Who is to Blame for the Subprime Meltdown?
Jillayne Schlicke on 09 16, 2007
Every day there’s another news story or blog post spreading more blame and anger about the mortgage market, increasing foreclosure statistics, the effects on our economy, fears of more layoffs in the mortgage sector and beyond, and so forth. With enough blame to go around, everyone keeps pointing fingers at everyone else. So far, here is who’s been blamed for the subprime meltdown/credit crunch/liquidity crisis.
- Mortgage brokers, for being rapacious capitalists;
- Loan originators, for having the audacity to wish for a six-figure income with no experience required;
- Loan officers who work at a bank, for knowing nothing and legally hiding their yield;
- Greedy wholesale lenders for enticing the brokers and relaxing the underwriting standards because of competition;
- Greedy Wall Street investors;
- Greedy Wall Street investment bankers;
- Incompetent Wall Street ratings agencies
- Greedy investors who just wanted to buy and flip;
- Realtors for threatening to pull business if the broker or lender did not approve their buyer’s loans;
- Realtors for pushing the sales prices up, up, up by continuing to add closing costs and more into the sales price, then threatening the appraiser when the home didn’t appraise;
- Real estate broker/owners, in their national conspiracy to keep commissions at 6%;
- Redfin, because it’s always Redfin’s fault;
- Zillow, for forcing loan originators to force appraisers to meet the homeowner’s expected Zillow zestimate or lose the refinancing client to a competitor;
- Unethical appraisers who turned in falsely inflated appraisals under threat of retaliation from mortgage brokers;
- Escrow closers for being a neutral, powerless, third party observer to the madness;
- Deceptive banner ad companies such as lowermybills.com, nextag, etc. who are still advertising pay option, interest only, negative amortization loan products;
- Deceptive, bait-and-switch advertising from mortgage lenders in the mail and on the radio;
- Allen Greenspan for keeping rates low for way too long;
- Ben Bernake for not lowering interest rates RIGHT NOW, when Jim Cramer says so;
- State regulators for not properly supervising their licensees;
- Federal regulators for being altogether absent on a day-to-day basis in regulating RESPA, and the Truth-in-Lending Act;
- The Mortgage Bankers Association for having a huge war chest of lobbying dollars;
- The Nat’l Assoc of Mortgage Brokers for continuing to testify before congress and congressional committees that their members subscribe to a strict code of ethics, when nothing could be further from the truth. By the way, their website points consumers back to state regulators for “ethical complaints.”
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The media, because they keep running bad news stories, which are frightening homebuyers;
The Community Reinvestment Act for forcing banks to make loans to non-whites; - Republicans, for promoting homeownership;
- Democrats for promoting homeownership;
- Democracy for allowing political candidates to receive $210 million dollars in campaign contributions and lobbying dollars from mortgage banking trade groups and corporations;
- The consumer is also to blame for being irresponsible, failing to read the loan documents, falling for the zero down American dream story, and believing the LO when told “we can just refinance you into a fixed rate after you clean up your credit.”
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and this just in from Greenspan: “off-balance sheet investment vehicles that issued much of the asset-backed commercial paper.”
With enough blame to go around, who will be first to step up to the microphone and say, “our group is partially to blame because…and we will hereby pledge to do the following to help homeowners in foreclosure…” Or “our group is partially to blame because…and we hereby pledge to make the following changes in our own industry so this never happens again…”
By the way, the groups that want to shift blame outward and let government clean up this mess, kindly refrain from whining about higher taxes, higher fees your industry will pay, harsher regulations, higher costs of doing business, and the cost of a bigger government sector.
Perhaps I’m asking for too much.
[photopress:marketemotions.jpg,thumb,alignright]I understand Allen Greenspan is going to offer a gentle confession on 60 Minutes that he didn’t see the significance of the subprime problems until late 2005. I don’t think Greenspan is the only guy able to admit mistakes in all this.
The change that the subprime meltdown/credit crunch/liquidity crisis will bring to the industry will have some positive effects. It’s hard to see them right now.
Let’s all help each other get through the anger phase of The Kübler-Ross grief cycle, (the second half of the cycle eerily maps the cycle of market emotions) so we don’t continue to cycle back to anger and blame over and over again.
This is hereby designated an open thread blame post. Who did I miss? Blame away. Let’s get it out of our system.
About the Author: Jillayne Schlicke
- Author's website: http://www.ceforward.com
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81 Responses to “Who is to Blame for the Subprime Meltdown?”
