Origination Views

The Blame Game

Perspectives By David Marx

Over the past several decades mortgage brokers have assisted many home purchasers navigate through the home buying maze. Now our industry is performing another function: we are taking the lion's share of blame for the mortgage meltdown, and not only from legislators and regulators but lenders as well.

One example is the CEO of JPMorgan Chase, Mr. Jamie Dimon. According to the April 2009 issue of Origination News, Mr. Dimon gave a speech at the U.S. Chamber of Commerce Annual Capital Market Summit where he said that the biggest mistake of his career was not shutting down the wholesale department at Chase sooner. He also said that it was time to assign blame, although adding that assigning blame is not a solution. What lenders like Chase should regret is that they did not do more to vet the brokers who brought them loan products - as well as the products themselves.

While on the subject, among the types of products lenders marketed were HELOC programs, which allowed borrowers to access 95% of their equity to use any way that they chose. Some borrowed 95% of the value of their home and used the proceeds to invest in the stock market. Now, in some cases, that 95% is 130%, while the stock investments are down 40% or 50%.

HELOCs have not even turned out to be the riskiest loan product for consumers. Countrywide (now owned by Bank of America), Washington Mutual, (taken over by Chase) and others, at one time promoted a far more onerous loan known as the option ARM that their current owners, in hindsight, might now regret they ever made. These were the loans that started at 1% but adjusted in the second month to 7% or 8%, while allowing the borrower to maintain the initial pay rate. The difference was added to the principal so that each month the borrower owed more than the previous month. What's more Countrywide, WaMu and many other lenders paid brokers a bonus if that broker was able to induce the borrower to accept a prepayment penalty. I wonder how many borrowers that got this loan clearly understood how this loan was structured. At any rate, who is really at fault here? Is it possible that the lenders promoting option ARM and high-balance cash-out second-lien loans while partnering with mortgage shops that they did not know enough about might also be culpable?

Also what about Congress, who apparently did nothing effective enough to stop the hard-to-pay loans from being made for a couple years and now holds hearings looking for someone to blame while enacting laws that make the damaged loan process more difficult than it already is?

One example is the new Fannie Mae/Freddie Mac protocol for obtaining an appraisal, which is designed to block all communication between loan originators and appraisers with the stated aim of preventing a conflict of interest.

First it establishes an entirely new bureaucracy, generally in the form of appraisal management companies, whose sole purpose is to act as a buffer zone between appraisers and loan agents. In other words their actual intended purpose is to get in the way. They will most likely succeed in making the loan process take longer, cost borrowers more, while at the same time the appraisers will make less. For example, the appraiser that I've been working with for several years had a standard turn time of seven days and if I needed it faster, I could get it in three days with no extra charge. This will no longer be the case with the new protocol.

What's worse is this: It's currently customary for appraisers who, when asked, would do a quick comparable search and, within hours, give me a ballpark idea if the value needed to make the loan was there. They were perfectly willing to do the search, at no cost, because they had no desire to waste my client's money on a useless appraisal report, nor delay a transaction. Now I (as well as the home buyer, the seller and each real estate agent) have to wait for probably two weeks for the report, which very well may have been done by a novice. I'm not even allowed to talk to an appraiser (there is a joke that if a loan agent is caught speaking to an appraiser both will be water-boarded.) This is particularly bad in a down market such as we are in now, where sellers are often unaware of the true value of their properties.

Finally, I'd be willing to bet that the bad actors in our business will surely find a way around this roadblock and defeat whatever good intentions were behind this, making it even tougher for reputable brokers like myself as well as for the appraisers who have done a great job for us, and our clientele.