Monday, January 15, 2007

Tanta: Information is Power, Which is Why You Don’t Get Any

by Bill McBride on 1/15/2007 01:53:00 PM

About 15 years ago I was working for a decently-sized regional bank in Secondary Marketing (the bitch with the rate sheet), and one fine day this unspeakably cheerful young person from Primary Marketing (the ditz with the Sunday Ad Section) sashayed into my cubicle with the request that I, as a “subject matter expert” (corporate-speak for “nearest available victim”) review this brochure being produced for mortgage applicants and other innocent bystanders. It took the form of a glossary of terms—how original—and it had actually occurred to Marketing that perhaps it should be reviewed for accuracy. Being a sucker for that sort of thing—accuracy, and light bulbs going on over in Marketing, I mean, not extra work—I held out my hand. I will never forget the definition provided for the term “points”: “A fee paid at closing to increase the lender’s yield on the loan.”

Now, that definition is, in fact, perfectly accurate (and copied directly from The Handbook of Mortgage-Backed Securities, second edition, I believe). For a mortgage portfolio investor, it’s a good thing to know, too: you may have a low-rate loan to invest in, but luckily Verne and Mary Sue coughed up some points at closing that you get to amortize over the expected life of the loan to bring that yield up to market. Oh, wait, that definition doesn’t actually tell you that. Not to worry, you’re just an investor with great gobs of money at risk, you don’t need details.

If, on the other hand, you are Verne and Mary Sue, and you have just been confronted with a loan officer telling you to bring a four-figure check to closing to pay for this thing called “points,” and you don’t know what they are, and you check out the handy Glossary of Terms provided by your trusty bank, and it says that points are things you pay just to make the lender richer—there is no other way to construe that sentence if you don’t already know what points are—you will of course happily whip out the checkbook instead of running across the street to some other bank. Happens all the time.

So I got out the red pen and re-wrote the definition of points to indicate that they are an optional fee that you may pay if you want a lower interest rate, and that there are loans that do not charge points, but the interest rate on those loans is higher. After I turned in my marked-up copy, the Marketing Ditz did mention that some of my revisions might get edited a bit for length. Not surprising, I thought; Tanta does blather on.

The final printed version contained the following definition of points: “A fee paid at closing to increase the lender’s yield on the loan.”

I’d like to say we lost customers over it, but I doubt that’s true. I’m sure that net-net—losing all the literate and at least marginally sane borrowers, gaining the ones who cannot be stopped by information of any sort, true or not, keeping everyone with the good sense to refuse to accept a brochure offered by a stranger—we came out even. It used to make me so proud when I went to conventions and met colleagues from other, bigger banks: “You might have more customers than I do, but mine are still more ignorant than yours.”

My point is that there is, in fact, no party to any transaction—borrowers, lenders, investors, regulators, those menacing sorts who squeegee your windshield at busy city intersections, my Aunt Harriet’s cats—for whom this definition is more useful than an acid flashback. If you do not already know something, it either doesn’t tell you enough or tells you the wrong thing. If you already know something, it doesn’t exactly advance you toward the goalposts. It’s a classic example of a statement that is literally true and perfectly worthless. Yet my employer saw fit to use it because it came from a real published textbook, whereas the suggested revision came from that coffee-torqued bitch on the third floor, and besides, it fit into the margins of a tri-fold better. Those of you who know anything about the writing of annual CRA reports will know what we included among our “community outreach” efforts for the year, of course. The regulators were glad to see us make such nice educational commitments, too; I think we got an “Outstanding” rating that year. And people call me cynical.

I have often wondered over the years what happened to the Marketing Ditz, but I wonder no more: looks like she got a job with the Washington Post. Consider, if you can bear to, ”Mortgage-Trapped”:

At 64, and looking toward his retirement next year, Willie Lee Howard agreed to refinance his duplex in Northeast Washington, thinking that a fixed-rate loan would help stabilize his finances.

What Howard got instead was a mortgage he did not understand. Baffled by the loan documents he was mailed after the closing, he consulted an AARP lawyer and learned that he now had an interest-only loan, a new and controversial kind of mortgage. Howard was told that under its terms, his mortgage balance will rise instead of fall and that he will need to refinance in 10 years, when he may be too old to work.

"This is a bunch of junk they done to me," said Howard, a construction worker.

Howard's chagrin at his mortgage's complex provisions illustrates the confusion felt by many borrowers struggling to adapt to a radically transformed home lending market. . . .

Howard said he was persuaded to refinance his house by a "very friendly" loan officer who called once a week for a year, telling him the time was right to stabilize his finances.