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- ARDELL: Around these parts t
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- Johnny Brooks: That is a very commo
- Lyle Crews: This is a very inter
- Denise: I bought a house at
Everyone – business and government – who facilitated a system where people were offered mortgages that they would be unable to pay off unless their houses appreciated so they could refinance. Providing ridiculously easy credit terms ensured a bubble, which will end the way bubbles always do.
Wall Street deserves a lot of the blame by setting up CDOs (collaterized debt obligations) where there was no mechanism for guaranteeing the quality of mortgages that they purchased to put into the CDOs.
The fifth largest bank in England – Northern Rock – has had a classical run on the bank the last two workdays. They specialized in residential mortgages, and grew very aggressively – one of the ways they grew so fast was that they were the first bank in England to offer mortgages for 125% of the assessed value of the house. That is going to end very badly – who knew?
After the dot com gimmick,Greenspan knew what he was doing with the RE bubble,but after gutting our manufacturing base,that was an easy ATM to set up.Like all ponzi schemes,it was hard to turn the herd,so “the Undertaker” let the bulls run.Like the running of the bulls,every idiot wants to run in front of the horns,adrenelin is addictive.Now,when Northern Rock is the first to really get gored ,its hard to cheer for the idiot.These bank runs,led by the oldsters,who remember,is going to be sobering.
was his reflexion on my favorite football expert,Tricky Dick.And also calling Bill the smartest President he knew,which is true.You know he liked hangin out w/Bill in the Whitehouse,you could see him flash back to those heady days,when men were men,and interns were,well,interns.
Anyway,a
Answer: Alan Greenspan
The rest happened because most of us are greedy by nature, but “Easy Al” made it all possible.
Nice post. I can’t believe I’m actually reading this on here.
I’m speechless, and that’s hard to accomplish.
Jillayne gets it.
Eleua’s condensed version:
Greenspan
Politicians
REIC
Stupid, greedy Americans
You forgot to blame terrorists. Wasn’t that the reason they gave for slashing rates in the first place?
Lynlee: Lenders rediculous lending standards & consumers stupidity.
Tim: The Master Enablers on Wall Street & Federal Reserve giving the largely complicit REIC the tools in which to create what in my view was nothing more than massive inflation, although many consumers would characterize it as “appreciation”….depending upon which side of the HUD settlement statement you reside on.
Hi Kpom,
I understand that the only way to figure out what’s in those Collateralized Debt Obligations is for a team of people to sit down and open up each file, and underwrite the files for risk assessment, much like we did with the S&L bailout. I’m sure there are plenty of underwriters out of work that could be kept busy for quite some time on this task. I’ve been watching the Northern Rock Bank updates, too.
Hi synthetik,
I didn’t catch the 60 Minutes episode tonight where Greenspan is interviewed as part of his book promotion. I understand that he was going to start the apology ball rolling by admiting that he didn’t understand how bad things could get with the subprime loans. Did you see it?
30. The bubble bloggers for not buying at the height of the bubble which would have perpetuated the ponzi scheme longer
31. Greedy and fraudulent buyers who agreed to pay much more than current bubble valuation to get cash back at closing so they could a) pocket the money, b) use some of it to pay the mortgate for a while hoping rising prices would bail them out, c) keep the comps rising so they could make more money by doing it again and again.
32. All of the above.
Regarding 60 minutes – Greenspan at the baseball park signing dollar bills, one guy gives him a bill to sign and says “If it weren’t for you I’d not have my house now”. Earlier in the segment Greenspan was accused of being responsible for the housing bubble. To cap it off, Greenspan later says housing prices will fall dramatically as things unwind. Classic.
Hi Eleua,
I’ve been teaching classes and speaking at industry conventions on Predatory Lending, HUD 1 Settlement Statement Fraud, Mortgage Fraud, and the ethical problems within the industry for, let’s see now….at least seven years. Not everyone in the real estate and mortgage industries was drinking the Kool Aid.
But people don’t like to listen to dialogue about “possible consequences,” “industry self-regulation” and “higher ethical standards” when the money is free-flowing towards them.
It was easier for folks to take the vodka shots off of the ice luge at the trade shows and wink and nod and look concerned about how “we ought to do something” and then go back to making money.
The people in power were making trillions by keeping the system just the way it was.
The regulators were trying like hell to keep their heads above water with just the basic bad guys. The state and federal regulators never will have much time for anything other than the most egregious cases of law violators.
