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"The Best Loan Possible" from Whose Point of View?

posted by Angie Littwin

"I want to be sure you are getting the best loan possible," is a line from a Countrywide Financial Service Corporation sales pitch.  Since a sales person would be the one saying it, borrowers could be forgiven for thinking that this meant the "best loan" for them. But as Gretchen Morgenson shows in an expose in Sunday's New York Times, it apparently means the "best loan possible" for Countrywide.  Relying primarily on anonymous interviews with former employees and documents they provided, Morgenson demonstrates how every aspect of Countrywide's business steers borrowers towards loans that are more profitable for the company and therefore more expensive for the borrower. 

Examples abound. Until last September, the software program used in Countrywide's subprime unit excluded borrowers' cash reserves, making them appear less credit worthy and therefore ineligible for the "best" loans (from the borrower's point of view, that is). The commission structure for sales representatives has the same effect. According to one salesperson, the addition of a three-year prepayment penalty clause to the contract means an additional one percent in commission. Higher adjustable rates in adjustable rate mortgages lead to higher commissions as well. And until recently, Countrywide steered clear of Federal Housing Administration loans, which are less risky but less profitable than other mortgages.

From the outside, it seems obvious that the "best loan" for the borrower is not the "best loan" for the lender. This is common knowledge when shopping for ordinary goods and services. Every buyer knows that the worse the deal for her, the better it is for the seller -- and consumers are appropriately suspicious of sellers who have a lot of discretion, like car salespeople. But people don't shop around the same way for loans and don't think of mortgage brokers like used car salesmen. Maybe by the end of the mortgage crisis, we will.


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This is an excellent report on Countrywide, known in the consumer advocate community inter alia for pioneering the sale of negative amortizing, escalating payment mortgages (misleadingly called option ARM's) to borrowers on fixed incomes. The difficulty with this type of expose is that it suggests the company under scrutiny is some sort of rogue or outlier. Similar stories have been written about most of the prior market leaders in the subprime mortgage industry, notably Ameriquest, and prior to the 2000 lender failures, First Alliance and United Companies.

In fact the market leader in originations as reported in National Mortgage News over the past ten years tends almost invariably to become the object of these sorts of investigations sooner or later, particularly if the growth in volume and market share was rapid. These market leaders become known in the broker community as the go-to lender for "hard" loans, i.e. the lender least likely to underwrite cautiously. They also tend to have incentive compensation systems or a culture of sales pressure that inevitably encourage consumer fraud. Lenders who take underwriting seriously, and try to compete based on price, seem to be pushed aside by the hucksters.

Given the ease with which mortgage originators can engage in bait and switch for loan terms (see Pat McCoy's article on the impossibility of comparison shopping) brokers and originators who don't promise homeowners better terms than they can deliver have trouble competing with those who do. The other important point about the Countrywide story is that brokers are not the only culprits in the predatory lending meltdown. At Senator Dodd's hearing a consumer testified about her totally unsuitable loan from Countrywide, and then had to correct the general misapprehension that the fraud had been committed by a broker. The loan officer was a Countrywide employee.

I read that article. I also read recently James J. Cramer's piece in New York Magazine, in which he suggests that nearly all the blame for the subprime mortgage mess can be laid at the feet of aggressive banks, mortgage brokers, and home builders. He suggests that they heated up the market and that the resulting crash will send investors for the exits, creating a real estate crisis for years to come.

But I think Cramer's take is incomplete. Mortgage brokers can only sell what they have. They need a supply. And the supply was there, in the form of new forms of instruments snapped up by investors of all stripes looking for a better return than sleepy bonds, treasuries or even (until very recently), most publicly traded stocks. Seems to me that the folks on Wall Street contributed mightily with their hunger for more "product," their need to place more investment dollars.

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