Monday, December 31, 2007

The "nobody saw it coming defense"

(Housing Wire) Let’s start out with a basic fact: a whole bunch of people saw the mortgage meltdown coming. Many of these people, in fact, actually worked in the mortgage banking industry, and many were talking about it as far back as three years ago in earnest.

I’m not referring to every free-wheeling mortgage broker that every now and then had a fleeting thought that said it can’t be this easy or you mean I can qualify borrowers like this? I’m referring to the people that worked in default servicing, code named “special servicing” — a side of the mortgage banking industry that up until this year was a mere afterthought for almost anyone running a mortgage operation.

Having worked in that side of the business for years, and having interviewed people in loss mitigation all the way through to REO disposition, I can tell you that nearly every one of them knew this would end badly. And nearly every one of them has told me so.

It’s just that nobody really cared to listen to what the guys in foreclosure or REO thought about origination practices. And this morning’s Wall Street Journal sheds some light more than 20 million reasons why:

During the housing boom, the subprime industry succeeded at more than just writing mortgages. It also shot down efforts by some states to curtail risky lending to borrowers with spotty credit.

Ameriquest Mortgage Co., until recently one of the nation’s largest subprime lenders, was at the center of those battles. Working with a husband-and-wife team of Washington lobbyists, it handed out more than $20 million in political donations and played a big role in persuading legislators in New Jersey and Georgia to relax tough new laws. Those victories, in turn, helped blunt efforts by other states to crack down on reckless lending, critics of the industry contend.

I recall the Georgia mess well from back in 2001 and 2002, when there was actual talk that not just subprime lending — but all lending — might actually come to a halt in the state thanks to so-called “net tangible benefit” provisions in a Fair Lending Act. The WSJ tries to paint a sinister lobbying connection here, but I seem to recall the more public debate was about Federal versus state-led industry oversight. Lenders have long argued that negotiating a patchwork set of varying state laws isn’t good chi for a national mortgage lending operation, something that I’m sure had as much to do with persuading legislators as did any Rolling Stones tickets.

Speaking of Rolling Stones tickets, the story centers on the lobbying efforts of one Wright Andrews, who has seen his business collapse along with the major subprime lenders he once represented:

“I certainly was not aware of the degree to which many in the industry clearly failed to follow proper underwriting standards — the standards which they represented they were following to those of us who were lobbying,” Mr. Andrews says.

But he also faults the Federal Reserve for letting the industry get out of control.

“Personally, I think and have long felt the Fed should have done more early on,” he says. “But I don’t think anybody realized the level of problems that were going to come out in the last year or two. If you had said to me the industry was going to melt down, I would have said you were absolutely insane.”

I’m starting to see alot of “who knew?” responses from various industry participants in the press as of late, and I suppose that’s at least tangentally part of our nation’s 5th amendment rights. After all, I wouldn’t expect Mr. Andrews to admit to the WSJ that he knew it would end badly, but that there were bills to be paid in the meantime.

Nonetheless, it’s got to be a never-ending source of amusement for those industry insiders that did, in fact, know this was coming — because there are plenty of them out there, and most are now knee-deep in trying to manage the unbelievable mess created by the origination side of this business.

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