After deciding to take out the loan, he said he told the lender he would need help reading the paperwork at the closing. He said he still doesn't understand exactly what kind of mortgage he signed.

Howard's mortgage contains several of these new features, said Sugarman, who has reviewed the documents. It is an interest-only loan, which is one of the nontraditional mortgages designed to help wealthy people manage their cash flow, and for people whose incomes are likely to rise -- not for those whose incomes, such as Howard's, are likely to fall as they retire on Social Security. The rate is fixed, but only for 10 years. Sugarman said Howard appears to have qualified for it with a "NINA" loan, a "no-income, no assets" loan that required minimal income documentation.

"It's a very exotic mortgage, and he had no idea he was getting that," Sugarman said. "He thought he was doing something smart."
That’s it, kids. That’s all the information provided in the article on Howard’s loan—read the whole thing if you don’t believe me. Read the whole thing anway: you really need to absorb the vicarious-outrage-on-behalf-of-the-uninformed tone of the whole worthless thing in order truly to savor the irony:

• Howard was told that an interest-only loan would result in a rising balance. This is of course false, a confusion of interest-only with negative amortization. The reporter does not correct this misinformation. Possibly the AARP lawyer is an illiterate moron. Possibly the AARP lawyer was misquoted by the reporter. Possibly a rather condescending article on how borrowers don’t often understand loan terms has gotten off to a rocky start in the second paragraph.

• Later in the article, we are given to understand that a “no-income, no assets” loan requires “minimal” income documentation. There are some misleading terms used by the mortgage industry, but in the case of a NINA, “no” actually means “no.” Not “some.” Loans with “minimal” income documentation are usually called “Reduced Doc” or “Streamlined Doc” or “Alternate Doc.” Have you ever heard the cliché “the blind leading the blind”? Just askin’.

• Howard was told that “he will need to refinance in ten years.” Why? Is the loan a ten-year balloon, which remains, in literal fact, the only kind of loan that really does require you to refinance in ten years? Tanta suspects—but can’t prove—that the loan is not a balloon but a 10/1 ARM. It is possible that Howard might want to refinance it in ten years. It is possible that Howard might not be able to afford the payments after the first rate adjustment. It is possible that Howard can’t afford the payments today. If you do not already know something about how mortgage loans work, what does “he will need to refinance in ten years” mean to you? If the Post thinks these loans are so dangerous to uninformed consumers, what would be the argument against actually letting us know what they’re called? That’s what I thought.

• Howard qualified for the loan with no—or possibly some but not much—income or asset documentation. What, precisely, is the problem with that? Do you know? Did you know before you read the Post? Do you still know after you read the Post? Would it have wrecked the layout of the entire newspaper to add one little sentence pointing out that this was a problem because Howard would not have qualified for the loan if he had provided verifications, or would have gotten a more affordable interest rate if he had provided verifications, or thought that he had provided verifications when in reality the lender threw them away, or perhaps is less an innocent victim than he would like us to think, or whatever the bloody problem actually is? Is it time for a drink yet?

• Howard, the story goes, refinanced his existing loan. He thought, the story goes, that “a fixed-rate loan would help stabilize his finances.” Um, did Howard start out with an ARM? Did he start out with a really high-rate loan? Did he need to take cash out? Other facts aside—and Dog knows we aren’t getting any anyway—if Howard already has a high-rate adjusting ARM, how, exactly, did he get screwed by being put into a 10/1 IO ARM? How did he fail to recognize another ARM? Is Howard illiterate? Would better-written disclosures have helped him in that case? Does the reporter actually believe that an IO loan legally prevents you from making the equivalent of an amortizing payment if you want to? If not, would it be worth providing that advice to people who have one? Could it be that Howard couldn’t have afforded a fixed rate amortizing loan if one had been offered? Does the reporter understand that amortizing fixed rate loans require higher payments and carry higher interest rates than IO ARMs do? Does Howard have faulty expectations as well as missing information? Does Howard have a very serious problem—he cannot afford his home with any available mortgage type—that cannot, actually, be solved merely by the provision of more information by a more honest loan officer? Would it be worth sacrificing the lack-of-lender-disclosure-screws-borrower-who-always-wants-the-right-thing-but-doesn’t-get-it boilerplate narrative in order to examine the question of what the real problem is? Could we, like, advance the ball?

There’s a definition of “news” that involves providing relevant information that readers don’t already have—true information, even—and there’s a definition of “serious reporting” that involves not providing unintentional comedy by parading one’s ignorance about mortgages in an article full of high-minded tut-tutting over ignorance about mortgages. There is. Really. Maybe we should send out a press release.