The saddest parts in this whole mess is how many workers are being laid off after giving so much to their companies during the last 10 years, and how the mortgage industry’s reputation is being taken down into the gutter. I wonder if I will live long enough to see the day when mortgage loan originators are trusted again by consumers. I hope so. I would like to be part of that change. But we must follow the cycle and get all the blame out of the way. As you can see, I am admittedly still working through some anger, too.
Hi Jay,
I had the bubble bloggers on my first draft, but then deleted it, because I don’t think it was their fault, but I like how you added some satire to our list.
I really like your number 32 contribution and have commented about that same scenario on other blog articles. There’s no way for an agent who is preparing a CMA to find out of the comparable sales being used, had seller concessions added on top of the original listing price, unless the agent calls the other agent, and then, the other agent would have to return the phone call.
Even though I hear arguments against number 32 all the time, by way of “there’s been seller concessions for decades,” I do believe we’ve experienced something out of the ordinary. 20 years ago, the only people getting 100% financing were veterans. Everyone else had to come in with at least 3 to 5% down.
Also, thanks for the 60 Minutes Cliff Notes.
Joel,
YES, you’re right. How could I have forgotten to blame the terrorists? Thank you. This is an excellent addition. I think a good follow up would be to blame women in the workplace, as well. I’m sure a reader can help us make a good argument for why working women are to blame for the subprime meltdown. It’s all our fault.
Hi Lynlee and Tim,
Lynlee: Your contribution is the foundation for why there should be no government bailout of lenders.
Personally, I believe we already have government-funded social service systems in place to offer a helping hand to the most serious, desperate of foreclosed homeowners find a place to rent. People ought not become homeless. People with the means to support themselves will re-enter the housing market as renters and when they’re ready to become homeowners again, they will hopefully read their loan documents or hire an attorney for counsel.
Hmm, now that I mentioned it, I wonder if we’ll start seeing consumer driven lawsuits against mortgage originators.
Tim, people have criticized the Federal Reserve (and its Chairman) of being a political tool that bends to the demand of the investment banker community. Do you think this is what might have happened?
The Chinese and Hedgies, for foolishly buying our debt. Anyone who thinks they can get 12% risk free deserves to be separated from their money.
Hi RDuke,
You paint a vivid picture (in comment number 2.) My mind went wild with images of bank presidents being gored by bulls. However, I do have a question for you (or any reader): Do you think Bernanke will do the same thing?
It seems like Bernanke is in a tough spot. He’s damned either way he turns. So I wonder if the Fed will leave rates alone on Tues. What do you think?
30. HGTV and the Learning Channel for showing people how “easy” it is to make money in real estate.
31. Internet ad companies who spammed teaser rates on a very large percentage of the web sites I visited.
32. Our education system for not teaching people that short term historical performance is not an indicator of future gains and that ten years is a short trend in real estate.
33. Double for our education system for not teaching basic financial skills like how a mortgage works and how to plan a budget. Seriously, anyone who knows how a mortgage works would know that there is something fishy about a $500k loan with an $800/month payment.
34. China for doing funky stuff with their currency and creating an environment where hyper-inflation is possible in the US which reduced the risk of running up huge amounts of personal debt at a fixed interest rate.
TEACHERS and SCHOOLS for never teaching the basics of qualifying for a mortgage. How long would it take to say 28/36! Think about it. Most of us had at least 10, and probably more, years of MATH…where were “qualifying ratios” in any of that? Basic budgeting and debt ratios takes about an hour to explain. Why is it excluded from basic education in this Country?
Why are most consumers asking the lender how much home they can buy in the first place?
oops, Alan and I were posting at the same time
Jillayne,
Bernanke will probably drop rates,but they shouldnt.Wont matter,the euphoria will be fleeting.The larger problem,the bull in the china shop,is all the bad paper coming due this week.Look for bank runs to really start,as old people,like Northern Rocks savers/pensioners get in line.The pea isnt under any shell now,dont look there,look at the smoke in those mirrors.Cant fool those old folks in line today at Northern Rock. Next….
“Why are most consumers asking the lender how much home they can buy in the first place?”
I agree that consumer greed had a lot to do with it – helped along by people who told them that they had to “get on the equity ladder”, that “real estate never goes down”, and that “renting is throwing your money away”.
But seriously – how on earth would a financial institution lend hundreds of thousands of dollars to somebody without making the slightest determination whether that person could pay the money back? There were thousands and thousands of Casey Serins out there.
