subprime

Consumer groups must be getting bored with the current foreclosure fault-fest. A recent article on Women’s eNews© claims that advocacy groups including the Consumer Federation of America believe that gender bias in mortgage lending is “quite common.” According to Allison Stevens, the author of the article, “The government currently screens for disparities based on race and ethnicity, but not on gender, making it difficult to assess precisely how widespread this type of discriminatory lending is.”

Um, has this woman ever seen a 1003 mortgage app? And what part of “Information for Government Monitoring Purposes” does she not understand? It’s all right there, Part X, that gathers ethnicity, race, and sex information for monitoring lender “compliance with equal credit opportunity, fair housing and home mortgage disclosure laws.”

So that takes care of the government monitoring question. Now, how about approvals — are women getting bounced for simply being women?Don’t think so –underwriting is largely done with programs like Loan Prospector and Desktop Underwriter; those computerized suckers don’t give a rat’s, uh, tail what the applicant’s gender is, but they do like to see enough income to make a payment and a few months’ reserves.

Finally, lenders are businesspeople and discrimination is simply bad business. If someone qualifies for a full-doc prime loan, why on earth would anyone quote them an Alt-A or subprime deal? Unless they only sell subprime loans or hard money? LOs can price in a decent profit regardless of the product offered, but would be far more likely to lose the deal to the guy down the street (or the next URL) by pricing higher than warranted. To make the assumption that gender discrimination is “common,” the logical conclusion is that it is also “common” for women to work with lenders who only offer subprime products, that it is “common” for women to forego shopping for a good deal (like that will ever happen), and that it is “common” for women to be less intelligent or discerning than men (don’t get me started here).

One of these groups took a 2006 government report and interpreted the data to conclude that women as a group pay more for mortgages than men with similar credit scores. But the government did not in fact conclude that the disparity was due to discrimination by lenders. As we all know, credit is only one part of a loan application. It’s an unfortunate fact that women in this country as a group earn less than men, particularly those whose career is interrupted by family obligations. And it’s no secret that nearly half of American marriages end in divorce and that it’s the woman who takes the brunt of the financial hit. Spousal support has become an anachronism, and child support is often unreliable and inadequate. Additionally, women are disproportionately represented in service industries which are characterized by low job security and minimal benefits.

So you have a single mom, re-entering the workforce (maybe she gets credit for her new income, maybe she doesn’t until she’s been on the job a couple of years), and she gets child support the underwriter can’t count unless the applicant’s been receiving it — on time — for a while. She will in all likelihood have a harder time getting a mortgage than her ex.

And that’s a crappy deal. And it should be changed, but not by insulting women, saying that we are too helpless and dumb to get loans without special protection. Gender discrimination and income disparity isn’t about lending — it’s about life.

Hello, I was working on a couple of assignments pertaining to bankruptcy filings and researching the new guidelines when I came across something potentially very scary.

One action that can prevent someone from being eligible to file for Chapter 7 bankruptcy protection is “lying to creditors about income or assets on an application.” Does this mean that borrowers, especially the walking wounded subprime ones, could be denied relief because their loan applications will almost certainly not reflect their real incomes?!

If true, the implications are scary. Even if the lender in question (a secured creditor, after all) didn’t raise the issue, could a different, perhaps unsecured creditor–retaining the right to continue pursuit of arrearages? If so we haven’t even begun to smell the stink these loans are going to cause — and fresh air may be a long time coming…

Boy do the presidential wannabes love to throw the F word around while slamming the mortgage lending industry and blaming us for all the economic ills of the world. And the F word I’m talking about isn’t what you think. It’s FRAUD. In one presidential debate last night I heard the word FRAUD a dozen times and then I stopped counting because I had to go throw up. To hear these guys (and gals) speak as they have in recent debates you’d think that the entire lending industry made it a mission to take down scores of innocent homeowners and blindside Wall Street. Yes, we are evil incarnate and have devoted our lives to perpetrating FRAUD on the unsuspecting public.

I could dismiss the commentary and mindless blaming if the presidential hopefuls’ proposed solutions didn’t demonstrate an appalling lack of knowledge of the mortgage industry and a complete disregard for free markets.

