My New Blog

    Before I even start typing this, I want to stress I am well aware this post may be less than popular. Oh well. Also, part of this post has exerts from an article written by Dave Biggers. Please just read all the way to the end, to my final question, before thinking I'm the one who's lost my mind.

ver the last couple of months, as many have been dealing with analyzing, publicizing, and trying to affect the final "look and feel" of the HVCC (Home Valuation Code of Conduct - the supposedly solution to stop inflated home values), I've been surprised frankly at the near-irrational venom directed toward mortgage brokers. There's nothing wrong with criticizing the problems of another cog in the huge real estate machine, but you have to begin to wonder if we've lost our minds and are just looking for a scapegoat.

The last time I checked, mortgage brokers didn’t do the underwriting of all these fraudulent and unsupportable loans... it was unvarnished underwriting negligence and pure consumer greed and fraud that drove the market to the edge, and beyond.

Let me get a couple of things out of the way by starting with the headline in reverse order. Let's start with the "ugly". I've seen and heard a lot of really ugly - and true - stories regarding "bad behavior" by some mortgage brokers. It makes sense. In most states, there's been no licensing and virtually no oversight of mortgage brokers. A less-respectable snake oil salesman and his or her buddies could start up a large unregulated business almost overnight, buy a bunch of online loan application leads, and start spamming and calling, and placing borrowers in exotic loans on properties which they acquired during bouts of "irrational exuberance". In a matter of weeks, a new mortgage broker could be driving a Hummer and buying all the champagne at the local bars, because there was an endless line of those all-too-eager borrowers banging on the door. It wound up attracting some of the worst of the worst, as cheap and easy money often does. With the mass exodus by many out of the mortgage industry, now those con artists have moved on to another gig.

But where did that cheap and easy money come from? Not from the brokers. They only were selling what the lenders were tripping all over each other to offer. Lenders and the GSEs and everyone in between knew full well that unqualified borrowers were being placed into loans designed for a different financial profile. The last time I checked, mortgage brokers didn't do the underwriting of all these fraudulent and unsupportable loans. They did their "brokerage" jobs, by putting borrowers in front of as many lenders as they could, getting them a shot, and the lenders opened their doors wide and said "Come on in, the water's fine". Of course it's fine, because when the water gets hot, the lender won't be in it, since they didn't have any skin in the game. Loans got sold upstream, bundled into blocks of mortgage backed securities, and out of the lender's hands as quickly as they came in.

All the while, the AVMs used by Wall Street and the ratings agencies and the automated underwriting systems used by the lenders made nary a chirp. If appraisers and mortgage brokers are all so corrupt and compliant, I wonder why the "objective" underwriting systems from Fannie and Freddie and the "objective" AVMs didn't raise alarm bells all day long.

Actually, I know why. Because any "objective" analysis would show that neither appraisers nor brokers were to blame for the problem, and nobody at the GSEs or the lenders wanted that really "ugly" part to come to light. In the end, it was unvarnished underwriting negligence and pure consumer greed and fraud that drove the market to the edge, and beyond.

Mortgage brokers didn't do any more than anyone else to make that happen. In fact, even the statistics that indicate that they were neither better nor worse get interpreted to make it seem like they were to blame. Case in point, the Mortgage Banker's Association recently publicized a headline stating 58% of all mortgage loan applications which were later found to be fraudulent had been originated by a mortgage broker. But the same organization had often included articles showing 60% to 70% of all loan applications, good and bad, came through mortgage brokers. If brokers originated more than 60% of all the loans, and they were involved in only 58% of the fraud, then the lender's own loan officer employees were actually more likely to engage in fraud than brokers.

In the end, 100% of the fraud involved borrowers and lenders. That sounds trite, but think about it. No matter how many people are involved or what their agendas may be, the fundamental underlying assumption should always be that lenders will not loan money to someone who is likely to default, and even if so, that there is a hard asset of sufficient quality and value to cover the loss when it happens. But with lenders offering "no doc" loans to everyone with a pulse, and even some without, and the media encouraging everyone to get in on the feeding frenzy, is it any surprise that there were borrowers who were willing to say and do just about anything to get in on the "flipping" frenzy?

And that brings me to my real point about what went wrong here and where the pressure on appraisers - from mortgage brokers and others - came from. While lenders were eager to move loans and overstepped their bounds in doing so, and mortgage brokers and Realtors and everyone else wanted their commissions, the most unlikely of players, the borrowers themselves, were the ones putting the most pressure on everyone in the transaction regarding the appraised value. They usually forced loan officers and mortgage brokers to be their mouthpieces to pressure appraisers, though it's obvious that they also sometimes proudly took on the task themselves.

I personally have a hard time grasping that. Decades ago, when someone bought their first house, they wondered if their loan would go through, and whether the house was worth what they thought. Had the appraisal come back below what they offered, they would have been inclined to thank the appraiser for helping them avoid a potential disaster as opposed to screaming and yelling at their broker to keep getting new appraisals or AVMs until the amount they offered magically becomes fair market value.