Answer: the lenders didn’t care, because they could sell the mortgages to Wall Street, and Wall Street didn’t care to inquire as to what was going into their CDO’s, because reducing the flow of CDOs would have reduced their bonuses.
Question: of all the people to blame, guess who are going to be the only people to get bailed out of this mess?
“But people don’t like to listen to dialogue about “possible consequences,” “industry self-regulation” and “higher ethical standards” when the money is free-flowing towards them”. This also applies to homeowners and not just LOs.
There have been many times when I would explain “worse case” to a borrower and they don’t want to hear it (even a paper).
I often have buyers say what do I qualify for and if you give them the answer based on a 38-40 back ration, the next words out of their mouths are: HOW ABOUT ONE OF THOSE STATED INCOME LOANS? It doesn’t matter if they’re W2 or have a business that doesn’t pencil. One borrower (who I did not wind up working with) wanted to do state income based on what she believed she would make “in the future”. She’s new to the restuarant biz…how risky is that? Who will be to blame if her biz doesn’t support the mortgage she stated higher than actual income for?
When I work with a client who has realistic expections and is financially responsible, I want to clone them.
My vote is: greed + out-of-date industry-very-slow-to-change + new playing field = shake up
Credit is both what makes and breaks a market economy… all booms and busts link back to credit. Great depression (loans for stock speculation), .com bubble (credit being VC money), etc.
The ultimate downfall of capitalism will be it’s endless need for growth. That’s unrealistic (long term) and over emphasizes speculative business practices instead of sustainable ones. The end result being waves of growth and collapse instead of a more stable economy.
The upcoming recession will shake out the flakes and re-base the market with solid businesses… they always do.
I just caught the end of part of Easy Al’s interview on CNBC…he’s predicting double digit inflation and the 10 year note reaching around 8%.
BTW, I think the credit rating agencies were criminal for how subprime mortgages were rated.
From Reuters 9/7/7
“Critics have said the financial fortunes of ratings firms are closely tied to the volume of securities deals and that higher ratings often spur deals, the report said.
The U.S. Securities and Exchange Commission wants to see whether clients that sell more deals and therefore generate more revenue for ratings firms, tend to get better ratings, the report said.”
One of the best articles I’ve seen about this is in the Washington Post:
“In the case of securities backed by mortgages, the raters have an even closer relationship with the entities they rate, say those familiar with the business. They say raters advise financial institutions about how to put deals together. “In fact, they go back and forth to get the desired tranched rating,” Rosner said.”
This requires a log in (free)…it’s worth the read: http://www.washingtonpost.com/wp-dyn/content/article/2007/08/27/AR2007082701467.html
Jillayne, you omitted Mortgage Banks who were the some of the largest dealers of Option ARMs: Countrywide and WaMu.
Looks like I have a message that wound up in RCG’s spam bin…my MIA comment should be after 20 and before 22. Can someone with RCG Spam power please fish it out?
Rhonda: Done. Good comments!
Thanks, Jillayne! Your list of blame is amazing…and we keep adding to it.
Jillayne:
Great list. You left off:
HGTV who convinced inexperienced specuvestors that they could renovate and flip a house with no experience or money for $100k profit in just 30 minutes.
Big developers who built millions of acres of tasteless, homogenized crap box tract McMansions and convinced the average home owner they needed 5,000 sqft, a four car garage, and full iron chef kitchens. Oh yeah, the developer’s in house finance company that overlooked the falsely inflated price to hide the $50k worth of incentives just for using their mortgage company.
Jillayne,
Has anyone checked with Al Gore? Has “Global Warming” caused this meltdown…or is this meltdown causing “Global Warming”?
Don’t really know if this kind of comment is appropriate but thought it might find a place on the list. All the really good reasons for blame are already on the list or in the comments.
OK, I coming off the sidelines and I just needed a way to say I’ve been reading RCG for a good long time and appreciate those who Blog and those who comment. This was a very interesting post. Thanks!
All well said and cogent… but who will we blame the next time a credit bubble occurs?
Unless the laws of human nature are repealed, you can count on it occurring again, just like it has for centuries. Granted, we’ll have to wait until the current crisis is forgotten (just like the S&L debacle)- maybe 10-15 years or at most until the next generation comes along.
The next bubble? That blame will be put on B-52 Ben Bernanke if he cuts rates in the face of massive inflation and dollar depreciation. What we need are rate HIKES, but I just don’t see Bernanke acting appropriately as Volcker did. The dollar is likely toast.
Gold and Oil at record highs today. Oil closed at $80.56b
I like how the National Association of Realtors wasn’t on this list….
