by Tanta on 10/04/2007 05:50:00 PM

As a follow-up to CR's post below, here's a chart from the Moody's report, "Subprime Mortgage Market Update: September 2007," released yesterday.

Note that this chart calculates delinquencies as a percent of the original security balance, so these numbers may not match other delinquency measures you have seen reported that are based on current security balances.

And what seems to be driving 2006 and 2007 delinquencies?

The data show that, as we have noted in previous communications, loan performance for the 2006 subprime vintage seems to be driven primarily by the proportions of stated documentation loans and high CLTV loans backing the transactions as well as the proportion of loans that combine (or "layer") these risk characteristics. (Stated documentation loans are those loans for which the borrower's income and assets are not verified by documentation during the loan approval process and therefore are more likely to be overstated.) Interestingly, FICO scores and LTV ratios do not vary significantly between the strongest and weakest performing transactions and on average transaction performance does not appear to have been influenced by these characteristics.

by Tanta on 10/04/2007 07:20:00 AM

Sorry my posting was so light yesterday, but I was working on my Ten Point Plan in anticipation of being named Mortgage Czar. I actually completed Point One, no sacraments for any public figure who recommends negative amortization ARMs. Then--get this--I find out that apparently this "church-state separation" and "free speech" and some nonsense about these products being legal are going to hamper my plan. Well, jeepers, why call it a "czar" if it can't involve theocratic absolutist ukases? I mean, if it's just going to involve a bunch of posturing with no ability to imprison dissidents, I'll stick to blogging. Why bother to change out of my pajamas for that?

Fear not, though, innovation in the mortgage gig continues apace. From the Washington Post:

CitiMortgage plans to announce today that it has set aside $200 million for mortgages to Washington area residents who have limited credit histories and therefore often end up with high-cost or risky home loans. . . .

To qualify for the program, a person must be in the country legally and have alternate credit lines -- such as rental payments, utility bills or a tithing record -- that a lender can use to evaluate creditworthiness.

Gathering the paperwork to confirm these trade lines historically has been a laborious process that could take months, which often discouraged potential buyers and hurt their chances of closing a deal.

But Neighborhood Housing Services, a sister organization of District-based housing advocacy group NeighborWorks America, will use a system that automates the credit-verification process and delivers results to CitiMortgage within 48 hours.

The technology evaluates whatever information is available at the national credit bureaus as well as from other sources. . . .

Mary Lee Widener, president and chief executive of Neighborhood Housing Services, said the program is set up to comply with technical rules that allow CitiMortgage to service or collect payments for all the loans, even though the loans are resold. CitiMortgage has agreed to work with Widener's group to keep borrowers in their homes should they face job loss, illness or other events that temporarily prevent them from making payments.

"It's important to us that we have one lender to deal with in those situations," Widener said. "Our borrowers have more than their share of life events, but we've been able to stick with them, and it's very rare that we have to move to foreclose." . . .

If the best loan is with CitiMortgage, then CitiMortgage will fund that loan and sell it to Neighborhood Housing Services. The nonprofit group will then sell the loans to State Farm and Fannie Mae.

So, basically, we have CitiMortgage offering to do $200MM of "nontraditional credit history" loans, which have been around for what, 20 years? Only this time, they'll be really fast because technology is involved, and we know that the biggest problem with loans to first-time homebuyers and persons with possibly shaky credit has always been speed: you really need to do those loans just as fast as you do the ones based solely on simple-minded FICO qualification. And that thing about the importance of a single lender/servicer? Yeah, well, that would involve having some outfit like Citi actually hold the risk on these loans, and we can't have that. So let's think outside of the box: we'll sell the loans to an investor, just like we always have, and Citi will just be the servicer, like it always has, and the answer to all questions will be "I can't do that, it's not in my PSA."

Mortgage Czar? We don't need no steenkin' Mortgage Czar. We're doing just fine innovating our way out of this mess.

by Tanta on 10/02/2007 10:53:00 AM

Forgive me. I slept until nearly 8:00 am today, and then my PC got abducted by aliens. I am a drive-by victim of this "anti-virus software" scam foisted on me by software developers who will not allow me to take enough risk. You know.

Anyway, USA Today is always good for a laugh:

David Brannan, 44, of Monroe, N.C., is co-founder of a software company that's been in business since 1989. He and his wife have owned their home for 18 years and are in the process of buying a new, custom-built home. Brannan has an excellent credit score.
So he was stunned last week when CitiMortgage (C), which just a week earlier had said everything was in good shape, sent a letter saying his mortgage application had been rejected. It suggested he consider credit counseling.

Brannan called Citi, which told him his income for the past two years wasn't enough for the size of the loan. He says Citi refused to include profit distributions from his company that account for more than half his income. (CitiMortgage declined to discuss Brannan's application. But spokesman Mark Rodgers says the company will restructure or decline a preapproved loan if it can't sufficiently verify information from a borrower.)

Brannan belongs to a group that's become a kind of drive-by victim of the mortgage industry crisis: the millions of Americans who are self-employed.

Yes, those people who custom-build homes and don't have permanent financing lined up yet. We see a lot of that.

This part is nice, though:

McNamee says lenders that are still catering to the self-employed have been flooded with business, which means it might take longer to process a loan. That can be difficult for some successful self-employed borrowers to accept. "When you're talking about CEOs of companies, they want an answer, and they want it now," McNamee says.

But hurrying the process, he says, could increase the cost of the loan. Even for well-off business owners, qualifying for a mortgage is "not that smooth, easy no-brainer like it used to be. If you want it to be quick, you're paying a higher price."

Anyway, feel free to discuss pending home sales until we hear what happened to CR this morning.

by Tanta on 9/30/2007 11:50:00 AM

I don't know how many posts I've written on Gretchen Morgenson's terrible reporting. I guess I'm going to have to start keeping score. "Can These Mortgages Be Saved?" Can this "reporter" be saved?

Her latest attempt to go after Countrywide, for sins real and imagined, contains the following "reportage":

But on the billions of dollars worth of mortgage loans that have been sold to investors in the last few years, it is not the banks or lenders like Countrywide that are hit with big losses when homes go into foreclosure. It is the sea of faceless investors who own pieces of these trusts. Also, under the trusts’ pooling and servicing agreements, Countrywide and other servicers typically recoup any costs they cover in the foreclosure process, such as legal and appraisal fees.