The part that just escapes me is how borrowers could possibly believe that it's bad when an expert warns them that they're about to overpay for something. Sure, I understand the greed aspect and the emotional factors that come into play, but that's secondary to the logic that's supposed to drive economic activity on the scale of a home purchase. For the vast majority of Americans, the equity - real or imagined - in their home is the largest asset they have. The payments on a home or investment property dwarf their other bills. That should cause some pause on their part before jumping in at all, much less pressuring others to make it happen even when they're being told it's a mistake. Clearly, it didn't. But that's not completely the mortgage broker's fault either.

So, if that's the ugly and the bad of a mortgage broker-centric lending system, what's the good? Why am I defending brokers?

Fundamentally, the "good" thing about brokers is that they're the appraiser and homebuyers clients. For appraisers, anything like the HVCC that removes their access to all of their clients with the stroke of a pen and replaces them with a middleman taking 50% or more of their fee must be stopped. Yet, in their rush to condemn mortgage brokers, many appraisers literally said "I don't care what's wrong with the HVCC, if it gets rid of brokers then it's fine with me". That's a knee-jerk reaction that doesn't help appraisers at all.

For homebuyers (as well as appraisers), the other good thing about brokers is their activism. Brokers are salespeople; they're comfortable making calls and asking people to do things. They're vocal and willing to act to get what their client wants. By and large, your minimum wage earning customer service rep at a local bank is not.

And now for my final question -

If you purchased an automobile from a dealership and months, or even years later, all around the country that make and model starting to fall to pieces, or worse yet...explode, would you hold the car salesmen who sold you the car responsible? Would you hold the dealership, the conduit for a product, responsible? Of course you would'nt, you would hold the company that created the product responsible. So why is the broker, who mearly provided a conduit for a product created by greedy lending insitutions (because they saw enormous profit margins compared to the risk...or so they thought) your scapegoat?

Yes there are exceptions to every rule, but you never shoot the messenger.

Scholastic Mortgage is a lender. We take pride in our integrity and business ethics.

David Biggers is the Founder and Chariman of A la mode

Consumers are battling recession and inflation at the same time. The national average price of gas crossed $4 on Sunday, which translates into higher commodity and energy prices. The unemployment rate rose to 5.5 %, adding to the argument that we are unofficially in a recession.

Although the U.S. Treasury has already issued 57.4 million payments totaling about $50 billion in tax economic stimulus payments, opinion is that most of the tax incentives will be used to pay down debt and to keep pace with rising food and energy bills. Coupled with this is the fact that the economy grew at a slow pace of 0.8 %.

News is mixed for the month of May. Some economic reports, such as better than expected retail sales figures and the Institute for Supply Management's manufacturing index are keeping hope alive that the economy is on a course to recovery. But, the ugly Friday sell-off in stocks showed signs that investors are nervous and cannot easily digest not-so-good news.

The biggest shock was the Employment report on Friday, which saw the unemployment rate jump from 5% to 5.5%, the largest rise in 22 years. There was also speculation of a rate increase by European Banks, which contributed to a weaker dollar. These factors, in addition to some Morgan Stanley analysts’ predictions of $150 crude by July, and increased tension in the Middle East after tough talk directed at Iran by an Israeli cabinet member, sent oil prices to another record level of $139. This seems to be an overreaction from nervous investors, as The Chicago Board Options Exchange's volatility index (VIX), often referred to as the "fear index," jumped 26.5 percent Friday. But tough talk on inflation from the Federal Reserve and other central bankers late in the Friday session resulted in a slightly firmer dollar and caused oil prices to trend somewhat lower.

The weak dollar and surging oil prices took away all of the major market gains as the S&P 500 index was down 3.1% on Friday and 2.9% for the week. The Dow Jones Industrial Average ended up with a loss of 3.5% for the week. Gold prices, which were down to $864 on Thursday, closed out the week back up to $899. However, the weakened dollar has boosted U.S. exports and helped boost profits for U.S. multinationals, which derive 45% of their revenues from overseas, according to Standard & Poor's.

The 30 year Fixed Rate Mortgage rate increased to 6.17 % from 5.96%, while the 15 year Fixed Rate Mortgage rate increased to 5.7 percent from 5.49 percent. One-year ARMs decreased to 6.8 percent from 6.92 percent. The Market Composite Index, a measure of mortgage loan application volume, came in at 502.3, a decrease of 15.3 percent on a seasonally adjusted basis from 593.3 one week earlier. The adjustable-rate mortgage (ARM) share of activity decreased to 8.7 from 9.3 percent of total applications from the previous week.

For the coming week, investors will be busy with economic indicators on inflation and consumer spending. May retail sales on Thursday will be interesting to watch, as it will present an idea as to how much of their economic stimulus payments consumers spent on durable goods shopping. In addition, the May consumer price index and June consumer sentiment index will be released on Friday. Indicators in the coming week will help the Fed to decide whether a slowing economy or rising inflation should be the main concern.

Thanks for your business and have a wonderful week.

Edward Woodhead

Disclaimer: The opinions expressed are those of the writer and do not necessarily reflect the views of Scholastic Mortgage. The information contained in this Update has been provided by various sources and is intended to be current and accurate, however we cannot and do not warrant or guarantee it as such. This Update is for informational purposes only and is not intended to be, nor should it be considered as, investment advice. It does not take into consideration the financial circumstances, needs or investment objectives of any specific person who may receive this Update. Individuals should seek financial advice with regard to their specific circumstances before making any investment decision.