Greed is bad.
Well, when it makes you so crazy that you become blind to – or don’t care about – risk.
Greed and risk are at the heart of Richard Bitner’s insider account of the subprime lending meltdown. “Confessions of a Subprime Lender” (Wiley, 2008) is 208 pages of blame, fraud, and just plain stupidity laid bare.
He describes the “underbelly” of the industry, detailing the steps each stakeholder took – steps that made increasingly less sense – until everyone had crossed so many lines that a financial disaster was the only possible outcome.
So whose fault is the mortgage crisis? Since Bitner himself was in the subprime lending business, it’s a natural question – whom does he blame?
Answer: mortgage brokers, appraisers, loan officers, lenders, Wall Street investors, rating agencies (like Moody’s and Standard and Poor’s), borrowers, the Federal Reserve, Realtors, and homebuilders.
Up front, it’s imperative to note that Bitner does accept some blame. The narrative about his own career, including his time as president and co-founder of subprime lender Kellner Mortgage Investments, shows the decline of his own business sense even as he was observing the decline of other industry players. It’s sort of easy for him to say, however, because he saw the writing on the wall and got out before the collapse.
His tale is a grim one. It makes one wonder whether there has been anyone with a shred of ethics in the entire realm of real estate so far this century.
If you or anyone in your family is a mortgage broker, you probably don’t want to crack the cover. Bitner’s world is populated with brokers who would do anything to close a deal and get their commissions. Inflate a borrower’s income; persuade an appraiser to fudge property values; mislead both borrower and lender – he claims “more than 70 percent of all brokered loan applications submitted to us at Kellner were somehow deceptive.”
Much of the narrative is familiar: borrowers taking out adjustable-rate mortgages (ARMs) and finding themselves unable to make payments when their rates reset. Homeowners facing foreclosure, unable to modify their loans because the loans are long gone – packaged into impersonal mortgage-backed securities and sold.
With the media saturation the industry has had, most readers won’t be shocked by borrowers without the income or credit history to get a loan, inspiring lenders to offer them … 100-percent financing with no down payment! Bitner doesn’t deny the fact it’s pretty unthinkable that halfway rational adults would behave in such ways while lending or borrowing.
He does highlight some players the mainstream media have overlooked. His explanation of how appraisers can work with brokers to strain property values is great fodder for some investigative journalism. Bitner places the “greatest blame” on Wall Street investors and the rating agencies that point them toward quality investments. The respected rating agencies told people it was safe, he says – giving securities backed by subprime mortgages the highest “AAA” rating.
That helps tie the mortgage debacle to problems in the general banking sector. Fannie Mae, Freddie Mac, Countrywide and Bear Stearns all make passing appearances in the tale, with some behind-the-scenes details that led to recently uncovered shenanigans.
Some practical advice for lenders and borrowers is sprinkled throughout. Bitner says he learned early that making a subprime loan required a “yes” to two questions: Can the borrower afford to make the monthly mortgage payment? and Will closing the loan put the borrower in a better position than he is in today?
Ah, the simplicity of good sense.
He also gives tips for borrowers, specifically for those who are at or near closing. Brokers can play gotcha with loan rates and try to gouge borrowers at the last minute, he warns. But if you’re faced with a bait-and-switch scenario, he says, “threatening to report the broker to the attorney general unless the original deal is honored is usually all that’s needed, but many borrowers don’t know that this is an option.”
The book reads a bit like a textbook, filled with case studies on borrowers, brokers, and more. If you’re unfamiliar with the industry jargon, it can be daunting in places and the glossary at the back is far too slim.
It’s unclear who the target audience is. If you’d read it several years ago, it could have been a how-to manual for committing mortgage fraud. It’s that detailed on some points. Bitner says his stated purpose is to prescribe reform, but he saves that for the last chapter and it’s not nearly as detailed as the history of subprime’s demise.
He says rating agencies should be put on a pay-for-performance system, brokers should be tracked in a fraud database, and all subprime borrowers should have mandatory loan counseling. It’s a prescription heavy with regulation, new bureaucracy and the creation of oversight offices. But at the end, as Bitner makes his final “confessions,” he admits:
“Perhaps the only solution is to let the cards fall where they may and allow the natural forces of the market to correct themselves. It may not be the most popular sentiment and the economic implications would be staggering, but given the depth and severity of this problem, there may not be any other choice.”
We continue to see fallout from the mortgage-backed securities crisis on an almost daily basis, with news of more financial firms in trouble. Bitner’s account provides a useful look backward, but as the feds keep taxpayers on the hook for Fannie and Freddie’s losses, the only sure thing about the way forward is that it’s painful.
Amy Menefee is a contributing editor for the Business & Media Institute.