I think the huge influx of under qualified agents due to the NAR’s lobbying power has certainly played a huge role in the current situation.
Seems like every Joe Schmoo and every Soccer Mom I used to see would tell me they are getting into RE or have an “I would Love to be your Realtor” sticker…
Hi Giles,
NAR was on my first draft! I was trying in vain to find a link to this article, but every turn I took lead to a dead link.
http://efinancedirectory.com/articles/NAR_Admits_to_Initiating_Bush%27s_Mortgage_Bailout_Plan.html
If anyone can find a working link, please post it here and thank you in advance.
Hi synthetik,
I don’t think a rate cut is going to help all these homeowners with reseting ARMS, the 100,000 laid off mortgage workers, and the damage that’s already been done to the economy. I am hoping he leaves rates the way they are, or raises rates. Maybe I’m asking for too much, but I like to dream big.
Hi Lee Mason,
Thanks for stopping by raincityguide.com I, like you, believe it will happen again in about 10 years or so. I am hoping that between now and then, the industry will raise the barrier to entry and require more pre and post licensing education. Maybe I’m asking for too much, but I like to dream big…and now I’m repeating myself.
Hi Jerry,
Good to “read” your voice on raincityguide (since I can’t hear you, but I can see you in my mind because you’ve been in my classes.) I think the Al Gore angle is intriguing. He is bound to have something to say about all this. You’re probably ahead of the curve. Now that you’re off the sidelines, welcome to the fire.
Hi Russ,
Here’s what I like best about comment number 28
“Oh yeah, the developer’s in house finance company that overlooked the falsely inflated price to hide the $50k worth of incentives just for using their mortgage company.”
With these words, you are creating a scenario that lawyers would have a field day with. I wonder how many law school students have recently changed their specialty area to “how to sue mortgage companies”
kpom,
You asked a question back in comment number 20: “of all the people to blame, guess who are going to be the only people to get bailed out of this mess?”
My guess is going to be the corporations who made the trillions. Why? Because they have the lobbying dollars to pull the strings in congress to make things go their way.
Anyone else care to take a guess?
“I wonder how many law school students have recently changed their specialty area to “how to sue mortgage companies”
I don’t know about students, but I’ve read few articles recently on lawfirms creating RE and subprime practices. For instance:
http://www.msnbc.msn.com/id/20817676/
I was at a seminar a few weeks ago and the speaker had just been in Florida where TV ads state “are you a victem of a subprime loan…”.
It will happen.
Jillayne, this is off topic (and promoting you) so slap me twice!
I recently had an ex-subprime LO contact me saying he’s trying to change his spots and wants to be a good ethical LO worthy of referral biz. He’s not in WA State…do you help reform out of state LOs?
Yes.
With a few very minor exceptions, we are all capable of moral growth.
Thanks…I just didn’t know if your moral outreach was limited by our fine state of WA.
Peter Schiff, author of “crash proof” just gave an exclusive interview to HP, where he actually goes through his own “to blame” list.
He picks “easy al” as his #1 too.
http://tinyurl.com/35oyxt
Hi synthetik,
Thanks for the link. I feel honored to have beaten him by one day. I’ve been assembling my list for a couple of weeks now as the blame-palooza gets into full swing. Peter has added Fannie Mae and Freddie Mac to our running list.
Someone should blame Peter Schiff for predicting the whole thing with his Jedi Knight power of thinking. Maybe it’s “The Secret” working it’s magic.
I vote for “no one” as being responsible for the real-estate bubble. Manias are phenomenas in group psychology that carry a logic all their own, and there is nothing that can be done to stop them. Should we blame people in a crowd of starving beggars for trampling some of their number as they fight for a few scraps of meat from a fish that washes onto the shore? Should we blame a father for stealing a loaf of bread when his children are starving (punish him, yes, but not “blame” him)?
Our real-estate bubble occurred for the simple reason that the societal knowledge of what a severe financial depression feels like has disippated. There are few alive today who remember the 1930s, or other severe financial traumas. It is inevitable that societies will repeat financial manias, and deep depressions, after the generations who have passed through the refiners fire have left the scene.
It was inevitable that politicians would appoint toady central bankers who would fight like mad to ensure that no one felt any financial pain. It was inevitable that investors would take riskier and riskier bets as they became convinced that they would always be bailed out, and that nothing bad ever really happened. It was inevitable that consumers would take on more and more debt after decades of asset appreciation demonstrating and increasingly easier credit terms.
