Mortgage Market Crisis/A Failure to Manage Risk/Economic Outlook Grim

Mortgage Dominoes

Subprime Mortgage Crisis Update

I wasn't busy today, and I happened on a C-Span colloquy sponsored by Demos, a New York City research and advocacy organization, on the mortgage crisis. The program featured three speakers--Jim Lardner, senior fellow at Demos and the author of a Demos report on the mortgage crisis, Mark Zandi, Chief Economist at Moody's, and Alfred Dellabovi, HUD secretary under George H.W. Bush and currently CEO of a large wholesale bank in New York that services more than 300 small banks.

The picture painted by the DEMOS report and by the three speakers was alarming. DEMOS supports the action taken thusfar by the FED and Congress but believes that much more is required. The situation is likely to get worse before it gets better according to the report and the three speakers.

According to the Miles Rappaport, DEMOS president, the crisis stemmed from a failure of deregulation and over-reliance on a belief that all problems would be solved by the market. What is needed, he said, is the re-creation of regulations that will protect the home buyer, the financial institutions and the U.S. economy by preventing future excesses and failures like the current one.

Dellabovi pointed out that historically the mortgage market functioned well because mortgages were written and financed by local FDIC banks and credit unions who, as well as the home buyer, had "skin in the game." That is the bank retained and serviced the mortgages, and risked its capital, and the home buyer had "skin" in the transaction by virtue of a healthy down payment.

Since 2000 many mortgages have been sold by mortgage brokers and bankers whose only interest in the mortgage was to collect the fees because the mortgages were packaged and sold to other banks and mutual funds around the world who thought they were buying a secure income stream from the mortgage interest payments. The mortgage brokers invented a variety of new types of mortgages and sold them to home buyers who didn't understand them and couldn't afford the over-appraised houses they were buying. Dellabovi said the best advice to a home buyer is to stay away from mortgage brokers and apply at a FDIC insured bank where he has a checking account. The local bank will provide a mortgage the buyer can afford at a fair price based on the documented income of the applicant and an accurate appraisal of the property and a suitable down payment.

Mark Zandi, Chief Economist of Moody's, who holds a PhD in economics from University of Pennsylvania and a BA from the Wharton School made the following six points:

1. Foreclosures are still rising. 2.75 million mortgages are currently in default. There were 800,000 foreclosures in 2005, 1 million in 2006, 1.5 million in 2007 and 2.75 million in 2008. Foreclosures are rising rapidly across the country in every state except for North Dakota.

2. The causes of the foreclosures are changing.

The first foreclosures were cases of crooked lenders and borrowers bent on flipping houses, many of whom never made the first mortgage payment.

In 2007 Adjustable rate mortgage (ARMS) re-sets led to more defaults and foreclosures.

And, now, in 2008, negative equity due to the collapse in house values is playing an increasing role. Currently 9 million mortgagees are in a negative equity position on their mortgages. Increasing unemployment is contributing to mortgage defaults.

3. The problem is likely to intensify this year and next. We are seeing a negative feedback loop phenomenon (some say death spiral) with price declines leading to foreclosures which are leading to more foreclosures.

Nobody is sure how long this will last. Mortgage interest re-sets are being helped by low interest rates. But rates are not likely to remain abnormally low as they currently are. The ARM re-set problem will continue in 2009 and 2010. This is likely to be an ongoing problem into the next decade.

4. The mortgage system has improved but still is anything but normal. The FED has done about all it can do. No one knows when the ongoing decline in house values will end. There is negative feedback between the economic situation and the housing/mortgage situation.

5. All of the policy efforts thusfar have been good--GSE and Hope Now. Hope now has achieved 500,000 loan modifications and 500,000 are on repayment plans. However, many of these are not likely to be successful. These efforts are not nearly enough.

6. The Frank-Dodd plan is a very good attempt at improving the situation. It is a voluntary plan. We are very worried that it won't be enough. There is no silver bullet. We need to try a lot of platinum bullets.

One of the speakers pointed to the serious financial problems created by foreclosures and declining home prices for many cities across the country as assessment based tax collections fall.

Listening to the hour long program which took place on Wednesday June 25 and was broadcast on CSpan the following day made me wonder if it contributed to the big decline in the stock market Thursday and Friday this week. ???

Note: The above is based on my memory and a few sketchy notes. The speakers painted a bleak picture.

Managing Risk

Greenspan's mea culpa

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Comments 10 comments

ColdWarBaby 8 years ago

What have I been saying in half the Hubs I've posted? The "free" market is about to destroy this country. The excesses which have resulted from it may well destroy the human race!

This is an excellent Hub, but, all the awareness is gonna be just too little, too late.


Ralph Deeds profile image

Ralph Deeds 8 years ago Author

I'm inclined to agree although both presidential candidates are at least giving lip service to the problem.


Ralph Deeds profile image

Ralph Deeds 8 years ago Author

The credit crisis contains a hard lesson in risk management for lenders and borrowers.


