Many years ago when I first entered the real world, the country was in the midst of a mortgage boom. New mortgage brokerages were popping up everywhere, creating waves of new opportunities for young, professional neophytes. It was in that setting that I secured my first real job, handling mortgage refinances along side a floor of other 20-somethings, none of us exactly sure what we were doing. For the next three years I drifted along, experiencing the peak of the boom and then the slow gradual decline that followed. In the process, I witnessed first hand the standards and practices that were commonly applied by every brokerage throughout the country. It was these practices that, while mostly legal, eventually led the near collapse of the entire mortgage industry. Granted, no one comprehended this forthcoming doom at the time, but in hindsight it’s clear that we should have. The whole thing was a mess and largely nonsensical, but we were all too naive to know any better.
The condensed version of the industry downfall is this: a little before the turn of the century, federal lending rates fell dramatically. This meant that banks were then able to borrow money from the Fed at a rate much cheaper than was previously offered. In turn, the banks could then lend that same money out in the form of mortgages with interest rates much lower than had previously been available to the general public. Once these mortgage interest rates fell, there was a huge demand across the country from people who wanted to either refinance their current mortgage or purchase a home which they could now afford the monthly payments on. Demand for new mortgages quickly outpaced the supply that current lenders could provide, so, as is the nature of a free market, new mortgage lenders and brokerages began to open all over the country to accommodate the demand. Throughout the process, the Fed, the banks and the brokerages were all making a lot of money.
During this period, there seemed to be a collective understanding amongst all the parties involved of three major points: 1) We are making a lot of money by booking new mortgage loans, 2) While demand is still high, it won’t last forever, and 3) If we can find ways to make mortgages easier (and faster) to obtain, we can make even more money while the demand continues. These concepts are what sparked the creation of the “stated income”, “0% down payment” and other new types of financial instruments that made little practical sense. Banks maneuvered lending qualifications in such ways that they could offer some type of mortgage to just about any customer who wanted one. It was in this atmosphere that we saw the rise of sub-prime lenders.
The sole function of sub-prime lenders was to provide mortgages to customer who had bad credit and could not qualify for traditional financing. These were individuals who previously weren’t capable of getting a mortgage, or at least not one with a single-digit interest rate. However, just as conventional interest rates fell, sub-prime lending rates decreased as well and thus, part of the large industry demand consisted of these sub-prime customers. Naturally, new mortgage lenders opened up shop and specifically catered to these customers since a) there was a large demand, and b) it was also legal to charge higher origination fees on sub-prime loans. My last stint in the mortgage industry was with one of these sub-prime entities and it lasted a hellacious 12-months.
The catch with sub-prime lending was while there was a large demand, it was much more difficult to actually supply customers with a mortgage. Most applicants had horrendous credit history so each deal had a lot more hair on it. It was as if we were a college that had just recently lowered its academic criteria for admission. All of the sudden, people with low high school GPAs and laughable SAT scores were applying for enrollment, where as before they wouldn’t even have bothered. It was then our job to find the few applicants that, while bad, were still capable of qualifying for a loan. This meant spending countless hours on the phone hearing about people’s bankruptcies and past foreclosures all in the hopes that maybe one in ten would still be able to move forward with a loan application. Even then however, because these loans came with so much more baggage, most of the customers who met the initial criteria, wouldn’t make it all the way through and close. As compared to conventional lending companies, the rate of loan closings to loan applications was much, much lower.
One of the major barriers in the sub-prime world was ordering the $350 appraisal. This was something that the customer would have to pay for upfront and would be reimbursed for on the back-end, but only if the loan closed. Keep in mind that the only reason these people were talking with us in the first place was because they had mishandled their finances in some way and therefore, the $350 often represented a significant portion of their available cash. Thus, the conversation always reached the point of the customer wanting a guarantee that the loan would close if they paid for an appraisal and us, the broker, explaining that while we couldn’t guarantee the loan would go through, we could say that if everything they stated on the application was accurate, then the loan should be fine. We were continually going to our manager trying to get a preliminary decision on a loan based on the information the customer had given us, despite the fact that we had no appraisal or income documentation. The reply we got back 99% of the time was: “Give them this guarantee: We guarantee they won’t get a loan without the appraisal”. It was always an interesting line to use with a customer because it marked the point of put-up or shut-up. They’d provided us the “facts”, everything looked reasonable based on what they’d told us, and now it was time to make a decision. We couldn’t do anything else and there was no other information to analyze. Sometimes a customer would spend days making this decision, hashing out the “what-ifs” over and over, longing for the outcome before committing to the actions.
Although I know it’s silly, I remember identifying with those customers. I think we are all guilty of avoiding things we perceive as risky because all we can think about are the possible negative repercussions. I often find myself getting caught up with everything that could go wrong in a situation and thus, either avoid it all together or attempt it with one foot already out the door. I get hung up about whether it will be embarrassing if it doesn’t work or how stupid I will feel if I am rejected.
While no one ever wants to make an obvious bad decision, you have to accept a certain level of risk tolerance if you expect to achieve anything beyond the status-quo. Naturally, any one of us would move to LA and try our hand at acting if we knew we’d become a star. Of course we’d all dedicate our lives to training if we knew the pay-off was becoming a professional athlete. In other words, we’d all be willing to work extremely hard and sacrifice, if we knew it would all pay-off in the end. But, it just doesn’t work that way. You never get to know beforehand. The commitment and hard work have to come first with no guarantees and then, only time will tell if it works out the way you had hoped.
I have accumulated plenty of regret in my life stemming from various chances I didn’t take, and that, I’ve found, is far worse than any rejection or failure. It’s with that thought that I remember those conversations with customers, when I assured them that the only true guarantee is that you wouldn’t get the loan without ordering the appraisal.
wastedcrescendo.com 
Leave a comment