Anyone who tried to stand in the way of the growing mania was just left as road-kill. Banks that refused to lower their lending standards lost market share and left profits on the table as competitors rapidly took advantage of taking commissions for issuing dodgy loans and re-selling them to investors. Appraisers would be out of work if they refused to play the game and “meet the number”. Consumers just wouldn’t be able to buy a house at all if they didn’t engorge themselves with debt and onerous loan conditions, and would just sit watching their neighbours get rich from appreciation if they decided not to participate.
I don’t hold any person, or group, responsible for the bubble or it’s aftermath. This is just a normal part of the human condition.
Hi sniglet,
I wrote about the “nobody’s fault” idea at length in this post, when I compared the subprime meltdown to the Space Shuttle Challenger disaster. Everyone followed protocol and we still ended up with a disaster. The consensus was that the disaster was nobody’s fault.
http://www.raincityguide.com/2007/04/13/this-just-in-zero-interest-loans-at-a-cost-of-zero-with-a-monthly-payment-of-zero-apr-0/
In a way, I read a counter-argument in your words: that by saying it’s nobody’s fault, we are also saying that it’s everybody’s fault.
This credit /real estate scam was created because we needed something to drive the economy.We have pretty much run out of rabbits to pull out of the hat.Why do you think bush Inc. is flooding the country w/illegals?Everyone needs to get used to a drastic reduction in standard of living.Do you think the illegals will complain when they are 12 to a dwelling?Thats how they roll in the 3rd/4th world.Its just coming to a theatre near you,and fast.Its going to be funny watchin the yuppies get squeezed/bumped as their PC world they want implodes,causing em to spill their $6 a cup trucker juice.
Hi R Duke,
I count one vote for capitalism and democracy, another vote for Bush, another for illegals, and one more for the yuppies, is that accurate?
Don’t forget Starbucks.
Duly noted.
I would like to add Credit Reporting Agencies…. and the mysterious “FICO” score. You know the one Suze Orman says “go to myfico.com and pull your 3 FICO scores BEFORE you apply for a mortgage.” Well turns out not all lenders use those scores from that site (or from any consumer facing “FICO” score site), they use a different model that only mortgage lenders have access to. So good luck knowing the “true” score your lender is going to use BEFORE you apply for a mortgage. It’s usually too late when the mortgage broker and/or underwriter pulls your mysterious new score that doesn’t match the scores you have spent good money to obtain. Then, you get thrown into an entirely different higher interest rate than the one that was originally quoted to you right before closing. “Take this new higher interest rate or risk losing your earnest money…” Seems like its a bit of wizardary that’s in the best interest of lenders and not borrowers.
Well…let’s add the 3 credit bureaus for re-selling credit reports to other mortgage companies as soon as your LO pulls your credit for a preapproval…ie Trigger List. Talk about predatory lending!
I’m with FICO Psycho,
I freaked out when FICOs came into being as the be all end all of interest rate, etc… No one else seemed to notice. The market was too hot for anyone to pay attention. Turning everyone into an almost impossible to explain or control number is terrible.
FICO Psycho,
Mortgage companies use different scoring models as do insurance companies as do car dealers. This is not a conspiracy by mortgage companies. It’s just the way it is.
If someone was to use http://www.annualcreditreport.com to obtain copies, I recommend just getting obtaining one copy every four months rotating the bureau you’ve selected (so you can check your credit three times a year for free). I would not buy the score (obtaining your score is extra, pulling your credit activity is free) since as you noticed, it may not jive with the reports that are going to matter.
If someone meets with a Mortgage Professional before they make an offer on a home or need to refinance (a few months before if possible) to review their credit, they’ll have time to make any needed corrections/adjustments and will not be “thrown into an entirely different higher interest rate than the one that was originally quoted to you right before closing”.
There’s no wizardary if someone does plans BEFORE buying a home.
This is such an impressive well written post, it inspires me, a lot of thought and energy went into this and it shows. Well done!
Hi Phyllis,
Thanks for stopping by raincityguide.com Do you have anyone or any entity to add to our blame list?
Hi FICOPsycho,
I noticed this sentence from your comment number 51:
“Then, you get thrown into an entirely different higher interest rate than the one that was originally quoted to you right before closing. ”
I don’t think it’s fair to blame FICO for what is obviously a predatory lending tactic. Switching a customer to a higher interest rate loan right before closing is considered a deceptitve practice in most states and would violate state if not federal laws that govern mortgage lending. Most states have laws that require the mortgage broker to re-disclose with a new good faith estimate, new truth-in-lending docs, 3 days prior to signing. If you have been taken advantage of, I encourage you to contact your state regulator.
