May 10, 2007

Neurton bomb loans. Coffee is for closers. Boiler rooms. And a corrupt, unregulated, out-of-control REIC

I've gotta give credit to the MSM lately for doing what they do best - reporting from the scene of a gory accident or triple homicide. Yes, they're lazy and terrible at reporting during the crime, but after the bodies are lying in the street, they wake up and do their jobs.

Here's highlights from a great Reuters expose on the out of control mortgage industry. Read the whole thing. And after it all comes crashing down, you'll know why.

Frenzy of risky mortgages leaves path of destruction

For nearly a decade, investors were rushing to real estate, creating enough capital to build a new class of homeowners -- loaded up with an incendiary mix of debt from car loans, credit cards and mortgages. Federal tax deductions and housing programs also fueled the boom.

Wall Street investment banks funded new subprime mortgage lenders, many based in California, by packaging their loans into mortgage-backed securities. That expanded the size and reach of the subprime lending, dovetailing with a long-held government policy of putting more Americans into their own homes.

The home-ownership rate surged to 69.3 percent in 2004, up 5 percentage points in 10 years. It was a stunning expansion, considering the rate rose only 2.2 percentage between 1965 and 1995, according to the U.S. Census Bureau.

But the subprime market began to sour in 2006 as home values leveled off. Lenders whose profit margins contracted in an increasingly crowded market were forced to repurchase a growing number of bad loans. When they couldn't, Wall Street pulled their funds, forcing many subprime lenders to shut down, sell assets or file for bankruptcy.

Bill Dallas, chief executive of Ownit, the nation's 20th-largest subprime lender in 2006, said he saw the handwriting on the wall in April 2005 after he overheard a rival account executive tell a customer how to get a better rate by committing occupancy or income fraud.

"I just went, 'We are hosed as an industry,"' Dallas said. "I told our guys, 'We're the problem."

The structure of the industry was part of the problem, he said: "Our account reps are talking to the mortgage broker, the mortgage broker is talking to the borrower, and they're teaching them all the wrong things."


Interviews with borrowers, mortgage executives, loan officers, appraisers and brokers describe a subprime industry engaged in the systematic abuse of prudent lending standards. There also was plenty of outright fraud by lenders and borrowers, they say.

Borrowers lied about their income, sometimes encouraged by unscrupulous subprime sellers.

Property appraisals were faked to justify inflated loan values. Loans were closed at fast-food restaurants or across kitchen tables at midnight. Brokers sometimes skipped the signings altogether, sending a notary to clients' homes.

"They basically put you in the closet, turned out the lights, and said, 'Sign here,"' said Bill Purdy, a California lawyer who represents homeowners with predatory lending claims.

Lenders often teased borrowers with low initial payments that later soared, leading to onerous penalties or higher rates. And better yet, Wall Street investment banks stamped their approval on no-money-down mortgages and loans widely known as "liar loans," which allow borrowers to state their income without verification.

It was a dangerous mix, said Chris Lefebvre, a Rhode Island lawyer who represents families with mortgage problems.

"You had consumers that really weren't creditworthy and lenders who were irresponsible," he said.

Some subprime mortgages had features that were bound to produce disasters. "Stated income" loans didn't require borrowers to produce pay stubs or tax returns. Option adjustable rate mortgages (or option ARMs) typically let borrowers choose a monthly payment, but instead of paying down mortgages they often paid interest-only. That put borrowers deeper into debt after each payment.

Purdy, the California lawyer, calls these "neutron bomb loans" because they clear out the buyer but leave the house standing.

Sometimes subprime lenders drew their inspiration from Hollywood to motivate employees to sell more loans. Branch managers showed movies that celebrated bullying and high-pressure sales tactics.

Account executive Mark Bomchill said he was given his role model soon after arriving at Ameriquest Mortgage. He was Jim Young, the sleazy salesman played by Ben Affleck in "Boiler Room," a movie about a stock brokerage that scams investors by getting them to invest in fake companies.

Bomchill watched the movie as part of training at the Plymouth, Minnesota, branch, where he said he also watched colleagues falsify income statements and push customers into high-priced loans. They would treat borrowers, he said, as if they had no place else to go to buy into the American Dream.

"I was taught and encouraged to close loans without regard to the customers' financial ability to make payments on the loans," Bomchill said in a federal lawsuit against Ameriquest, a leading subprime lender.

Ameriquest said if what Bomchill described happened, it would be against policy. The company closed its network of 229 branches last year.

Others in the industry were told to model themselves after Alec Baldwin's hard-as-nails character in the movie "Glengarry Glen Ross." The 1992 film, based on David Mamet's play, depicts desperate real estate salesmen trying to unload undesirable properties while the home office threatens their jobs.

"Put that down," Baldwin yells at Jack Lemmon's character as he pours a cup of coffee during a sales meeting. "Coffee's for closers only. You close or you hit the bricks."


Anonymous said...

Well Duh.

I'm not sure why you think this is a surprise. There has always been, is, and always will be this type of behavior in all areas of human endeavor. It's not unusual. It's the norm.

Welcome to the Real World.

Anonymous said...

Glengarry Glen Ross Wow you are freaking me out. Life Imitate ART!

