In times past, buying a home required sufficient personal capital to make a sizable down payment, usually 20 percent, sometimes a little more. It also required the person to sit right down in front of the banker or mortgage executive and prove beyond a shadow of reasonable doubt annual income, job, and prospects of remaining employed. In many cases people were asked what they proposed to do about the mortgage if for any reason they became unemployed. And honesty was a watchword, because the local banker was an integral part of the community, a familiar figure, who shared schools, sports, and friendships with many of his clients. These were the standards of American banking, and they had stood the test of time, the pivotal issue being in every case the reliability of the customer and his ability to repay the money his home had cost.
But as the year 2004 drew to a close, there was a brand-new culture in real estate. The mortgage broker was no longer the lender, because he was about to unload the whole package, one thousand mortgages at a time, to Lehman Brothers or Merrill Lynch for the now-well-established parceling-out process, masterminded by the ratings agencies, Fitch, Moody’s, and S&P. So the brokerage house did not care what happened after that, because they no longer had their own capital on the line. And those bodybuilder salesmen, those affable Californians, were free to run amok among lower-middle-income earners and sell them anything they darned pleased. There were no standards, no consequences, no responsibilities, and no recriminations. Because, and I stress this once more, nobody cared. There was no need. The brokerage firms could sell any and every mortgage they wrote, sell it on to Lehman Brothers or Merrill Lynch, or any other major U.S. bank, on faraway Wall Street.
-- Lawrence G. McDonald,
A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (2009)
http://en.wikipedia.org/wiki/
But as the year 2004 drew to a close, there was a brand-new culture in real estate. The mortgage broker was no longer the lender, because he was about to unload the whole package, one thousand mortgages at a time, to Lehman Brothers or Merrill Lynch for the now-well-established parceling-out process, masterminded by the ratings agencies, Fitch, Moody’s, and S&P. So the brokerage house did not care what happened after that, because they no longer had their own capital on the line. And those bodybuilder salesmen, those affable Californians, were free to run amok among lower-middle-income earners and sell them anything they darned pleased. There were no standards, no consequences, no responsibilities, and no recriminations. Because, and I stress this once more, nobody cared. There was no need. The brokerage firms could sell any and every mortgage they wrote, sell it on to Lehman Brothers or Merrill Lynch, or any other major U.S. bank, on faraway Wall Street.
-- Lawrence G. McDonald,
A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (2009)
http://en.wikipedia.org/wiki/
Right, nobody cared, because they were all getting their share.
Mortgage lending was no longer a simple legal contract between a lender (of his own money) and a borrower who invested something of his own in the bargain (like a down-payment). A mortgage was no longer a contract, made in good faith, between two people who shook hands and made each other a promise. An old-fashioned notion, right? I know it is; that doesn't make it wrong.
I've told this story before, my own story, but it bears repeating:
In 1995, I completed the construction of my first and only newly-built home, and went "mortgage shopping." And it really was "shopping". It was my first and only home mortgage. I evaluated the options, including two of the most-advertised Internet mortgage lenders of the day (one of those was Countrywide Financial, which financed 20% of all U.S. mortgages in 2006). The Internet was an attractive option to me; I was comfortable with it, the rates were very competitive, and it seemed the easiest and quickest way to get approved. I asked friends and coworkers who financed their homes if they could offer advice on selecting a lender. They all suggested one of the easy financing options with an ultra-low "teaser" rate.
We weren't shopping for a refinance, or a no-down-payment mortgage, or a negative amortization loan (in which the principle grows) or a reverse mortgage, or a no-documentation mortgage, or an adjustable-rate mortgage, or a balloon mortgage, or a cash-back mortgage. We weren't interested in any of the sales gimmicks from any of the new mortgage lenders who were not even banks (like Countrywide), We weren't interested in any of those fancy new easy-money mortgages. These were all "shadow banks" to begin with. They weren't real banks with depositors and carefully managed money to lend. They didn't hold mortgages as assets. They packaged and resold them to investors in far-away places. They weren't proper banks, because they didn't have any money. They were lenders who had to borrow money in order to make mortgage loans. They were lending money that wasn't their own on easy terms because they got it themselves on easy terms.
In 1995, we wanted a conventional 30-year fixed-rate mortgage. Just as conventional, straight-down-the-line as possible, thank you very much. Don't try to confuse us with your marketing BS. That's why we chose a well-established statewide bank (Amsouth Bank was founded in 1873) with a local branch in my hometown. My wife and I met with the bank's Loan Officer, we arranged for a property appraisal, we read and understood all the documents before we signed them. We made an appointment, we went and sat down with a bank manager, we shook hands on the deal. I felt really good about it. We formed a long-term business relationship.
Several months later, we received a notice in the mail from some company I had never heard of that told us our loan had been "purchased" and we would be issued new payment books. The payment amount and schedule would not change, we'd just be sending our checks to a different company each month.
I was furious. I called my bank for an explanation and was told that my mortgage had been sold. "It's a very standard practice," the loan officer told me. "Not with my loan, it isn't!" I replied. I was outraged.
I didn't choose my local branch of Amsouth Bank arbitrarily. I chose their bank because I wanted a relationship, based on mutual trust, that would last the 30 years of my loan, hopefully longer. And that bank, its officers, took my trust, my confidence, my goodwill, and they sold it to the highest bidder. They sold my trust.
What they did is called "securitization", and since the 1970's, it has become a common practice in the banking/mortgage lending business. My mortgage was packaged along with many others, and put on the market as a "Mortgage-Backed Security" (MBS); it was bid on and purchased by a company that wanted it for a cash-flow investment. Amsouth Bank, like many other banks today, was no longer in the business of "portfolio management", they had no intention of holding my mortgage, or retaining me as a customer; they sold us both for what the market would bear.
They called it "standard practice." In the sense that it is a common practice in their industry, and a completely legal practice, I suppose that it is "standard practice". But I call it bad business. Furthermore, it represents a profound change in the process of mortgage lending.
Ok, I know I'm old school, and my entire notion of doing long-term business with an established bank in my hometown; that whole notion of mutual trust and loyalty between me and my hometown banker, the handshake and the promise; it's quaint, and it's obsolete. The Bailey Building and Loan Association closed its doors a long time ago.
I admit, I'm the one who was wrong. I am the one who was under the misconception that Amsouth Bank and I had a two-way contract which neither of us could break without the consent of the other. I am the one with the "quaint old-fashioned notions" of hometown banking, of responsible lending, and responsible borrowing, of debt as a contract between two parties acting in mutual good faith.
These big corporate banks want a system in which trust, openness, honesty, mutual respect, and loyalty have no relevance. And, it would appear most Americans agree with them (as long as they see profit in it for themselves).
That's fine for others ... but I chose to live my life differently. I'm satisfied with my own choice. And I'll watch the success or failure of the debt-based economy from the sidelines, thank you very much.
I'm out of this game. I would like to add, though, that many others would've been wise to get out sooner. The number of people I know, personally, who have been forced to postpone their planned retirements tells me that's true.
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