I was at a dinner party the other night, at a state university. There was a number of "educated" people around. Conversation came around to the financial crisis. I interjected my opinion that the bailout was a bad idea. Of course I was laughed at by a few. One guy didn't laugh though. He remembered that I told him several years ago that I had been in the financial business, specifically mortgages.
He respectfully asked me why I thought it was a bad idea. I told him we were essentially socializing the banks and wall street and that every instance of government involvement in the markets I could think of, the intervention made things worse for longer.
He asked about causes. I talked about the blossoming world wide money supply. How the street was begging us for more and more MBS and how they wanted to get as much as fast as they could. I told him about the first sub-prime meltdown of 1999 and how we knew we were writing junk then and how the investors closed down our warehouse lines when the commercial banks yanked our lines of credit when they audited the paper we were writing.
There was one point I wish I had remembered. In 1996, but probably starting in 1995 or 94, the justice department started auditing origination files against funded loans. Then they took the zip codes and the HUD racial self-identity form and compared those files they classified as "minority" against "loan denied" files. Guess what they found? Minorities in certain zip codes (inner city Detroit) were less likely to get a mortgage than someone in say Grosse Pointe or Bloomfield Hills. This was outrageous. Under the direction of our first black president, this sort of thing was going to change!
It did too. Lenders were pressured to make more loans. Yes we were allowed to charge more interest to compensate for the risk. Yes we could charge more points and fees. That is what everyone did.
I had a loan that I bought for securitization on the street. Black borrower, black mortgage broker, black appraiser, black title company, my processor in the office was black, the only white people involved with the loan were myself and my underwriter who had to sign off on it before it went to funding (the funding rep was Asian). This was a true NO DOC, NO ASSET loan. What that means is the borrower writes down what his job is, how much he makes and everyone pretends he is telling the gospel truth.
Loan Type: Purchase SFR flip out of a L/C, 1yr seasoning (right)
Down payment: No cash/sweat equity
Employment: Self Employed Pharmaceutical Sales Rep (drug dealer)
Income: $250,000 per month (Never happened)
Value of Home: $350,000 (not even if it had been up to code and in good repair)
Credit Rating: He didn't even pay his cell phone or cable bill. His landlord (the guy selling the house, lied and said he made his payments the same time every month, even though he was going through the eviction process while the loan was being processed)
Every black person involved in this deal, from the LO to my processor said don't do this loan, its a bad idea.
Lending decision: Approved.
Rational: we had denied to many loans from that zip code and a bad loan was better then the extra attention of not writing any loans in that neighborhood.
I remember this loan for one reason. In my subprime career, out of millions in loans, I have only had one first payment default, that means they don't even make the first payment. It was this deal.