Borrower advocates fear that fees imposed during periods of delinquency and even foreclosure can offset losses that lenders and servicers incur. Few borrowers know, for example, that when they make only partial payments on their mortgages, servicers do not credit those payments against the principal or interest on their loan. Instead, the partial payments are deposited into a so-called suspense account. Servicers can dip into these funds and make use of them as interest-free loans, although the funds have to be accessible when the borrower becomes current on payments. In the meantime, borrowers — whether or not they know it — are still zapped with fees and charges for delinquent mortgage payments.

“The foreclosure process is a profit opportunity for servicers and lenders, but there is very little oversight of the fees imposed,” said Michael D. Calhoun, president of the Center for Responsible Lending. “There are a lot of folks trying to squeeze distressed borrowers.”

I cannnot, literally, think of a better way to stir up sympathy for Countrywide than printing crap like this.

1. Servicers recoup foreclosure expenses because servicers are servicers. Investors are investors. Investors buy the credit risk; they therefore cover foreclosure costs. This is a perfectly normal arrangement. If you think there's a problem with it, can you explain how being reimbursed for an out-of-pocket expense, like a fee paid to a lawyer or an appraiser, is "making a profit"? Are you saying there's a markup in there? Do you have evidence for that?

2. Servicers are not now and have never been required to accept partial payments. Mortgage loans are not free-form Option ARMs where the borrower gets to decide how much principal or interest to pay this month; all of them, even the real OAs, have "minimum payments." If a distressed borrower talks a servicer into accepting a period of partial payments, to be made up later, that is called a payment plan or forbearance arrangement or some other "workout," and it takes the servicer's consent.

3. Putting partial payments in "suspense" means they don't get posted to the customer's account. It does not mean that the money goes into the servicer's own account. Those funds go into custodial accounts to which servicers cannot "dip in." Servicers do receive float income on those accounts, but of course in most cases they are also obligated to advance the full payment to the investor, out of their own funds, until it is collected from the borrower. So advances do offset the float. This entire paragraph is such an egregious mismash that it's unbelievable.

4. Foreclosure is a profit opportunity? What does that mean? That mortgage loan servicing--which unfortunately does include having to foreclose loans when they default--is a profitable business? Well, yes. That's why people engage in it. Is the claim here that an unfair or excessive profit is being made off of foreclosures (but not off of performing loan servicing)? How? Specifically? The "examples" in these three paragraphs don't make any sense.

And I cannot begin to make sense of the "Connor" loan example. With the hashed-up timeline and limited information given it's impossible to figure out. All I can say is bang-up job of reporting.

Ms. Morgenson, if you want to keep up on your mission to portray Countrywide in the worst possible light, you are going to have to get an education from a reliable source at some point about how the mortgage industry works.

by Tanta on 9/29/2007 06:10:00 PM

I had pretty much decided that I had said all I have to say about stated income loans with this post, but now that, per Chevy Chase, IT'S BACK!, I'm going to say one more thing. Then I'm done.

Apologists for stated income always bring us back to this so-called "classic" loan involving a self-employed borrower who "needs" a stated income loan because income is hard to verify or, you know, the tax returns don't "show the whole picture." This is never, really, actually, an argument about why stating rather than verifying income is necessary, although it pretends to be. It's really about why people with volatile income or a preference for not paying taxes on their income should get the "benefit" of financing on the same terms as wage-slaves and people who don't cheat on their taxes. That argument will end just before the sun freezes, so I'm not at all interested in participating in it.

My big problem with stated income lending has never really been about the wisdom or importance or lack thereof of making mortgage loans to the self-employed. My problem has to do with elemental safety and soundness of lenders, in a way that may not be obvious, so I'm going to hammer it for a bit.

Let us take the "classic" stated income hypothetical loan: the borrower is self-employed, has been for years and years, is buying a house, and has some trouble verifying income. Imagine that everything else about the loan is just groovy: high FICO, big down payment, lots of cash reserves after closing, scout badges out the wazoo. I'm not "stacking the deck" here. This looks like a super loan in all respects, except that question about whether there is sufficient current income to service the borrower's debts, or reason to believe that current income will last long enough to get past payment three or so.

We can make this loan in one of two ways:

1. We go "stated income." The borrower provides no tax returns, and just happens to state income sufficient to produce a debt-to-income ratio of 36%, which just so happens to be the maximum traditional cut-off for "acceptable risk."

2. We go "full doc," and the underwriter does a complete income analysis. In writing, on the sacred 1008 (the Underwriting Transmittal in the file), the underwriter fully discusses the business and its cash flow, noting that a 24-month averaging of income is producing a DTI of 68%. However, the underwriter believes that cash flow trend is positive, that there are documented reasons to believe it will continue, that the borrower has sufficient personal cash assets not needed for the business to supplement income for debt service, and hence this high DTI is justified. The 1008 of course is countersigned by a senior credit officer, because it is an exception to normal lending rules--the DTI is too high--and also because we are doing our required Fair Lending monitoring, making sure that the exceptions we make are made fairly, not just to rich white folks or folks in certain zip codes, but to anyone who qualifies for them.

Either way, it's the same loan, but Number 1 was more "efficient." Same risk, right?

Wrong. The default risk of the individual loan is only one risk. There's another huge looming risk created in Number 1 that we keep ignoring.

What happens if the loan performs just fine for a while? Well, if it's held by a financial institution, that institution will be subject to periodic safety and soundness and regulatory compliance examinations. One major point of those exams is to make sure the institution is holding sufficient reserves and capital against its loan portfolio. Among other things, an examiner might look at some reports of loan activity. And on reports, Number 1 looks like a low-risk loan with a 36% DTI. Number 2 catches someone's attention.

But, you say, wouldn't an examiner's attention be caught by the fact that Number 1's "doc type code" is stated, making it the kind of apparent higher risk worth a look at the loan file? Well, not if we started this whole thing by having assumed that there's no additional risk in stated income if other loan characteristics are good enough. The whole circular argument--stated is OK for OK loans--means that this will be considered one of those "not high risk" stated income loans, because all the other data points (FICO, DTI, LTV, etc.) look good.

The odds, therefore, that Number 2 would get further review are high, because it stands out as an exception loan with a high DTI. The odds that Number 1 would get further review are no better or worse than random.

And for any other purpose, such as counterparty due diligence, investor approval, um, servicer ratings, etc., that relies on aggregated data, Number 1 isn't going to make the institution's average DTI look worse, while Number 2 will. It matters if you write enough of those loans.

And what does the institution risk by having an auditor or examiner take a look at the file for Number 2? Why, the risk is that the auditor or examiner will not agree with that analysis, or will find the documentation unconvincing, or will be troubled by an apparent over-willingness to make exceptions or something. This is how the game is played: the loan shows up on some examination problem report, management is forced to respond with a memo defending its underwriting practices, and possibly even more loans get reviewed as the examiners seek potential evidence that whatever they don't like about that file is part of a pattern. Any stray skeletons you might have in your loan file closet (and everyone has a few loans they rather wish they hadn't made, or had handled better when they made them) get dragged out onto the conference room table.

