always cause shortages. Normally, banks would respond to such laws by extending fewer riskier loans. But in this case the banks are forced to continue making the marginal loans by their bureaucratic masters at the Fed and the other three federal bureaucracies mentioned above.
Lastly, there are two further issues involved. The investors who supply the actual cash had to be tricked. Lied to. And since you cannot do this directly, like you have said without it being fraud, you simply keep increasing the appraised value of the Real Estate. Banks pay for the appraisals. They are the ones who come back and tell you your house is worth “X”. And so to get more capital up front, they just began to slowing add a FEW dollars into those appraisals. Not by fraud, but by the genuine fact that an appraisal is a guess. They just took the highest guess because it covered them better and they knew the good people would NOT, on average default.
So, good people, got value for their homes and lands, and were happy. They paid on time and the investors were happy. The banks loaned a little more risk, but these were all good time and good money. And most of these banks who began this process, were the smaller local banks or brand new upstart “Brokers” who just jumped in.
Brokers are many times, just a former bank officer who understood the GAME and figured out he could make REAL money doing the loans himself, since, like the banks he could resell them for a fast buck and not NEED any up front capital.
This is where 45 day, and 90 day First Payment plans originated. Brokers who needed more time to sell the loans before they actually exchanged paper for paper in terms of easy cash for credit. In the peak heyday of this scheme, the banks, who are needed to service these loans, saw they too could make money charging the brokers. So the system itself created this cycle of debt for more debt and INFLATED the value of the Real Estate.
I could go on and on.
How much MORE do you want to know?
The Community Reinvestment Act does no such thing and any practicing bank attorney worth their salt would know that.
The ONLY criteria for CRA lending is that the property be located in a census tract that has a median income less than 80% of the median income of the county the census tract is located within. All other lending standards remain the same.
There is NO preference given to race or gender, NO limitations are placed on the borrowers income, NO exceptions are made for a borrower's bad credit or low credit scores. King Midas himself would qualify for CRA lending provided the property he was buying was located within a qualifying census tract.
Banks also typically hold CRA loans on their books rather than sell them into the secondary market as a means of demonstrating their commitment to the entire community in which they operate. This precludes the type of fraudulent loan bundling practices you claimed they were 'forced' to engage in.
Consequently, banks in every community in America have been forced to create a portfolio of bad loans, euphemistically referred to as sub-prime loans. In order to compensate themselves for the added risk of extending these loans, most lenders have increased the lending fees associated with loans. This is simply an indirect way of doing what banks always do and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.
There is no correlation between CRA lending and sub-prime lending, they are two completely different programs. Sub-prime lending programs are employed when borrowers with poor credit history are applying for a loan. Sub-prime borrowers come in all shapes, sizes, and colors. Many sub-prime borrowers earn substantial incomes or be self employed. The same standards and practices are used to qualify sub-prime loans as with the prime lending programs, the difference being the higher interest rates sub-prime borrowers are charged to reflect the added risk their loan represents.
There is also no consideration given to the location of the property as there is in CRA lending, thus a million dollar home in an upscale neighborhood is eligible for sub-prime financing but not CRA financing.
There is plenty of evidence that crooked lenders who stood to make larger fees from the origination of sub-prime loans, either bent the qualification standards or simply placed prime borrowers into sub-prime loan programs anyway. It was the latter practice that minorities complain about especially.
The rest of your screed is a pack of regurgitated distortions and outright lies about lending and investment practices that I'm not going to waste time responding to. The idea that the existence of today's Too Big To Fail institutions were ever threatened by 'community activists' or that these same super-banks are kept on a tight leash today by some federal bureaucracy regulating the Community Reinvestment Act is laughably not true.
I could go on and on.
So could a babbling brook, with about the same effect.
So far, all I have seen is why “I am wrong” and not a peep about WHY banks have increased 37% their fees or ANYTHING else on ANY other view for our financial situation.
Since everything you posted in response to my “theory” comes right out of the leftist handbook, I’m really keen to see your diagnosis and cure.
Mine is pretty simple. Stop telling banks HOW and TO WHOM they must lend and let them make loans on their own terms.
It was once called the “free market”. Ever heard of it?