The Subprime Primer

[mia]

A clever series of cartoons that explains the subprime mess.
http://docs.google.com/TeamPresent?revision=_latest&fs=true&docID=ddv7hj34_03774hsc7&skipauth=true

It all seems to roll down to the pension funds. I wonder if the Florida Retirement System will grab on to the end of this train wreck - like they did with Enron and Edison Schools Inc.

[Snarkoleptic]

1. Pretty much on the money...but

I object to the way that the mortgage broker is portrayed as the instigator.
Much of the bad paper was written by the big retail mortgage outfits like Countrywide, Wells Fargo, National City, etc.
If you're looking to blame someone for the current spike in foreclosures and the present liquidity crisis, I suggest you look at-
The Federal Reserve...for lax monetary policy (in hopes of having the housing sector spur the economy)
Wall Street...for their greed in green lighting a mind bending expansion of exotic products (esp. in subprime and Alt-A)
Bond Rating Firms...who were asleep at the switch and consistently mis-rated CDO's and MBS's as 'investment grade'
Lenders...for responding to Wall Streets open floodgate by reducing underwriting standards to a cursory overview
Investors/speculators...for using the lenders easy money to play a risky game of speculation in real estate
Borrowers...many buyers lied about their income, job history, and intent to occupy the property (Lenders turned a blind eye to this as well)

As a mortgage broker, I specialize in mortgage planning and go beyond the loan application to find out what the borrowers short and long term goals are.
Try getting solid mortgage planning advice and a competitive rate from the industry newby $25K/year loan clerk at the bank.

[TexasBushwhacker]

3. I agree about mortgage brokers not being the cause

Sub-prime mortgages aren't a problem as long as the value of real estate is going up. Yes, there is a bigger risk taken by the lender, but they figure that 80% of the value of the house is covered by mortgage insurance, and they can easily recover their money through foreclosure if necessary. The thing is, when the value of real estate starts to drop, foreclosures go up because more and more people find out they are "upside down" and owe more on their home than it's worth by tens or hundreds of thousands of dollars. Add to that the number of people who've taken out home equity loans and you have a disaster waiting to happen. It's not the home buyers (in most cases) that made the problem, and it's not the mortgage brokers either. It's the big guys. Color me NOT surprised.

[mia]

7. I had a good mortgage broker - like you.

I guess the cartoonist figured that the mortgage broker was at the beginning of the loop.
They also left the appraisers out of the story. In my case, I was told not to worry about the property being appraised high enough because "they work for the bank".

[Snarkoleptic]

8. Good point...plenty of shady appraisers out there.

I've seen appraisals where the home looked OK from the outside, but had been completely gutted.
No furnace, no cabinets, no fixtures, no doors, etc...
Shady appraisers usually don't last long. They get blacklisted and added to exclusion lists.

Funny thing is that loan officers who work in banks and other federally chartered institutions are exepmt from licensing and continuing education requirements. These captive loan officers are generally less qualified and have a more narrow product offering.
It's like we say "When the only tool you have is a hammer, everyting looks like a nail.". There are plenty of horror stories about industry newby's working at the local bank giving people poor advice and placing them in inappropriate financing vehicles.

The big push now is to blame the mortgage broker community for the foreclosure meltdown. Many banks are closing their wholesale operations (which is the broker channel) and expanding retail. They'd like nothing better than to corner the market and set the price themselves.

A good mortgage broker can consitently beat a banks, credit union, online broker, etc by 3/8 of a point. I closed a refinance for a client on Friday where I beat the Motorola Credit Union by 5/8% ($110/month in their case).

[mia]

10. Speaking of points...the other ones that are extra up front-charges

I heard that Ditech doesn't charge them. Is this the area where mortgage brokers make their commission?
Or are their fees paid by the bank?

Thanks for your informative posts.

[Snarkoleptic]

11. The thing to watch in the APR.

The annual percentage rate shows the 'true cost' of the loan.
When you see a major variance between the 'rate' and the APR, that means you're being charged a lot of fees.
(although many of the 'cost of doing business' fees aren't counted in the APR)
A broker earns yield spread premium whereas a banker (like Ditech) earns service release premium.
The difference is that the broker is required to disclose this additional compenation whereas the banker is not required to disclose this source of income (that the federal government working for you). Personally, I'd like to get a complete picture of all compensation (you won't get that from Ditech).
Any good broker will beat Ditech, Lendingtree, the local bank, local credit union, etc by around .375% (or around $60/month on a $250K loan).

One final point, most brokers will offer you a 'no closing cost' option where they pay your costs from their yield spread premium.
This is an effective way of lowering the out of pocket costs.

I've been in the industry for over 20-years, let me know if you have any other questions.

[Hydra]

2. That's priceless

It needs one more pane in the beginning, though:

Bank Manager: "We need to get some more poor saps set up with the money we spin out of thin air- our profit margins aren't high enough!"

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on edit- "are" to "aren't"- too much outrage today :evilgrin:

[mia]

5. Another cartoon for the first pane.

[Hydra]

6. God, that's so apt!

Too bad it was the case before the little chimpenfuhrer showed up....

[yellerpup]

4. Good explanation.

Very clever way to explain it even tho' the cartooning picks, the informations is valuable.

[mia]

9. Thanks for the heart...

:loveya: