I’m thrilled to host Lisa Black again at Murder She Writes. Not only because she’s a terrific person, but because she writes terrific books — with fabulous covers. Look at this cover of her upcoming book PERISH … just gorgeous, dark and evocative and tells a story in and of itself.
So please welcome Lisa and read her very interesting post … then head on over to her webpage to read an excerpt!
GREED IS NOT ALWAYS GOOD
When a bank or financial firm’s loan officer tells you “I want to be sure you get the best loan possible,” it might be a good idea to remind yourself that this person does not work for you. He or she works for the bank.
In other words, trust but verify.
There is not a better lesson for this caution than the case of Countrywide Financial Corporation. A short ten years ago, Countrywide was a $500 billion home loan machine with 62,000 employees. Founded by Angelo Mozilo, Countrywide made standard home loans to people with excellent credit as well as ‘subprime’ borrowers with not-so-great histories. They provided home equity lines of credit. They serviced other loans, doing the grunt work of collecting payments and disbursing them to investors, which provided a great database of borrowers to call up and offer a ‘better’ deal. Intensive telemarketing drove the business.
All well and good, business as usual. Until you take a closer look.
According to former employees and regulatory agencies, the smooth-talking sales force led borrowers to high-cost loans with higher fees paid to Countrywide and its affiliates. For instance, the computer system itself excluded borrower’s cash reserves, which would have qualified them for a lower-cost loan. Countrywide didn’t want to give anyone a good credit score, because then they couldn’t justify charging them more for the mortgage. Loan officers’ commissions inched up with every additional element of risk, because each promised an additional element of reward. And if a borrower’s credit was actually decent, it could be tweaked downward to push them into the subprime, higher-rate bracket. When agents promoted ‘the best loan,’ they meant the best loan for Countrywide.
In their arsenal of financial quivers:
Loans with low teaser rates, that jumped up to the double digits after a few years. Countrywide could sell these loans to investors because the interest income would increase in future years as the homeowner had to pay more. Apparently it never occurred to the investors that the homeowners might default and not pay at all.
Hefty prepayment penalties, which would make refinancing so expensive that, once they realized their mistake, homeowners couldn’t get out of it. Prepayment penalties are not unreasonable per se, but there should be defined limits spelled out in the loan contract.
No-doc loans, which required no documentation of a borrower’s income, and incidentally could be worth more than 95% of the home’s appraised value.
No-money-down loans, in which the home’s value was the only collateral. The borrower didn’t have to put down a penny of their own cash.
The interest rates would look great, but they didn’t include the cash cow of fees (somewhat like airlines and hotels these days). Borrowers had to pay fees for flood and tax certifications, appraisals, document preparation, emailing documents, and using FedEx. These fees could reach double the amount that other lenders charged.
Countrywide, in short, would lend to anyone. Someone with a credit score of 500 could get a loan up to 70% of value. It didn’t matter if they were three months behind on their current mortgage, declared bankruptcy, or been foreclosed on. The larger the loan, the more money they made—as long as housing prices kept rising.
Which, as we all know, it didn’t.There’s nothing wrong with subprime lending. It fills a needed niche. Getting a home loan did need to get easier, especially for those whom bankers felt were the wrong color/age/socioeconomic status. But bringing equality to the market had never been the true goal of Countrywide and other predatory and borderline-predatory lenders like Ameriquest and FAMCO.
But that was the bad old days. All fixed now, right?
Maybe not. Miami is currently suing three banks for predatory lending aimed at minorities. A huge car dealership in Oklahoma and the national auto lender it used are being sued for the same type of activity. I see ads for ‘rocket’ mortgages and I get worried.
Trust. But verify.