Ralph Deeds profile image

Ralph Deeds 8 years ago Author

More bad news on the economy every day.



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Ralph Deeds 8 years ago Author

Belated thanks for the comment, excellent video and articles. Sorry I missed your comment!


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

I have a dream house

By Elizabeth Jacobson

From an affidavit by Elizabeth Jacobson, a former loan officer at a Maryland branch of Wells Fargo, submitted in support of a federal lawsuit brought by the city of Baltimore against the bank. The city filed the lawsuit in January 2008, claiming that Wells Fargo targeted African Americans in Maryland for high-interest subprime mortgages, which have since forced many homeowners into foreclosure. The affidavit was submitted in June. Asked for comment, Wells Fargo said that it believes the “lawsuit lacks merit” and stated that “race is not a factor in the pricing and products we offer.”

I worked directly with loan applicants to make subprime loans. Much of my business came from referrals from Wells Fargo loan officers who were on the prime-loan side of the business. These loan officers were known as “A reps.” For several years I was the top subprime-loan officer at the company. My pay was based on commissions and fees from making these loans. In 2004, I grossed more than $700,000 in sales commissions.

The commission and referral system at Wells Fargo was set up in a way that made it more profitable for a loan officer to refer a prime customer for a subprime loan than make the prime loan directly to the customer. I knew that many of the referrals I received could qualify for a prime loan. It was in my financial interest to figure out how to qualify referrals for subprime loans. Moreover, in order to keep my job, I had to make a set number of subprime loans per month.

There were various techniques that were used to qualify the A-rep referrals for subprime loans. One way was to tell customers not to put any money down on the loan and borrow the entire amount, even if they could afford a big enough down payment to qualify for a prime loan. Another technique would be to tell the customer that the only way to get the loan closed quickly would be to submit it as a subprime loan. Some A reps actually falsified loan applications in order to steer prime borrowers to subprime-loan officers. One means of falsifying loan applications that I learned of involved cutting and pasting credit reports from one applicant to another. I was also aware of subprime-loan officers who would cut and paste W-2 forms. I reported this conduct to management and was not aware of any action taken to correct the problem.

Federal Housing Administration (FHA) loans, like other government-insured loans, offered lower interest rates that are closer to prime rates. Subprime-loan officers were required to have a subprime borrower sign a “Benefit to Borrower” statement that stated that the borrower may qualify for a government-insured loan but did not want it because it was too much paperwork. In fact, subprime-loan officers were never trained in how to make FHA or government-insured loans. We asked for this training, but Wells Fargo refused to provide it.

I know that Wells Fargo Home Mortgage tried to market subprime loans to African Americans in Baltimore. I am aware from my own personal experience that one strategy used to target African-American customers was to focus on African-American churches. Wells Fargo had a program that provided a donation of $350 to the nonprofit of the borrower’s choice for every loan the borrower took out with Wells Fargo. Wells Fargo hoped to sell the African-American pastor or church leader on the program because Wells Fargo believed that church leaders had a lot of influence over their ministry and in this way would convince the congregation to take out subprime loans with Wells Fargo.

I remember being part of a conference call that took place in 2005 where Wells Fargo sales managers discussed the idea of going into black churches in Baltimore to do presentations about our subprime products. On that call we were told that we “have to be of color” to come to the presentation. The idea was that since the churchgoers were black Wells Fargo wanted the loan officers to be black. I was told that I could attend only if I “carried someone’s bag.” Subprime-loan officers did not target white churches for subprime loans. When it came to marketing, any reference to “church” or “churches” was understood as code for African-American or black churches.

I complained many times about what I thought were unethical or possibly predatory loan practices that Wells Fargo was engaged in. Managers never took any action to respond to my concerns. In my office we morbidly joked that we were “riding the stagecoach to Hell.”


Jaime P. Imbat 6 years ago

HongKong and Beyond,

In 1994,I was hired as Overseas Filipino Workers OFW) to Hongkong and work on a highly industrial state full of factories at North Territory.Somewhere mid 1994 China open its gates for factories and industries from Hongkong and the result 90% of the industries transfer operations to China for a primary purpose labor ( 15 Chinese is to one Hongkongian), second low cost of materials and good government subsidies and the result most Hongkongians and us OFW were thrown out of work. As it go beyond,China opens its gates World wide (USA etc.) again it is on labor (100 Chinese is to one American)and the result most industries world wide transfer operation, merge operation /joint operations leaving constituent behind.This is the recession that most of the world is suffering. But in fairness we could not blame China and all business involve, we must accept reality .


Ralph Deeds profile image

Ralph Deeds 6 years ago Author

Thanks for your comment. Free trade has been quite disruptive in recent years with the awakening of China. It creates winners and losers. The U.S. manufacturing industry has been a big loser.


Ralph Deeds profile image

Ralph Deeds 5 years ago Author

At last the US is suing the big Banks for their role in the subprime mortgage fiasco!

http://www.nytimes.com/2011/09/02/business/us-is-s...

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