Mortgage Monsters: Party's Over
In the Wild Wild West of mortgage sales, the hills were full of mortgage gold
by Bryan Copley
Editor's Note: iTulip is pleased to add Bryan Copley to its lineup of finance industry insiders writing about what they know. He worked in the mortgage industry during the bubble years and continues to work in the industry today. These are his war stories from the front lines of the credit bubble.
Picture this: you’re standing shoulder to shoulder in a room the length of a football field overflowing with howling, raucous young men. The leader of the pack is being hoisted upside down over a freshly primed and pumped keg full of beer. The whole throng erupts as he performs an honorary keg stand, suds gushing from his mouth, an appropriate salute to the members of this wild organization. You’re no doubt present for the induction ceremony at a local university frat house.
Not quite. In fact, you’re taking part in the awards ceremony at one of the largest wholesale mortgage brokerages on the US west coast. Welcome to Merit Financial in Kirkland, WA, a ritzy lakeside Seattle suburb, circa 2005. You’re standing in the heart of the mammoth mortgage company. Everyone just made a lot of money and you can’t help but feel a little giddy, too, like someone just filled the room with nitrous-oxide or your junior high crush passed your note back and you’ve unfolded the note to a blissful "yes."
Following suit, you glance to where the room’s collective eye is fixed, near the beer source. A notoriously prudish manager, eschewing his standard calm deportment and sporting full suit and tie, has consented to an upturned swig on the keg. Pandemonium ensues. Cups are raised in victory and in slow motion liquid golden pirouettes shower the crowd.
Unlike a rowdy college kegger, this party was never stopped by the police, or anyone for that matter. As fast as subprime mortgages flew out its doors, alcohol and drugs were flying in. Rumors of illicit goings on were the norm.
From the moment you walked in the door you got the feeling that Merit wasn’t like other mortgage companies. A gargantuan-font slogan shone down from the marble and waterfall adorned entrance: “That was then, this is Merit.” The motto claimed correctly that your perception of the mortgage finance industry would be forever modified by this mortgage giant. Anybody could walk into this place with decent sales skills and no industry experience (you didn’t even need a high school diploma) and quadruple their income–and I’m being conservative here–within a month.
In this Wild Wild West
of mortgage sales, the hills were full of mortgage gold.
Back to the conclusion of the awards ceremony. Before the brouhaha concludes, a loan officer in his twenties walks out of the room carrying a check the size of a Geo Metro
for over $100,000, grinning like the Cheshire cat. Good month. The lot of loaded loansmen leaves the halls of Merit, and a Wells Fargo nearby will soon be calling in the par-tay "reserves."
Then, across the nation, for a spell the financial front falls silent. It is Friday evening. The 400+ cubicles usually producing cash nourishment like cells in this 80,000 square foot Godzilla building are empty. Following the evening’s revelry, drunken mortgage makers nationwide stagger outside to pass out in a corner, their money and party fueled by the ignorance of American consumers, to take the weekend recoup.
Let me pause. To our collective lexicon I would now like to add my own little piece of gobbledygook, a necessary new layman’s term, which we can use in our daily financial-speak: the mortgage monster. This term would describe any mortgage company which preys on the ignorance or misfortune of the consumer, neglecting its fiduciary duty to protect a client’s best interest, to extract the maximum amount of profit from each transaction. And make no mistake: the majority of subprime lenders fit this category, in 2005 and now. The only difference is the margins have been pared down considerably.
Since 2005, Merit Financial and countless other mortgage monsters have been swallowed whole by the leviathan which is the subprime mortgage crisis. In early 2006, the owner of Merit gathered his faithful hundreds into the same room where earlier the beer flowed freely to break the news that Merit had filed for bankruptcy protection – less than a year after their most profitable month. The multi-million dollar head gave the news, cried, slammed the door with his fist, and walked out on a stunned audience.
It was awkward. In that moment, the financial Disneyland of debauchery morphed into Unemploymentville faster than Angelo Mozilo can say “sell.” Loan officers scattered out the doors like cockroaches. The light went out and stayed out. At Merit alone, 400 employees lost their jobs, and their last month’s income. Some law suits gained steam, but then faded away. Commissions were never paid. There was no money.
What followed is history. Tens of companies followed suit, prompting websites like “The Mortgage Lender Implode-O-Meter” into existence. Merit is imploded lender #1.) Millionaire reps for subprime mortgage companies were suddenly unemployed. Some sold what assets they had left, while many others were, ironically, forced to file bankruptcy or go into foreclosure on their own mortgages. Lenders’ stock halved, halved again, then evaporated. Ameriquest went bust. Subprime rates adjusted dutifully upward to price in the dearth of demand on the secondary market, pricing most subprime borrowers right out of the game.
I recall telling borrowers with poor credit, “I can’t help you, and even if I could you don’t want this
kind of help.” Interest rates continued to adjust, raising payments for many borrowers by hundreds of dollars a month. Investors, foreign and domestic, watched in denial as asset-backed securities values and returns collapsed with each default.
All the while the subprime pied piper continued playing and the mortgage monsters followed each other off the cliff. The pileup and its full effects are still unknown. Even the “experts” have no idea exactly what the crash portends.
Still, there is a silver lining. Reform is in the wind. In the state of Washington, for example, new laws have been enacted requiring loan officers to pass state mandated exams which were, encouragingly, difficult. New restrictions on licensing barred all felons with convictions within seven years from originating loans. Many moved to California where, incredibly, law does not prevent felons, even those convicted of financial dishonesty such as fraud or embezzlement, from practicing in the finance industry.
Lenders have tightened their long lax lending standards to preclude those who lack creditworthiness. More rigid guidelines entice lenders to court those who have always qualified for loans, but are less profitable borrowers. Lenders are also abandoning high-risk (stated income, interest only, short term, and negative amortization) programs because demand for securities that created the debt that back these loans on Wall Street
vanished almost overnight. Investors have all but abandoned these and opted for safer, lower rate, longer term and more secure conventional products. FNMA and FHLMC mortgages as well as FHA and VA programs will see huge volume increases in months and years to come.
Correction is in train, and if you’re thinking that's all good ask yourself why the Great Depression
was called a “depression.” Banks, consumers, investors, loan officers, speculators, Wall Street… an entire nation is now being force-fed responsibility. With regard to the subprime mortgage crisis, many are relearning basic economic principles: "There is no free lunch." "Caveat emptor." "If it looks to good to be true..." and so on.
The heyday of irresponsible mortgage lending is over, much to the chagrin of predatory lenders nationwide. The house of one-eyed jacks is crashing down and even political conservatives are taking cover from the fallout.
Appears the party really is over. Will the age of 20% down, good collateral, and good credit will make a comeback? Perhaps Americans will change their minds about leveraging themselves to the hilt and begin living within their means. But in the words of the late John Kenneth Galbraith “In the choice between changing ones mind and proving there's no need to do so, most people get busy on the proof.”
See also:Frankenstein EconomyDancing, Booze and Overpriced HousesThe New Road to SerfdomiTulip Select: The Investment Thesis for the Next Cycle™
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