Number 1, in other words, doesn't attract scrutiny. And what happens if it actually goes bad?

Well, with Number 1, it's "clearly" the borrower's fault. He or she lied, and we can pursue a deficiency judgment or other measures with a clear conscience, because we were defrauded here. We can show the examiners and auditors how it's just not our fault. The big bonus, if it's a brokered or correspondent loan, is that we can put it back to someone else, even if we actually made the underwriting determination. No rep and warranty relief from fraud, you know.

With Number 2? There is no way the lender can say it did not know the loan carried higher risk. Of course, higher-risk loans do fail from time to time, and no one has to engage in excessive brow-beating over it, if you believed that what you did when you originally made the loan was legit. If you're thinking better of it now, at least with Number 2 you have an opportunity to see where your underwriting practice or assumptions about small business analysis went wrong.

For anyone using loan servicing databases to research risk factors, of course, Number 1 might cause the conclusion to be drawn that stated income is a risk independent of other loan features. Number 2 might cause the conclusion to be drawn that 68% DTIs just don't work out well on the whole. You could, of course, go back and update the system with Number 1, after it fails and your QC people get around to finding the true income numbers, so that the database will show the true ratio of 68%, but that gets you to the catching-examiner-attention problem above.

And what about Fair Lending compliance? Insofar as a lot of stated income lending is just a way around having to make a formal exception to your lending policies, it's a good way of hiding certain patterns in terms of who you let get away with what. We do ourselves no good by thinking that the current environment--in which any marginal risk can get a stated loan--is the permanent environment. Structural ways to avoid showing your exception patterns invite abuse.

I have said before that stated income is a way of letting borrowers be underwriters, instead of making lenders be underwriters. When I say make lenders be lenders, I don't mean let's not regulate them. I have no problem with regulatory examinations; far from it. I am someone whose signature (usually, in fact, as that second sign-off) has appeared on exactly these kinds of loans, and whose butt has been on the line for them. We all face having loans we approved go bad; the world works that way. What the stated income lenders are doing is getting themselves off the hook by encouraging borrowers to make misrepresentations. That is, they're taking risky loans, but instead of doing so with eyes open and docs on the table, they're putting their customers at risk of prosecution while producing aggregate data that appears to show that there is minimal risk in what they're doing. This practice is not only unsafe and unsound, it's contemptible.

We use the term "bagholder" all the time, and it seems to me we've forgotten where that metaphor comes from. It didn't used to be considered acceptable to find some naive rube you could manipulate into holding the bag when the cops showed up, while the seasoned robbers scarpered. I'm really amazed by all these self-employed folks who keep popping up in our comments to defend stated income lending. It is a way for you to get a loan on terms that mean you potentially face prosecution if something goes wrong. Your enthusiasm for taking this risk is making a lot of marginal lenders happy, because you're helping them hide the true risk in their loan portfolios from auditors, examiners, and counterparties. You aren't getting those stated income loans because lenders like to do business with entrepreneurs, "the backbone of America." You're not getting an "exception" from a lender who puts it in writing and takes the responsibility for its own decision. You're getting stated income loans because you're willing to be the bagholder.

And no, this doesn't particularly do much for my assessment of your business acumen. Frankly, I'd rather see your tax returns and your P&L and hear your story about how investments in the business you have made, with the intent to grow it wisely, have limited your income or made it highly variable, than to see you volunteer to risk prosecution for fraud because, you know, you really need to buy a house. Do you do business with people like that all the time? Are you typically attracted to deals that are claimed to be perfectly legitimate, except that it's important not to fully disclose certain facts to certain parties? Does that maybe explain some of your accounts receivable problems and your pathetic cash flow? It certainly seems to be explaining some lenders' cash-flow problems at the moment.

This isn't just an issue for regulated depositories. All those claims by securities issuers and raters about how we had no idea that gambling was going on in this joint are directly comparable. The tough news for the self-employed "respectable" borrower is that I don't care if you're individually willing to play bagholder: you can't afford to underwrite that collective risk. We have a major credit crisis that's proving that.

by Tanta on 9/28/2007 09:46:00 AM

Via Mr. Coppedge, I see Accrued Interest has a nice UberNerd (AccruederNerd?) on CDO structures that I missed first time around, with a follow-up here that will warm the heart of any poor downtrodden credit analyst who got stomped on by the quants. I recommend it; it makes a point I've tried but dismally failed to make clearly, which is that the big issue for a lot of these deals is timing of default, not level of default. If you're still confused about how a relatively low level of early default can hurt much more than a comparatively higher level of later default on a structured security, this post will certainly help you.

For contextual purposes, here's a set of charts from Moodys that you may ponder. (These are MBS/ABS issues, not CDOs, but they'll be the collateral in a lot of CDOs.) Notice how the slope of the 2006 vintage changes in just six months, as more of the deals in that vintage get old enough. Notice also that this chart is based on original balance (so the numbers won't match anything you see quoted based on current balances), and that the comparison is the 2000-2001 vintage. That's a meaningful comparison because, until 2005-2006 came along, the 2000-2001 vintages were about the ugliest anyone had seen in a long time.

by Tanta on 9/26/2007 11:19:00 AM

Many of our commenters have expressed concern over the possibility that servicers offering workout modifications will lead to "freeloading" by borrowers who could make their payment, but who wish to tell the servicer a sob story and get a rate break. I thought you might find the following from American Banker (subscription only) interesting:

In an interview this month, J.K. Huey, the senior vice president of home loan servicing at IndyMac Bancorp Inc., said that more than half of the borrowers who call the company for a workout or a loan modification do not qualify.

"We want to help people stay in their home provided they have the financial ability to do so," she said. "But we have to make sure they're going to be successful and the loan is going to perform. We can't do a modification just for the sake of it."

Of those whose requests for relief are rejected, roughly 60% did not respond to written requests for financial information, such as the borrower's last two pay stubs, a W-2 form or the last income tax return. "A lot of people do not want to send the financial information needed to prove what their income is," Ms. Huey said. "They really don't want to take the time to work with us."

The other 40% of loans that are denied loss mitigation are to borrowers who are current on their mortgage payments but who contacted IndyMac in an effort to get a lower rate, she said.

"We do have some customers calling us that shouldn't be calling us," Ms. Huey said. After reviewing those customers' finances, "we say that they have a $4,000 surplus and are able to make their payments, and they say they just wanted to check."

