The Senate Banking Sub-Committee On Sub-prime Issues

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Millionaire Now! by Larry Nusbaum

This blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth".

The Senate Banking Sub-Committee On Sub-prime Issues

Posted on 03/25/2007 14:41 PM | Link | Post Comment

I watched testimony last week on sub-prime problems. The guest panel was comprised of two borrowers, several lenders (who created this monster and remain in denial) and a prominent consumer advocate attorney, Irv Ackelsberg, from Philadelphia.

"This fraud infested market has been producing little social benefit," Ackelsberg said. "Mortgage origination practices are run over by greed."

Robert Menendez, Democrat from New Jersey, claimed the Fed was "asleep at the switch" when it should have been using its broad regulatory power to enforce lenders to use prudent practices.

A senior staffer for the Federal Reserve, Roger T. Cole, admitted some responsibility lay with the Fed. "Given what we know now," he said, "we could have done more, sooner."

The lending industry members asserted that subprime loans have enabled many Americans to become homeowners; without them, first time buyers would not have had access to credit. But, data has shown that only 11 percent of subprimes are made to first time buyers.

Had I been with Mr. Ackelsberg, I would have added the following to his brilliant statement entered into the record:

Financial products and services (including loans) are sold, never bought. People buy what they are told to because of the complex nature of the product as well as trusting the person selling it.
Despite what the lenders told the Senate, sub-prime loans are not credit repair vehicles. Paying your debts as agreed is the only way to repair credit. The 2-28 loan product mentioned in testimony simply won't do it. They're lying.
A 2-28 "credit repair' loan product is nothing more than a gamble of and on time. What if the borrower hasn't repaired their credit in 2 years? They lose their home?
If they were credit repair products, why the heavy pre-payment penalties? I suggest that regulators limit the length and amount of a pre-payment penalty to one year and 2%.
Regualtors must require underwriters to qualify borrowers to the fully indexed payment in an effort to protect the borrower (and the lender). That's not a problem as explained by the lenders. But, I they're wrong. It simply means that borrowers wind up buying less home! What's wrong with that? The reason they object? It means smaller loan volume to them.
A low "teaser rate" and lower starting payment should be a vehicle to save money not get more house.
Remember, not everone is worthy of credit.
Lenders should stop always trying to "predict" the future with their product structure. Loans should be written based on current income and capacity, not on some probability of higher earnings in two years.
We don't need a lot of additional regulations, per se, since the ones we have are not being enforced. (like immigration) In fact, 60% of stated income applicants over-state their incomes by an average of 50%. But, lying on the Uniform Application is already a federal crime, one that is ignored. In fact, I have never seen a federal tax return transcript requested by a bank {from the IRS}, even though borrower authorization to do so is always provided at closing. And, I know. I audited the loan files for two Arizona commercial banks bewtween 2001 - 2002 in preparing for their FDIC audits.
I have been an investor, (commercial) realtor and lender for 20 years, so I pretty much have my heart and sole in the industry. However, for the life of me I never could understand why banks offer "Stated Income Loans" or "Low Documentation Loans". They created a breeding ground for fraud. One of their common responses has something to do with the nature of uneven monthly income streams from self-employed people. That is simply nonsense. Here's why: Income is just a snapshot in time based on the previous 24 months. Also, every single small business loan is made to a self-employed person and they are fully underwritten with full docs and income verification from tax returns and bank statements. It's their job!

I propose that banking regulators adopt two very important tenants from the securities industry (as loans are investment vehicles of sorts):

"KNOW YOUR CLIENT"
"SUITABILITY" STANDARDS

Subprime loans accounted for 19% of originations nationally in 2006. See the list by market HERE. Most were in California. I have heard that the percentage of all existing sub-prime loans is somehwere between 5-10%. Only 4.84% are delinquent. In 2006, 0.50% of credit worthy borrowers were delinquent. The worry is that the "liar loans" in the prime market may become an issue. No one really knows. Just another something to worry about that doesn't really affect you and me. So, why worry?