Dave Kranzler explains why until the housing market crashes yet again, it’s all massive profits for subprime lenders on the taxpayer’s-backed dime…
A branch manager gets home loans for borrowers with weak credit or low incomes—and taxpayers back him up. – Bloomberg.com
Bloomberg News featured a story today that I find to be an outrage. It seems that some punk kid in Houston – Angelo Christian – has recreated the Jordan Belfort story (“The Wolf Wall Street”) using subprime quality, Government-backed mortgage.
The Government now guarantees mortgages which require no money from the buyer’s pocket for a down payment, a 50% DTI (monthly total debt payments = 50% of pre-tax personal income), no income restrictions and will finance down to a 580 credit score. Someone with a 580 score has a track record of debt default, serial delinquency and, quite likely, a recent bankruptcy:
This would-be homeowner has a 596 credit score, putting him in the subprime range. His car has been repossessed, something that would likely disqualify him at the Bank of America branch next door.
“Usually a repo that’s like three years old, we’re not really going to sweat that,” he assures the caller. “We’re pretty lenient here.” He steers his prospect to several $400,000 homes with swimming pools. “Have your wife check that out,” he says, referring to a remodeled kitchen with granite countertops. “She’s going to love it.”
Christian works for American Financial Network, which underwrites, funds and services the entire spectrum of Taxpayer-guaranteed mortgage programs: Fannie Mae, Freddie Mac, FHA, VHA and USDA (yes, the USDA guarantees “rural area” zero-percent down mortgages). AFN receives fees up to 5% – or $15,000 – a on $300,000 mortgage. This in and of itself is an outrage because it takes zero skill to underwrite a Government-backed mortgage.
“Zero-skill,” that is, unless fraud is involved. I’m not accusing AFN of fraudulent activity, however, as we witnessed during the Big Short housing bubble, fraud was oozing from every crevice in the U.S. mortgage underwriting industry. And subprime mortgages pumped and dumped by a character like Angelo Christian are usually the standard breeding ground for unscrupulous behavior.
Even Bloomberg expressed skepticism: “This kind of lending echoes the subprime mortgage boom that preceded the credit crisis of 2008.”
In civil fraud complaints, the Department of Justice has accused many companies, including Quicken and Freedom Mortgage, of improperly underwriting FHA loans and then filing claims for government insurance after borrowers defaulted. In 2016, Freedom Mortgage settled for $113 million, without admitting liability.
Angelo Christian and American Financial Network use Taxpayer guarantees to underwrite mortgages with an elevated probability of default and yet, they bear zero risk. They pocket a big fee-skim upfront and face no consequences when the 580 FICO score borrower declares bankruptcy – again. Just for the record, after accounting for a 0-3% down payment plus all transactions costs – which approximate 10% of the cost of the home – these mortgages are upside-down vs. the value of the “net” value of the house at close. Not a good business deal for the Taxpayers.
FHA loans are now experiencing a 30-day or more delinquency rate with nearly 10% of its loans. Fannie Mae and Freddie Mac combined wrote-down over $15 billion worth of loans in Q4 2017. They required a $4 billion cash infusion from the Government (taxpayer) as a result of both accounting and cash losses.
This is going to get worse. But until this collapses again – and it will – mortgage brokers like Angelo Christian are proliferating. They employ a salesmanship resembling that of dirty boulevard used car salesmen (“we finance any credit / bankruptcy o.k.”) as a means of transferring a massive amount of money from the Taxpayer to their own pockets.
I would urge everyone to read this Bloomberg article so you can read about how Angelo uses taxpayer-funded fees to pay for his fancy sports cars in exchange for pushing subprime mortgages destined to blow-up onto people who have no hope of supporting the cost of home ownership on a sustainable basis.