Regulators don’t know which companies are violating their laws unless we tell them. They don’t have enough money to oversee every single broker and every single transaction. Our state investigators need our help. Point them in the right direction.
I don’t think its as simple as trying to say its predatory lending on the sake of the broker. I actually don’t think my situation is that at all. The issue is I have no way to go online and pay to see the exact same score from the mortgage scoring model. I get a consumer score, not a mortgage score. What’s the reasoning why consumers can’t obtain this information themselves BEFORE they speak with a broker? In other words, why do we have to get a “permissible purpose” hit on our score, just to be able to see it?
This is from the Transunion website.
“There are a wide variety of credit scores available and each lender may use a different score, or give more or less weight to the one they use in relation to other factors.”
http://www.transunion.com/corporate/business/clientSupport/resources/creditReportsScoring.page?
Here’s an article from Washington Post, about the difference of web scores and the ones lenders use:
http://www.washingtonpost.com/wp-dyn/content/article/2006/05/19/AR2006051900660.html
The FICO score you can purchase from a “FICO” score reporting website like myfico.com, transunioncs.com etc is a CONSUMER score, not the mortgage one.
In my case, the mortgage FICO is 25 points lower than the consumer FICO score I get from MyFICO or other FICO reporting sites.
FICOPsycho, this is why I would not pay the bureaus to obtain a score. It is not going to be used by the mortgage companies since different formulas are being used. Just use the free report (no score) to review your credit and make sure what’s being reported is accurate.
When you pull your credit on http://www.annualcreditreport.com, it does not hit your score.
If you are using http://www.annualcreditreport.com to obtain a score, instead of having a Mortgage Professional pull it for you, just know that it is most likely lower than what a mortgage company will provide.
*Update*
There was a bit of good news today. The issue with my score was resolved and it improved by 15 points. Enough to get me into a better loan program and rate.
Thanks for all the advice. Hopefully its smooth sailing from now to closing.
Hi FICOPsycho,
Thanks for the update. Question for Rhonda: It looks the score FICOPsycho received from the mortgage lender was LOWER than the public score, yet in comment 60 it is indicated that the mortgage company’s version might show a higher score. What do you think happened to FICOPsycho?
Jillayne, it looks like I twisted my words. What I meant to say is that the score shown on http://www.annualcreditreport.com is higher than what I (or any mortgage lender) would pull.
The same is true when car dealers or insurance agents pull your credit, their scores are different than http://www.annualcreditreport.com and what a mortgage lender would pull. It’s my understanding that different scoring models are used.
My guess is this… because it was an additional permissible purpose hit on my credit report outside of the 2 week “shopping window” it lowered my score. Rhonda, does that sound right?
Hey…I was just reviewing the testimonies from today to the House…
I don’t see on your list (although it’s a quite impressive lengthy one…so I could be missing these):
1) Borrower fraud
2) Stated Income
Well let’s just go ahead and add them! Soon, I will update the master list.
FICOPsycho, it’s possible.
I think we loan originators are largely to blame because we are central to the transaction. The real estate agent certainly isn’t (even though the referral may originate from them). The escrow officer ain’t (even though without them, frankly, we couldn’t close). And all other 3rd parties are simply that….3rd parties….no matter how VALUABLE they may truly be.
Now what do we do? Anybody?
We have successfully located one loan originator who is willing to admit that his group is largely to blame.
It is people like David who will lead us out of this hell.
David, I would say there are some LOs who are and some who are not. I guess most categories are hard to throw a blanket of blame.
I would not exclue real estate agents from blame. If I couldn’t approve buyers, even after telling some that they would be better off waiting, they’d just haul them off to another LO who would gladly slam ‘em into a toxic mortgage. (Maybe this is half proving your point… I guess I just don’t like to be associated with practices I did not commit with my business).
Certainly Rhonda. I understand your point. However…
…I believe that we are too individualistic in our approach to business. We don’t take a ‘community’/'covenant’ structure to the way we approach life. We, as loan originators, are most responsible and should ’step up’. We are in this thing called life together. We are not separate, cubbyholes that live unto ourselves.
Paradoxically, I believe, those who step up will be given the leadership of the next generation of moneylending and will be able to set the stage for what ‘appropriate and honorable lending’ is.
David, what do you propose? How are you going to stop other LOs from doing subprime loans?