The gist of the article is that modification rates are still very low relative to the number of troubled borrowers; Moodys estimates that about 1.00% of 2005-vintage ARMs have been modified this year.

For those interested in data sources, the article quotes a spokesman for First American Title indicating that requests for modification-related title updates are up about 40%. (A modification does not require a new title insurance policy, as a refinance does, but it does need a "date-down" endorsement to bring the mortgage date down to the modification date, which is much cheaper than a new refi policy.) So title update volume might be a useful proxy for modification activity outside the securitized sector (which a source like the investment banks or rating agencies will limit themselves to).

by Tanta on 9/25/2007 10:51:00 AM

I made an idle threat a while ago to write something about the negative convexity of mortgages--and options theory generally--but I haven't gotten around to punishing you all like that. I looks like I should. Exhibit ZZ in my never-ending war on "economist-underwritten loans" showed up this morning, courtesy of our WaitingInOC, and it's a doozy: "Surprise: Toxic Mortgages Are the Best."

This is a summary of an academic paper by professors Tomasz Piskorski and Alexei Tchistyi, the full text of which I don't have. If any of you do and feel the need to forward it on to me, why, go ahead. It has to be more fun than a sharp stick in the eye. What I can glean from the Reuters paraphrase suggests that it's about a massive campaign of borrower re-education designed to convince you that giving up your option to prepay and your fixed rate protection in exchange for a couple of nickels of interest is in your best interest, since investors who suddenly experience positive convexity with MBS--it's like perpetual Christmas morning--will give up all the resulting price gains in rate concessions to you, and interest rate cycles will be repealed. Or something. Remember that I am working with a summary here.

Right now is not the moment for the major UberNerd treatise on convexity, so suffice it to say that the main issue is the imbedded options in mortgage loans. In options theory terms, a mortgage gives the borrower a put (the right to default or "send jingle mail") and call (the right to prepay the mortgage with proceeds of a refinance or any other funds). Although both options have costs--especially if you have a prepayment penalty on your loan--those costs can end up being much lower than the cost of keeping your current mortgage. Because the "strike price" of these options is so heavily dependent on local and national economic conditions, interest rate levels, and home price changes, it is notoriously difficult to predict for any given borrower over any given stated loan maturity.

The lender, on the other hand, is "long a bond, short an option." Mortgages cannot be called or accelerated by the lender, except in case of default. No lender can make you refinance (although loan terms can certainly be created that will make you see that as your best option). If you are given a 30-year fixed rate, the lender must allow you to keep that rate for 30 years, even if it subsequently becomes uneconomic for the lender, as market rates rise and new investments would return more. On the other hand, if market rates drop, you may exercise your right to prepay, which means that the lender loses your old higher-rate mortgage and must reinvest its funds at new, lower market rates.

All this produces some difficulty in valuation of mortgage securities, since mortgages have a tendency to prepay at the worst time for the investor and to extend durations--stay on the books--when prepayments would be best for the investor. The mortgage origination industry--as distinct, here, from the investment community--has a lot at stake in making refinances fast, cheap, and easy, as each new loan is a new fee opportunity. But the lower the option cost of the borrower's "call," the less valuable the loan is to the investor (and servicer). Prepayment penalties have become, basically, an attempt to put the genie back into the bottle.

We think of the ARM mania so much in terms of payment "affordability" that we forget why lenders like them: the idea of an ARM is that, subject to some lags due to adjustment frequency, caps, index volatility, and so on, the ARM is designed to keep "repricing" itself to current market rates. Theoretically--and we are definitely in the realm of theory here--ARMs obviate the borrower's refinance option because a refinance would offer no better rate, as long as the ARM is "at market" at any point in its life and the refi rate is "at market." In the real world, of course, we've created enough "inefficiency" here with teasers, discounts, "lagging" indices, long adjustment intervals, and cap structures to make sure there's still--or there was until recently--plenty of incentive for borrowers with an ARM to refinance. Not coincidentally, we have used the best technology we can buy to make refis fast and cheap in terms of transaction costs, which we're perfectly happy to finance if even low upfront costs bother you.

"Until recently" is a way to speak volumes about the flaw in this plan: the refinance option depends as much on the value of the collateral as on the availability of cheap, easily-obtained mortgage money, and we have a little bit of a problem right now with that. As the LTV rises on a loan, that other option, the borrower's "put," gets a whole lot cheaper for the borrower and more expensive for the lender. Theoretically, the "perfect" loan, for the investor, would be one with no or minimal options for the borrower to call or put, and with a rate adjustment mechanism with very short reset invervals, large caps, and a highly sensitive (not "lagging") index. This ideal loan would prohibit prepayment or make it terribly expensive, and also allow the payment to fluctuate such that borrowers in a bit of an income or expense jam are less tempted to put the thing back in periods of home price declines.

Well then why, you ask, have we not invented this perfect loan? Apparently we're nearly there:

If you had to name the most toxic, dangerous, foolhardy kind of mortgage loan that exists, you'd very likely pick a pay-option ARM, which lets borrowers get deeper into debt by paying less than the minimum interest they owe each month and adding the unpaid interest to the loan principal. Worse yet, you might say, would be a pay-option ARM with a very high penalty for prepayment so borrowers can't get out of it easily once they're in it. There's a move afoot to ban these worst-of-the-worst loans.

Guess what? The worst is actually the best.

It's the best, not the perfect, because even though we've managed to stick the most onerous prepayment penalties on these loans that the law allows, we have yet to find a legal way to extend them to the life of the loan at a high enough penalty rate to make Option ARMs permanent loans. If we did that, you see, these things would be a fabulous deal; we would need only to "educate" borrowers about how giving up options is handsomely repaid in lower interest rates forever, and we're nearly there.

If the optimal loan really is better for homeowners who behave rationally, maybe it makes sense to get people to behave rationally through extensive, even expensive, consumer education. In an interview, Piskorski told me that by his rough calculation, the benefits of the optimal mortgage vs. a conventional mortgage amount to a least half a percentage point of interest -- namely, $50 billion or more a year for the U.S. as a whole. In other words, you could devote many billions of dollars a year to consumer education about these misused-but-potentially-valuable loans and still come out ahead.

Anyone who can determine who "you" is in that last sentence wins a free subscription to Calculated Risk. When dollars are being proposed to be spent, it is always wise to ask whose those dollars are.

And why are Option ARMs, in a perfect world, "optimal" for borrowers?

