NYT’s Gretchen Morgenson helps pull the curtain back on mortgage lending during the bubble

Regular readers of other financial blogs will no doubt have been directed to her two recent articles already, but I would highly recommend both articles to those who have not read them yet.

A Mortgage Paper Trail Often Leads to Nowhere (Dec 26/08) (found in Naked Capitalism’s links)

Saying Yes, WaMu Built Empire on Shaky Loans (Dec 27/08) (I opened it this morning from my NYT daily e-mail but did not read the article until reading this post about it at Naked Capitalism)

Ms. Morgenson does an exceptional job in revealing how the smaller cogs on the front line of the mortgage business were encouraged — sometimes by design — to contribute to the massive blown mortgage and real estate bubble we have just witnessed.

Ms. Morgenson tends to favour the juicy evocative quotes (naturally) and provides very little explanation as to the capacity or expertise of some of the industry employees she quotes, but that is common and rather understandable given the limitations in space and the context of the investigation (this is, after all, a New York Times article meant for a general readership and not meant for industry associates).

So one at a time now.

About the mortgage paper trail article… I was very happy to see this reported as I believe few are aware at how much of the burden of proof is shifted from the lenders to the borrowers.  I have been involved in countless collections negotiations (I never worked in mortgage collections but did interject from time to time) and I can definitely attest to a similar distribution of responsibilities between borrower and lender in my own dealings.  The lenders I have worked with and for did not show anything approaching the disdain that Wells Fargo appears to and I am shocked that the judge’s patience was not much shorter.  Ms. Morgenson’s portrayal of the lender is beyond callous.  Wells Fargo seems downright dismissive of the claim.

Some who read it might wonder why a borrower might be so easily cowed into jumping through hoops and agreeing to prove that he or she indeed made payments to their mortgagor, but this is a very common situation.  With time pressures hanging over the mortgagor’s head, as well as the threat of personal financial cataclysm (foreclosure) being constantly issued, a borrower can become surprisingly docile.  As the collections or servicing agent on the other end of the conversation has very little personal investment in whether or not a file enters foreclosure (from my experience, avoiding foreclosures is not really a goal of the occupation.  Mostly, avoiding foreclosures would just provide the benefit of avoiding a tremendous amount of paperwork on the collections’ representatives side), they can be very quick to threaten the action if a borrower seems unwilling to make an effort.

In defense of the collections or servicing agents that can be found on the other sides of these negotiations: they are dubious for a reason.  The volume of lies and excuses they hear on a daily basis as to why a mortgage payment wasn’t made is shocking.  It would numb the most trusting of us, I assure you.

The second article, specifically focused on Washington Mutual, was even more interesting.  The stories revealing Washington Mutual’s shocking loan factory culture were interesting, but no surprise to me personally.  I believe since WM’s collapse, few would be surprised by the revelations in the story.  And many of the most notorious players in the grand scheme are no longer at WM, as the article indicates.  Frighteningly, many have moved on to larger entities.  We can only hope thatthese WM transplants performed in the manner they did not due to their own proclivities, but simply due to their filialty to the pressures from their superiors at WM, lest the practices at WM spread to their slightly-better-reputed new host.

What the article helps to reveal that is still a major concern is the role brokers played in the uncontrolled expansion of the real estate and mortgage lending bubbles.  From my vantage point (I was recently employed at a private mortgage lender), brokers were largely little more qualified to sell mortgages as a retail cashier.  The lack of enforcement and training for these privateers of the mortgage industry is striking and is best exemplified in the article’s anecdotes about brokers (and real estate agents) who steered immigrant home owners, with poor English comprehension, towards subprime products replete with false representation.

Even in Canada, it became very clear to me very early on the one overriding characteristic of the majority of subprime borrowers, beyond the self-employed: immigrants.  Shows like The Daily Show have joked about the propensity of African-Americans to be found in subprime mortgages, and I have no doubt that that is true in the US.  More or less by definition, a subprime mortgage is going to be given to those with poor credit, and poor credit is likely more prevalent in communities with high poverty.  But those who are targetted and most vulnerable to being taken advantage of are new immigrants with little English comprehension (and even worse Contract-English comprehension) who, in order to purchase a house, have to rely almost totally on the spoken-and-not-contractually-stated promises of a trusted bilingual broker or real estate agent.

I have personally seen a great deal of borrowers who, under a quick review, might seem to qualify for a prime product but end up in a subprime product, likely due to the incentivization for brokers to offer subprime products that rewards brokers with higher fees.  As they have few options available to them (there can be very few brokers who speak their language or are willing to spend their time with someone who does not speak English well), they are unlikely to compare the offered product among competitors.  As they have little understanding of the contract given to them, they rely entirely on the spoken commitments, unrecorded and entirely unaccountable, made by their friendly broker even in the face of contrary figures and statements in the contracts.

This sort of predation upon contract-naive immigrants is widespread, well beyond the boom areas and the areas most densely populated with immigrants.  It is difficult to imagine a solution or any reason why this will not continue long after this economis crisis ends.  Immigrants will likely never enter North America fully savvy in the intricacies of contract terms, nor can charitable groups or niche lenders likely spring up to to service each community in the written language of their choosing.  Quite frankly, it doesn’t take a heartless mortgage broker or a meth-addled mortgage processing supervisor to make a target out of a new immigrant.  What is saddest is those who already have the most barriers to success in this country — immigrants who do not have a large number of already-assimilated kinsmen in North America — are those most vulnerable to this predation and will continue to be targeted.

… and the cow goes moo