All the Devils Are Here [133]
It wasn’t subprime products alone that put us where we are. Option ARMs can be an appropriate product for a certain kind of borrower. We never thought of them as subprime. It was the behavior, the mind-set that took hold. The gun didn’t kill the market—the shooter did.
Twenty-six-year-old college grads, with their navy blue suits and cuff links and slicked-back hair, would come in to broker shops acting all full of themselves because they were pulling down $150K a year. They didn’t know anything about the business, but they were inviting us to parties and conventions and the music played, and the booze flowed.
I had an originator that made $31,200 on one loan that I referred to her at a 40 percent split, yet she had the audacity to tell me that it should have been a 50/50 split. That one loan paid her more money than her salary for an entire year at her previous job. That exchange was eye opening to me about a dark mind-set that had taken over.
There were commission incentives for prepayment penalties. Lenders enticed originators offering bigger YSP8 on specific products they wanted to sell and would charge hard discounts on those they didn’t. The entire industry was driven by yield. Lenders were simply driving volume, any way they could. The fight for loans and market share was fierce. All that marketing power slowly evolved into a way of life. We were hammered every day.
I ran an accounting business before I got into the mortgage business. My perspective was one of how to be creative and stay within the guidelines. At one time, there was a clearly delineated line of who qualified and who didn’t. With each new day came a new product that moved that line ever so slowly away from prudent risk management into the world of high fees. There were those in the business who couldn’t get it done within the lines—they just moved the lines. It was known as “structuring” the loan. That meant if it didn’t qualify one way, make it qualify another way.
I remember giving a Realtor seminar one day and not only saying, but actually believing, “The lenders are offering these products.... They have lots of brain power in their risk, legal, compliance, and secondary market departments. They know the risk they are taking and they price for it. Who was I to question them?” So much for that! I remember a woman who worked for me making incredulous statements like, “Hey, they just dropped the FICO requirement to 580!”
“It is clear to me,” Killian concluded, “that a slow creep took over... a slow moving slime that ultimately permeated the industry. I have this picture of lava... just creeping along until every business was covered with it, eventually getting smothered.”
What infuriated Prentiss Cox more than anything was the realization that no one cared. “The war was lost,” he says.
Even as the subprime business descended into true madness, the national banking regulators remained hopeless. In late 2005, the bank supervisors asked for comment from the industry on proposed “guidance” for “nontraditional” mortgages. The industry pushed back. The American Financial Services Association argued that it was “unnecessarily stringent” to require lenders to assess whether a borrower would be able to pay the full cost of a loan. The American Bankers Association said that the guidance “overstates the risks of these mortgage products.” It was “incorrect,” said the ABA, that they were riskier: “[R]ather, they simply present different types of risks that may be well-managed by prudent lenders.” The AFSA also asked the regulators to make it clear that “guidance” was “not intended to be statements of absolute rules.”
Consumer groups pleaded for stricter rules. The California Reinvestment Coalition argued that regulators shouldn’t allow certain