-- The option to pay less than the minimum monthly interest owed on the loan is valuable for people with good self-control whose income fluctuates a lot. They can pay just a little in lean months and catch up in fat months. It's good for lenders, too, because they don't have to foreclose on people who fall behind, which is an expensive process. People with steady incomes don't need this feature, but having it doesn't hurt them.

We must, of course, leave aside "good self-control," because that will undoubtedly be covered in "our" training program. We will have to content ourselves with asking how, in a perfect world, incomes "fluctuate." In some tight band around a mean to which they revert? In that case, why would you not qualify the borrower at an interest only payment at the "bottom" of the band, allowing for sporadic principal payments when times are "fat," but preventing negative amortization? Perhaps we are really talking about incomes that never quite "fluctuate" up to where they need to in order to retire the debt? And how does this option not hurt people who don't need it, when it comes at the cost of losing the right to prepay and the inflation-protection of a fixed rate?

-- The fact that the loan is an ARM -- namely, its rate fluctuates with market interest rates -- is especially valuable to lenders. This is a subtler notion, but the idea is that if there are going to be a certain number of defaults in a pool of mortgages because of random bits of bad luck like a job loss or a divorce, the lender would prefer that they be concentrated during periods of high interest rates. Why? Because when market interest rates are high, the lender that forecloses and gets back (most of) its money can redeploy the cash in high-yielding alternatives. The lender would prefer not to foreclose and get its money back when rates are low and other options are unattractive. An ARM loan achieves what the lender wants. Borrowers, meanwhile, are neutral about whether they default in periods of high or low market interest rates.

So "lenders" don't want to foreclose because it's expensive, except for the fact that apparently investors would like to see foreclosures happen when rates are high. Whether the additional cost of foreclosure in a high-rate environment doesn't offset reinvestment gains is a good question. All that high past-due interest has to be recouped out of the liquidation of the REO, and there is a theory about connections among RE values, marketing time, and high interest rates, you know.

Similarly I'd like to know why borrowers are "neutral" about default in various rate scenarios. But I am most interested in the idea that lenders wouldn't want to foreclose on an ARM when rates are low. It's, um, an ARM. Why would the rate on a new loan be lower than the rate on an existing ARM, in our perfect frictionless world? If there is in fact some friction here--the ARM rate is still higher than market in this falling rate environment--then where is this "discount" that these consumers got in exchange for giving up the refi option?

-- Finally, the economists say the optimal loan contract would outright ban getting a new loan from a different lender. There are no such bans. But they say that the prepayment penalties that are common in subprime loans are a good second best. How could that be? Because lenders will offer more favorable terms if they know that they'll be able to hang onto the loan long enough for it to be profitable. If they fear that the borrower will refinance at the drop of a hat, they'll give less favorable terms.

OK, guys. What are "more favorable terms" on an ARM? I mean, you do not have to have the cynical response that lenders who know you can never get out of the contract will be motivated to extract as much out of you as possible short of forcing you into foreclosure to wonder where the deal comes in without the offer of a fixed rate.

The problem with those subprime ARMs, of course, is that while the borrowers did get a "discount" on the initial rate in exchange for that prepayment penalty, it is not at all clear to informed observers that it was much of a discount: you have to rule out the possibility of predatory lending, and assume perfect pricing of credit risk, in order to say that no borrower got a "discounted" subprime ARM that involved a higher rate than that borrower would have paid on an undiscounted FHA fixed rate. You also have pretend we haven't been having a major affordability problem with home prices in order to understand rate discounts as something other than "qualification" games, or simply a matter of rate concessions the lender makes solely because the alternative is no loan at all if you have to qualify at a "market" interest rate. A "teaser" is not a simple discount in exchange for a prepayment penalty; it's a means of getting you into a loan you cannot afford, because lenders who do not own the loan forever just want to make lots of loans.

You can, of course, assume anything you want in a "perfect world," but I notice these helpful economists are not proposing a massive educational campaign designed to teach lenders and servicers and investors not to be greedy, sociopathic cretins. We are proposing that "we" spend "our" money to teach "you" to understand that what is in our best interest--all the options on our side, none on yours, except your "option" to get deeper in debt each month--is really in your best interest.

Says Piskorski: "Obviously people are to some extent irrational. But if you want to ban this type of contract, you should really weigh the benefits and the costs. How much could you educate people? Make people understand them. Provide them with software. Make a federal law that requires the lender to reveal what this contract is about."

In other words, we need to keep our toxic products but fire these irrational borrowers, replacing them with some trainees who can be brought to have more rational points of view. I suggest issuing this software with applications for Social Security Numbers; as soon as you begin to work for money, you should begin the process of understanding how to become contributing members of the "free market" by handing over your "pricing power" and behaving the way the rentier class wants you to.

I am not, of course, suggesting that there's no room for improvement in borrower education. I certainly don't think your "refi options" are always more about saving your money than about handing over fees to an industry that loves to "help you out." Nor do I claim that these academics are mere useful tools of the mortgage industry. However, I am reaffirming an old conviction of mine: there is no fruitcake like academic fruitcake.

by Tanta on 9/24/2007 09:22:00 AM

It used to be basically impossible to keep up with the terms of newly-issued mortgage deals, but you could at least stay up to date with downgrades. Now that the situation is completely reversed, I thought it might be interesting to look at the terms of one of the very few new issues out there.

This Bear Stearns deal (Asset Backed Securities I Trust, Series 2007-AC6) just got rated. With 7.90% credit enhancement to the AAA tranches for an Alt-A deal--that's more than you used to get in some subprime--I thought it might be interesting to look at the prospectus.

Remember the uproar earlier in the year about Bear buying delinquent loans out of securities in an attempt, it was alleged, to "manipulate" the market? This prospectus has a new bit I've never seen before that clarifies that:

[A]s described in this prospectus supplement, the sponsor has the option to repurchase mortgage loans that are 90 days or more delinquent or mortgage loans for which the initial scheduled payment becomes thirty days delinquent. The sponsor may exercise such option on its own behalf or may assign this right to a third party, including a holder of a class of certificates, that may benefit from the repurchase of such mortgage loans. These repurchases will have the same effect on the holders of the certificates as a prepayment of the mortgage loans. You should also note that the removal of any such delinquent mortgage loan from the issuing entity may affect the loss and delinquency tests that determine the distributions of principal prepayments to the certificates, which may adversely affect the market value of the certificates. A third party is not required to take your interests into account when deciding whether or not to direct the exercise of this option and may direct the exercise of this option when the sponsor would not otherwise exercise it. As a result, the performance of this transaction may differ from transactions in which this option was not granted to a third party.