Anonymous said...

I live in Phoenix and I really want to know who this Hayes Barnard person thinks he's fooling. He is just advertising like housing is going out of style. Paramount Equity sounds like the next group of jailbirds to me?

Anonymous said...

Coffee is for closers, renting is for losers. HA HA HA

Anonymous said...

oh two great movies, thanks for the reminder I will rent them this weekend while Andrea blows thru.

Natural Eyebrows said...

Keith, your critique of the MSM is rooted in a confusion of reporting with analysis. Yes, they're good at chasing that ambulance to the scene and telling you who got hurt. That's reporting.

Vistitng the scene prior to any accident and predicting an accident because or risky conditions is analysis. Newspapers are supposed to keep analysis confined to the editorial page. Broadcast and cable media are supposed to make similar distinctions. A reporter is trained to answer the questions "who, what, when, where" in putting together a story. Saying "why" is supposed to be off limits, except for a few anointed oracles. The premise of this arrangement is that the reader/viewer is smart enough himself to understand the "why" element of the story.

Anonymous said...

You forgot about how the salespeople brought out the bats if someone turned down a loan .

Isn't it ironic that neg. movies turned into positive roll models by the real estate industry .I'm sure criminals get their ideas from TV and the movies .

Yes ,the REIC was corrupt , unregulated ,and out of control .Now that the problem has been defined ,when are these people going to be brought to justice and pay for the sub-prime bailout .

Of course the borrowers were counseled by the REIC on how to get a liar loan .These borrowers who were paying inflated prices for real estate were to stupid to commit fraud on their own .What the heck , these new homeowners didn't have to put any money down .

Now that the REIC has f-cked up the entire stability of the real estate market ,that will result in the biggest real estate correction in history with 5 million homeowners going down the tube, all they can say is ,"It's a good time to buy ."

Anonymous said...

oh dont miss these classics:

Dean said...

Vistitng the scene prior to any accident and predicting an accident because [of] risky conditions is analysis. Newspapers are supposed to keep analysis confined to the editorial page.

No, editorial pages are for opinions. Analysis is what investigative reporters do-- specifically trying to figure out "why," which usually appears as a "feature article." Reporters aren't purely stenographers.

Anonymous said...

Speaking of the MSM, This cracked me up!

60 Minutes: 'Be glad that it's Mother's Day,' says NAR

Word is out that the much-anticipated 60 Minutes segment on the real estate industry will air this Sunday night and the shrewd PR team at the National Association of Realtors has already been out doing damage control. A letter from the national trade group to its smaller associations has been circulating, giving some talking points on how to handle media and member inquiries about the issues raised in the segment.

The letter notes: "Bottom line is that we don't expect that the segment will make Realtors happy but it could have been much, much worse. Be glad that it's Mother's Day and the show will probably draw fewer than its average 14 million viewers."

Anonymous said...

Newspapers are supposed to keep analysis confined to the editorial page.

I have to say that the above poster is 100% wrong. Reporters need to check their facts, analyze data, and dig deeper and deeper to uncover the true story.

The downfall of the main stream media is because (for the most part) they aren't doing any real reporting anymore. More and more they just spout what the government official or trade organization put out in their press releases.

Drive-By Media said...

I call the MSM, the drive-by media.

They report based on the agenda of the editor and ownership. Facts is the last thing they are concerned with. Pushing an agenda to court buyers is all that matters. More buyers = more advertising revenue.

The rules of the majority of the MSM are as follows:

1) If it bleeds, print it.
2) If its anti-american, print it.
3) If its anti-christian, print it.
4) If its anti-US military, print it.
5) If its anti-conservative, print it.
6) If its pro-3rd world, print it.
7) If its pro-Islam, print it.
8) If its pro-liberal, print it.

Just read a typical New York Times newspaper. They wrote the book on these rules.

Anonymous said...

The downfall of the main stream media is because (for the most part) they aren't doing any real reporting anymore. More and more they just spout what the government official or trade organization put out in their press releases.

Yep - the faulty conclusion and overblown hype of global warming is a prime example of the retarded media. Hype sells, facts - just make them up.

Anyway, if you have a family it is always a good time to buy. (real estate)

Anonymous said...

I call the MSM, the drive-by media.

No, actually, you don't call it that. Rush Limbaugh calls it that. You're just repeating what he told you to say.

Anonymous said...

I have tommorow off of work - i think it's going to be a Housing Panic Moviethon day. Going to watch Boiler Room then GGGR back to back.

Anonymous said...

"They took away the Goose that Laid the Golden Egg."

Steve the Dog said...

Good to know mot of our 535 elected officials are all over it.

Wait, it willbe 18-24 months before they will be shocked - shocked I say - that this was going on...

Steve the Dog


Anonymous said...

"I live in Phoenix and I really want to know who this Hayes Barnard person thinks he's fooling. "

I live in Portland and he advertises here too. hey, he will pay for your appraisal........ no conflict there....

Anonymous said...

I have actually worked with Paramount Equity Mortgage and had the chance to meet Hayes Barnard. He is actually a nice guy and I got a really great deal on my mortgage. I know that people give him crap for his radio spots, but he seemed like a really good guy.