I apologize for my “tude”…I have two of my clients who I helped with their original mortgages that both wound up in the hands of LOs who put these guys in options ARMs without them understanding what they were in for despite my ongoing communications..etc.
One client I should be able to “save”…it’s costing him tons in prepays, lost equity, lost closing costs…etc. The other one, I’m not so sure if I’ll be able to help…I don’t think she has any equity from thanks to the mortgage broker she was dating at the time.
Grrrr.
So…what do you recommend as an actual plan? Your words are nice but unless you run for office or ??? I’m not sure what you can do.
[...] 5. Be more credible: Whether taking on short sales, professional status, or subprime lending, Jillayne Schlicke always finds a way to offer the voice of reason by providing an interesting perspective filled with interesting solutions… [...]
Here is another one to add to the blame list: “Asian, European, and Anglo Saxon Central Banks.”
The US Congress is orchestrating a show trial of “predatory lenders”. The blame-game was ever thus. Wall Street bankers were hounded after the 1929 crash: some went to prison. But if you track down the root cause of this credit bubble – now popped – the “blame” lies with Asian, European and Anglo Saxon central banks.
They created this mess, if that is what we now face. It was they – in effect governments – who intervened in countless complex ways to push down the price of global credit to levels that warped behaviour, as the Bank for International Settlements (BIS) has repeatedly noted. By setting the price of money too low, they encouraged debt and punished savings.
—Abrose Evans-Pritchard, in the UK Telegraph, August 21st, 2007.
Is everyone just *)&*%$ stupid?!!!!
If a mortgage originator is selling a product (no doc) etc, that means a bunch of aholes on wallstreet created the product as a sucerity that a rep came to the mortgage company to get the broker/banker to sell it. Is everyone so &)&#*&(# stupid, they don’t see the similarity in the insurance and investment businesses????!!!
Steve
ps. Carl Berkelhammer s-cks
Steve,
I’m not involved in this thread, but I am an Editor of the site. Your comment with cursing in it posted twice, so I erased one and edited the other.
Your comment seemed relevant, but please know that we don’t permit cursing here.
Thanks.
“creative minds knows no boundary” the investors! They knew from day one the outlay, statistics, and the consequences but were willing to risk it all to make Trillions of dollars, they never actually talk about how much the investment firms actually made from 05′ – meltdown, only the losses they suffered, which I’m sure are a drop n the bucket. I also believe that their blame game was calculated and targeted at the backs of the industry who solicited the products to sheild themselves from any immediate ramifications.
You are absolutely right. Instead of blaming somebody else, we all should exam ourselves. What have we done to contribute this? What can we do now to prevent this to happen again in the future?
As a LO, we should never mislead customer to have a mortgage he/she can’t afford to make a profit. We should always take every opportunity to educate our customers and help them to make the right choice.
The business community relies on certain human traits- our predictability is what makes us vulnerable. We are weak creatures, and as a result tend to be overconsumptive and illogical, and as a result, easily exploited.
Did anybody really think Santa lives in Washington and was giving away free money? Does anybody think our government and central bank is run by a bunch of savants and couldn’t figure where this was eventually going?
If you wonder why you are paying $4 for a gal of gas, it is because of all the extra money that had to be printed, thus devaluating your dollars. This was necessary to keep the lifeblood (money), in the “circular flow” (nationally circulating discretionary income expenditures to pay for each other’s labor) at a level where the country can function. This makes up for the money hemmorhaged from the circular flow into the elite’s bank accounts. Even though they are hit by inflation, they actually profited from it- for them it is the cost of doing business. The rest of us can’t say that. BTW- In what currency do our public officials keep the fruits of their labors?
[...] During the subprime meltdown of 2007, many mortgage brokers and LOs defended their decision to sell subprime loans saying “The lenders were the ones that provided the loans. We were only selling what we were told to sell.” As wholesale lenders fell, the blame shifted to Wall Street. “It was Wall Street’s fault for creating those toxic mortgage products.” Now the Wall St investment bankers are failing and the blame continues to shift. This blog post is not about who is to blame. I’ve already blogged about blame in other places. [...]
Just read today, in 2011, that Michael Bloomberg is blaming Fannie, Freddie and Congress for the meltdown. Things people should know: Fannie & Freddie don’t make loans and the Community Reinvestment Act did not create the subprime meltdown. Read more here:
http://mortgagefiduciaries.com/2011/11/mortgage-folks-stop-blaming-fannie-freddie-and-the-cra-for-the-meltdown/