You have been warned, I guess. There is also this:

The sponsor may from time to time implement programs designed to encourage refinancing. These programs may include, without limitation, modifications of existing loans, general or targeted solicitations, the offering of pre-approved applications, reduced origination fees or closing costs, or other financial incentives. Targeted solicitations may be based on a variety of factors, including the credit of the borrower or the location of the related mortgaged property. In addition, The sponsor may encourage assumptions of mortgage loans, including defaulted mortgage loans, under which creditworthy borrowers assume the outstanding indebtedness of the mortgage loans which may be removed from the mortgage pool. As a result of these programs, with respect to the mortgage pool underlying any issuing entity, the rate of principal prepayments of the mortgage loans in the mortgage pool may be higher than would otherwise be the case, and in some cases, the average credit or collateral quality of the mortgage loans remaining in the mortgage pool may decline. . . .

Modifications of mortgage loans implemented by the related servicer or the master servicer in order to maximize ultimate proceeds of such mortgage loans may have the effect of, among other things, reducing or otherwise changing the loan rate, forgiving payments of principal, interest or other amounts owed under the mortgage loan, such as taxes or insurance premiums, extending the final maturity date of the mortgage loan, capitalizing or deferring delinquent interest and other amounts owed under the mortgage loan, or any combination of these or other modifications. Any modified loan may remain in the issuing entity, and the reduction in collections resulting from a modification may result in reduced distributions of interest or principal on, may extend the final maturity of, or result in an allocation of a realized loss to, one or more classes of the certificates.

You have been even more warned. Furthermore,

The underwriter intends to make a secondary market in the offered certificates, but the underwriter has no obligation to do so. We cannot assure you that a secondary market will develop or, if it develops, that it will continue. Consequently, you may not be able to sell your certificates readily or at prices that will enable you to realize your desired yield. The market values of the certificates are likely to fluctuate, and such fluctuations may be significant and could result in significant losses to you.

The secondary markets for asset backed securities have experienced periods of illiquidity and can be expected to do so in the future. Illiquidity can have a severely adverse effect on the prices of certificates that are especially sensitive to prepayment, credit or interest rate risk, or that have been structured to meet the investment requirements of limited categories of investors.

In case you hadn't noticed, you're getting warned again.

As far as the mortgage pool? It's fixed-rate Bridge Mix: 18% full doc; WA FICO of 701 with range from less than 600 to more than 800; average balance just under $306,000 with a range from $33,000 to $2MM; 14% non-owner-occupied; 29% CA and 10% FL; 35% interest only. The sort of thing that would have skated by a year ago, in other words. The big difference here: only 28% of loans are purchase-money, and only 19% have subordinate financing.

The loans are also rather older than new production issues have been in the last few years--averaging 7-10 months--which suggests that it took a while to put this deal together. I'd say this is less an indicator of what kind of loans are being made today than it is what kind of loans have been parked in Bear Stearns' inventory since the first quarter, waiting for the RMBS market to revive. And with subordination levels of nearly 8.00% on fixed rate "Alt-A," it's quite clear that rates to consumers for "non-conforming" loans have nowhere to go but up.

by Tanta on 9/18/2007 09:25:00 AM

LEND finally got around to filing a 10-Q today for Q01. It's jam-packed with exciting self-serving revisionist history masquerading as opening the kimono. I recommend it to connoisseurs of first-rate HorseHockey™.

Lowlights:

In the third quarter of 2006, the non-prime mortgage market in which the Company operates was characterized by increased competition for loans and customers which simultaneously lowered profit margins on loans and caused lenders to be more aggressive in making loans to relatively less qualified customers. By the end of 2006, the non-prime mortgage industry was clearly being negatively impacted. The sustained pricing competition and higher risk portfolios of loans reduced the appetite for loans among whole loan buyers, who offered increasingly lower prices for loans, thereby shrinking profit margins for non-prime lenders. In addition, the higher levels of credit risk taken on by non-prime lenders resulted in higher rates of delinquency in the loans held for investment and in increasing frequency of early payment defaults and repurchase demands on loans that had been sold. These trends accelerated during the first quarter of 2007, and the industry experienced a period of turmoil which has continued into the second and third quarters of 2007. As of August 31 2007, more than 55 mortgage companies operating in the non-prime mortgage industry had failed and many others faced serious operating and financial challenges. The most notable of these failures is New Century Mortgage Corporation (“New Century”), one of the largest non-prime originators in recent years, which filed for bankruptcy protection in April 2007.

It now appears that an underlying reason for the deterioration of industry conditions was the relatively poor performance of loans originated in 2006 in comparison to loans originated in 2004 and 2005. While real estate markets were booming during 2004 and 2005, and some areas experienced significant home price appreciation, many originators extended credit and underwriting standards to meet market demands. When home price appreciation leveled off, or in some areas declined, many of the loans originated in 2006 did not perform up to expectations. This decline in performance led to increases in the cost of securitizing non-prime loans as the rating agencies which rate non-prime securitizations increased loss coverage levels, requiring higher credit support for non-prime securitizations.

Yeah, the funny business just happened to happen in Q04 06, which made it visible in Q01 07, which just happens to be the point at which LEND suddenly discovered that it could no longer prepare financial statements. Funny how that works.

At minimum, may we remind everyone that the 2005 subprime mortgage vintage was on track to become the Worst Ever until . . . you know . . . we had data on 2006?

by Tanta on 9/18/2007 07:38:00 AM

Bloomberg reports:

MT. LAUREL, N.J. - PHH Corp., the mortgage lender that agreed to be bought by General Electric Co. and Blackstone Group LP, said the $1.8 billion sale could unravel as lenders back away from some leveraged buyouts.

JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. told Blackstone they might fall $750 million short in funding its part of the deal, PHH said Monday. GE, which plans to keep the company's vehicle-leasing unit, might pull out if Blackstone can't get financing. . . .

PHH is the second company in a week to warn that an LBO could be derailed as banks seek to renege on lending commitments for smaller buyouts while sticking with big deals such as Kohlberg Kravis Roberts & Co.'s $26 billion takeover of First Data Corp. Reddy Ice Holdings Inc. said last week that Morgan Stanley might back out of selling debt for GSO Capital Partners LP's purchase of the company.

"There will be some deals that won't get done, but it won't be the big names," said billionaire financier Wilbur Ross, whose New York-based WL Ross & Co. invests in distressed companies. "Some of the smaller deals have better escape hatches." . . .

"We continue to hope that Blackstone will succeed in arranging its financing so the merger can be completed," said Stephen White, a spokesman for Fairfield, Conn.-based GE. "But if Blackstone is unable to complete its purchase, GE will not be obligated to complete the merger."

