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Thursday, May 31, 2007

Subprime and The Press, Version Eleventy Jillion

by Tanta on 5/31/2007 09:52:00 AM

Our loyal commenter Yal directed my attention to this piece from CNNMoney, "Wow, I could've had a prime mortgage." I was going to get right on it, but I was a touch queasy yesterday, and the minute my mind processed the allusion to the famous V-8 commercial--I hate all forms of vegetable juice, with or without vodka--I had to reprioritize.

But it's a new day.

"I reviewed several hundred [subprime] loans recently for our wholesale division," said Allen Hardester, regional director of development for mortgage-broker, Guaranteed Rate, "and all of them, with one exception, qualified for a prime-rate loan."

Freddie Mac, a government-sponsored mortgage-loan buyer, estimated that borrowers of 15 to 35 percent of all subprime loans it bought in 2005 could have qualified for prime-rate loans.

Fannie Mae, another government-sponsored loan buyer, estimated up to 50 percent of the borrowers, whose subprimes it bought that year, had credit profiles that could have qualified them for prime rates.

There are any number of things one can say about reports such as the ones above, from highly-informed industry participants with very, very big databases and the ability to perform professional, in-depth due diligence review on a loan file. So what does CNN say?

No one to blame but yourself

"You" here means you, the hapless borrower, not me, the person who is expected to know what product you can qualify for and what the market rate might be for it.

Then there is the obligatory denial from the vested interests:
[Doug Duncan, chief economist for the Mortgage Bankers Association], however, doubted that very many prime customers do get put into subprime products.

"I have yet to see any scientific evidence that that is true," he said. "If you only see credit scores, that doesn't capture the whole story."

Jim Nabors, past president of the National Association of Mortgage Brokers, said, "[Fannie Mae and Freddie Mac] may not be seeing the whole picture. They didn't take into account a lot of things that help determine the kind of loan a borrower receives."

These factors include items such as "seasoning" of loans, which takes into account how long a buyer had a down payment on a house and the source of that money, the borrower's debt ration [sic] and the appraisal value [sic] of the property.

Nabors said that, undoubtedly, some borrowers qualified for prime did get subprimes, but the extent has probably been exaggerated. [Emphasis added]

Welcome to the wonderful world of mortgage industry logic, as mediated by the press. Duncan sees no "scientific" evidence here, even though he is being confronted with estimates that are derived from much more than a simple credit score. Nabors seems to think that Fannie and Freddie use automated underwriting systems that don't capture DTI or appraised values. The GSE systems, of course, don't simply "capture" appraised values; they have internal AVMs that subject those reported numbers to a plausibility check. Nor do they "look at" FICOs. They do "capture" FICOs in the dataset. But what they "look at" is the entire contents of at least one and usually three full credit reports (from each of the three major repositories). Plus about a thousand other data elements.

But if you're an underinformed sucker, you can read these statements by Duncan and Nabors--which are blaming you for not knowing enough--and think that the claims being made by Guaranteed Rate, Fannie, and Freddie are based solely on looking at FICO scores. If you're a reporter or editor who uses "ration" instead of "ratio" and "appraisal value" instead of "appraised value," it is possible you haven't had enough exposure to the industry and its lingo to know when smoke is being blown in your direction. And if I say you have no one to blame but yourself for printing nonsense from an industry shill, you better not start trying to explain to me why people who read CNNMoney are at fault if they don't know more about their mortgage eligibility than their lender appears to. You are a reporter. You could have called Fannie and Freddie and asked them on what basis they have made these estimates. You could have asked Mr. Hardester about the exact nature of the "file review" he performed. You could have identified Guaranteed Rate as a mortgage banker who buys loans from brokers, not as a broker itself. You could have had a V-8.

What you did, though, is give us another "he said/she said" piece of tripe.