First, they repeatedly and mistakenly assume that if people can’t or don’t make their mortgage payments that the lenders must have ripped them off, fast-talked them, or committed FRAUD in some way. And that industry profits are proof that lenders are driven by greed and FRAUD. Enough already. Nearly all of the borrowers in default received required disclosures and their loans were originated in accordance with federal and state laws. The instances of FRAUD or predatory lending in the news have been isolated cases involving a handful of bad apples. Every industry has them, and enforcement of existing laws should be sufficient to curtail their activity.

Second, nearly everyone running for the top job in the US proposes freezing rates and dictating what lenders can charge subprime borrowers. Naturally, if lenders can’t charge rates high enough to compensate for serving the subprime market they will just stop lending there–effectively barring subprime borrowers from home ownership. The 85% of subprime borrowers who successfully managed their mortgage would not thank their representatives for this I think.

Finally, there is something seriously wrong with proposed bailout schemes that reward subprime borrowers who skip payments by dropping their rate while punishing responsible borrowers by leaving their rates unchanged.

Which brings up a whole slew of F words: FOOLISH, FRIGHTENING, and FAILURE.

Discouraged about the dearth of subprime products or the availability of jumbos? Wilbur Ross may be your next wholesale lender.

While the Federal Reserve was conducting secret meetings with 30 top banks two weeks into September, Wilbur Ross was preparing to bid for the mortgage servicing assets of Michael Strauss’s bankrupt American Home Mortgage Investment Corp.

The Fed was trying desperately to avoid further catastrophe; Ross was carefully preparing to create profit from the ashes littering the devastated financial landscape.

He’s likely to do so. Three things tilt the scales in his favor.

1. Track Record. On October 5th, his bid won. While Ross doesn’t always come out on top, he always has a plan. Here the plan in his own words: “…WL Ross portfolio companies raised $2 billion this year to eliminate outside financing needs. More recently, we provided a modest $50 million debtor-in-possession financing to American Home Mortgage, the tenth-largest subprime lender, as it entered bankruptcy. Ultimately, we will make a major move into mortgages, because lending to weak borrowers makes sense at premium rates with proper due diligence and appraisals. After Japan’s real estate bubble burst, we used a similar strategy to rehabilitate Kansai Sawayake Bank. It was earning 17% a year on equity after one year, almost twice the return typical of a Japanese bank.” Wilbur Ross, Fortune magazine
2. Smarts. CEO’s are a dime a dozen. Wilbur Ross isn’t your average CEO. Quiet, soft-spoken, and not given to profanity, he’s in a league with the likes of Warren Buffett. If Rudy Giuliani wins the Republican nod as 2008 presidential candidate, look for Wilbur Ross to figure into the campaign behind the scenes. He served as privatization advisor to the very successful Mayor Rudolph Giuliani.
3. Automation. Here’s a shocker. Little old ladies with letter openers have nothing to do with payment processing in the mortgage industry. Instead, $400,000 systems by little known (and privately held) OPEX Business Machine Corporation of Moorestown, NJ ingest payments from the public at the rate of 3 envelopes per second, process them in a 3.5 second paper path, and spit out data files and image files. That’s 10,000 envelopes per hour per system. With one operator! Giants Countrywide Home Loans and Option One Mortgage, as well as national banks like Chase and Wells Fargo have used these systems (and their predecessors) for more than a decade. 3 payments per second, at an average of $1,000 per payment… You do the math.
   The systems provide economic efficiencies of scale that are otherwise impossible, and with a much greater degree of accuracy than is possible when a person touches the payment.
   Marina Walsh, a senior director in the Mortgage Bankers Association’s research and economics department, is quoted by Bloomberg.com as saying that “Per-loan profit for servicers declined by 44 percent to $58 in 2006 from $104 in 2005.” Wilbur Ross expects to reverse that trend.

There are $10 trillion in home mortgages outstanding in the US. Ross’s AH Mortgage Acquisition Co. services $45.3 billion of these. Ross believes he can triple that with little additional cost.

The next step? There’s a tremendous pent up demand for subprime and jumbo mortgage products. Wilbur Ross intends to meet that demand at some point in this cycle. “If you want a growing business, you need to be in some form of originations,” says Ross. “It could be jumbos, it could be subprime, it could be whatever.”

The New York Times likes to refer to Wilbur Ross as a Vulture Investor. He doesn’t see it that way. “We spend a lot of time trying to figure out which industries will go bad a year from now,” he says, “and then within that universe, we try to figure out which companies are salvageable.”

content and photo copyright Michael W. Jones