In March, GE agreed to buy PHH and resell the mortgage unit to New York-based Blackstone, manager of the biggest buyout fund. PHH said Monday it told GE that it expects the company to "fulfill its obligations under the merger agreement."

In case you happen to be curious about it, PHH was once an independent company that got sucked into the Cendant conglomeration of "affiliated businesses," mixing mortgages and real estate sales and all kinds of other stuff. Then after the spectacular accounting fraud at Cendant, PHH got "spun back" to being an independent company, until GE saw a flip an investment opportunity early in the year.

PHH is a big mortgage originator, although you might not realize that because a huge chunk of its business is "private label outsourcing" of one kind or another. Lots of smaller banks and credit unions, for instance, and a few larger financial firms like AmEx use PHH to originate and service loans under a "private label" arrangement that is opaque to the consumer. PHH will, for instance, issue a separate phone number to Little Dog Bank's "mortgage department," which will be given to Little Dog's customers. When they call, the PHH reps answer "Little Dog Bank, how may I help you?" or words to that effect. So a lot of what goes on that looks like "retail" lending is actually running through PHH's fee-for-service outsourcing operations. So is a lot of "direct lending," insofar as PHH's private label clients offer their own customers a "loan by phone" option that involves calling PHH-in-drag. There can be loans brokered to Little Dog that are really closed by PHH pretending to be Little Dog Wholesale. You would need Visio more than you would need Excel.

The whole point of this, besides making it less expensive for a Little Dog or a financial services company like AmEx that doesn't primarily originate mortgages to "originate" mortgages, is the "branding" part, which involves either "seamless customer service" or "endless opportunities to sell you more stuff," depending on which PR you are reading. For a lot of outfits, the mortgage loan itself isn't the "profit center": it's the other accounts or insurance policies or what have you that can be "cross-sold" to people with mortgage loans. Alternately, the ability to offer these "private label" mortgages is a way to hang onto depositors or other account-holders who want all their accounts, including their mortgage, at one place. Of course they aren't all at one place; they look like they're all at one place. Which is why putting it all at GE, which once apparently made lightbulbs and has been in and out of the mortgage business more times than the set changes at Phantom of the Opera, makes perfect sense. If only the credit markets saw it that way.

by Tanta on 9/16/2007 10:41:00 AM

A new paper by Federal Reserve Board analysts I highlighted the other day contains some discussion of the issues of loan pricing and fairness to consumers. I encourage anyone who is interested in this issue to read the entire paper. However, I promised to write something UberNerdy about loan pricing, and this bit from the Fed paper provides me with a place to start:

As price flexibility has emerged in the mortgage market, so have concerns about the fairness of pricing outcomes. Such concerns generally fall into four broad categories. First are concerns about possible discrimination based on the race or ethnicity of the borrower. Such concerns are heightened because loan prices are not always determined strictly on the basis of credit risk or cost factors but can involve elements of discretion, in which loan officers or loan brokers may seek prices that differ from those on rate sheets or other techniques used by lenders to establish baseline prices.

Second are concerns about whether borrowers in the higher-priced segment of the loan market are sufficiently informed and whether they are willing or able to shop effectively for the loan terms most appropriate to their circumstances. For example, it may be difficult for borrowers to determine where they fit along the credit-risk spectrum.

For the moment I am going to largely ignore the first issue, of discrimination based on race or ethnicity. This is not because I don’t think it’s important; I do. But I don’t think we can really get there, in terms of understanding how pricing of a loan can be manipulated at the primary market level (in discriminatory or just equal-opportunity predatory ways) without getting a grip on how it works. What I will propose is that, indeed, it is very “difficult for borrowers to determine where they fit along the credit-risk spectrum.” Not only do borrowers, on the whole, lack the ability to size up their own risk, they don’t know how lenders price that risk. As long as information about “the market price” for certain risk factors is non-public, the public will not know whether the price it gets is the best on offer or not.

It is supposed to be the role of a mortgage broker to locate the best price for a consumer, since the idea is that the broker receives rate sheets from many wholesale lenders, and can choose the best-priced one on any given day or for any given kind of loan. This presumes that the broker is mostly motivated to offer a “competitive” rate/price to the borrower, not to maximize its own compensation by offering a worse-than-market rate/price to the consumer in exchange for higher fees from the wholesaler. The standard riposte of the brokers is that this kind of gouging can’t really happen, because the customers will “shop around” and know whether or not they’re getting the best deal. Or, at least, they should shop around, and if they don’t, it’s their own fault.

As I have argued before, this creates an odd conception of the broker’s role: the broker with access to all those wholesalers is supposed to be “shopping around” for you. If you go to another broker to get a “comparison” quote, you’re going to someone else who is “shopping” the same universe of wholesalers your original broker was, as a rule. So, in practical terms, what you would be “shopping” for here is differences in broker “markup” practices, not “best market rate.” Why you would pay a broker to “shop” for you and then do your own “shopping” is one of those things that beats me.

That’s my whole argument about “fiduciary” responsibilities in a nutshell: if the broker isn’t obligated to give you the best rate out there, what’s the point of using a broker? If you’re going to do your own shopping, why not shop a couple of different retail loan officers? Your loan is going to end up with the wholesaler anyway; you might as well skip dealing with someone who may not be around if problems ensue, or may not have regulators breathing down its neck about origination practices as a depository lender will (relatively speaking).

But in reality the whole “shop around” business is nearly meaningless when we look at this “risk based pricing” thing. You might know, from reading blogs or something, that, say, the Freddie Mac conforming fixed rate national average loan last week involved a rate of around 6.375% and 1.00% in points. Do you have any idea if you qualify for that? Are you “average”? Is the kind of loan you want “average”? If you were quoted a higher rate than this, would that mean that you are riskier than “average”? Says who?

It’s not easy to find lots of wholesale rate sheets on the web to do comparisons, because most wholesalers put them behind registration walls to keep people like us out. There are, however, a few exceptions, and I found this one. Please understand that I am not “picking on” this lender because I have any particular beef with Chevy Chase, although I will say this “Cashflow Monthly ARM” you encounter on the first page of the rate sheet is perfectly nauseating. Other lenders have equally or probably even worse products, of course, but CCB is dumb enough to make its rate sheet publically available.

Whilst we are on this subject, notice the verbiage at the bottom of the page: “These rates are solely for the use of mortgage brokers, correspondent lenders, and other arrangers of credit and are not to be distributed to potential loan applicants.” All rate sheets have words to that effect on them. You are not given a copy of a rate sheet like this, if you are a loan applicant, and invited to price your own loan. The better reason for that is that you need a “professional” to assist you in this complex process (i.e., we acknowledge you do not understand “where you fit along the credit risk spectrum”). The less better reason is that if you can’t see the rate sheet, you won’t know if you got a higher rate than the best one you qualified for in order to increase the broker’s compensation. In any case, if CCB doesn’t want to see some blogger go to town with its wholesale rate sheet, CCB can invest in a better (more protected) web portal.

I am not, in fact, going to get anywhere near that “Cashflow Monthly ARM” today. We’re just going to look at the pricing for a plain old vanilla conforming fixed rate. If that makes your eyes cross, then do think about how lost in the weeds people are over these toxic ARMs. If you get the hang of the fixed rate pricing, you can play around with how to determine the price to the customer on the goofy ARM. So we’re going to look at page 5 of the rate sheet (page 6 of the "All Other Property States" pdf), which you might want to print if you’re following along at home, although you will need a magnifying glass to read it. Please note that if you’re following the link, the discussion below refers to the “all other states” rate sheet dated 9/14/2007 at 10:00 a.m. If you are now seeing different numbers, you’re looking at an updated rate sheet.

The first thing you see is a rate/price matrix. Eventually you will see that CCB doesn’t use the word “price.” It calls this “premium.” If you know anything about bond pricing, this will drive you crazy right off the bat. If you don’t know anything about bond pricing, it’ll just keep you very confused. “Everybody” knows (uh huh) about this thing called “discount points,” which are a fee, paid at closing, expressed as a percentage of the loan amount. You pay discount points in order to get a lower interest rate (from the lender’s perspective, the points bring the yield on the loan back to up to market).

“Premium points” would be, logically, money the lender pays you to take a higher rate. Now, lenders don’t hand out premium points in cash to anyone. If you the consumer get “paid” a premium, what you are getting is a credit on the final settlement statement against your closing costs (such as your credit report and appraisal fees, title fees, etc.). The “no cost” loan works on premium pricing; “no cost” just means “no cash outlay,” because the costs are there but paid for with premium. However, you do not always get that premium: it can be paid to the broker, not to you. We call this “back-end points” or “yield spread premium” (YSP).

So, anyway, CCB calls everything “premium” instead of “price," which in itself tells you something about the mindset here. I’m going to keep talking “price,” because I have a point to make. Another thing you bond-people will notice immediately is that the prices on this rate sheet are expressed in a “retail” format, not a dollar price (or “buy price”) format. This varies in the industry. Most correspondent rate sheets (remember, that’s a lender buying a closed loan from another lender) use dollar prices, and some wholesale (broker) rate sheets do. (Dollar prices are things like “par” or 100.00, 101.00, or 99.00, which numbers mean “percent of face value” of the bond or mortgage. The equivalent “retail” or consumer price would be 0.00, (1.00), or 1.00, respectively. Subtract the retail price from 100 to get the dollar price, and remember to change the sign on the adjustments. If that last sentence confused you, ignore it.)

That means that CCB’s rate sheet expresses a premium price as a negative number and a discount price as a positive number. You may also notice that CCB quotes 15-day locks in rounded ticks (1/32 increments) and 45-60 day locks in even eighths. This means that at any given rate, the borrower pays around 0.187 to go from 15 to 45 days, and .125 to go from 45 to 60 days.

Most of the “risk based pricing adjustments” on this rate sheet are also quoted in even eighths, although you’ll notice that the LMPI and Expanded Approval (EA) adjustments are not necessarily expressed in eighths. I will observe that: eighth increments are “traditional” in primary market pricing, and when you see pricing in other increments, you are likely to be seeing pricing that was derived from a much more exact model. The LPMI adjustments are based on the actual cost to the lender of mortgage insurance policies; the EA adjustments are based on the guarantee fee or loan-level pricing adjustments Fannie Mae comes up with in its Desktop Underwriter AUS. The rest of this stuff, my consumer friends, is ballpark. I know; I’ve been in the meetings. For years. We’ve been charging a quarter of a percent for escrow waivers since before Windows was copyrighted. If you tell me that number comes from some fancy cutting-edge servicing valuation model that looks at exact current float costs and some razor-sharp analysis of marginal credit risk differences, I will laugh in your adorable nerdly little face. I’m sure we had some data when we first made that one up, but we used a sextant, not LORAN and certainly not GPS.

In order to see how this works, let us imagine that Tanta wants a loan: a $140,000 cash-out refi. Tanta’s LTV is 90%, the property is her principal residence, a 1-unit home, and she is providing full documentation of income. However, since she has no idea where her tax returns are hiding, she needs a 45-day lock. Her FICO is 655. Because her brother-in-law’s boss’s Avon Lady’s financial advisor said it had “tax advantages,” she asks for an interest-only loan with “no MI” (that is, LPMI). On the other hand, Tanta read on some website that you should never pay points, so she wants the “no point” rate. You may reflect on how far Tanta and her loan request are or are not “average.”

You can see right now that you have to supply a lot of information to a broker or loan officer these days to get a simple rate quote. Actually, you can’t even get a real rate quote without someone running a credit report on you, because you do not know your own FICO (and even if you think you do, your lender will get that information directly from the credit bureaus anyway). You are already handing over your Social Security Number and incurring cost to someone who will want to recoup it by making a loan, even if all you thought you were doing was “comparison shopping.” And we’re just guessing on LTV at this point; that value isn’t conclusive until some sort of appraisal or AVM determines the value part. But you’ll be in this process fairly deep by the time that happens. Remember that this is a refi request: do you know, really, what your house is worth today? Does Tanta?

So how do we go about quoting a rate/price here? Well, what your broker is likely to do is first add up all the price adjustments you would be subject to. Tanta’s loan gets the following (COR = cash out refi):

Loan amount: 0.125
FICO: 0.750
COR: 0.750

Total: 1.625

Since Tanta doesn’t want to pay points, we must find a 45-day rate that shows premium of at least (1.625). Let’s take that 7.375 rate: it pays exactly (1.625) in premium. So Tanta’s base rate is 7.375: we add 1.625 to (1.625) to get zero points. However, Tanta has some rate adjustments in store:

Interest Only: 0.25
LPMI LTV: 0.30
LPMI FICO: 0.10
LPMI COR: 0.10

Total: 0.75

Therefore, Tanta gets a rate of 8.125% (base 7.375 plus 0.75 adjustments) at zero points. Now, the trouble here is that the broker still has to make some money for going to all the trouble of taking Tanta’s loan application, so Tanta is highly likely to pay one or more “origination points.” Of the many things that makes Tanta a crazy person, indiscriminate use of the term “points” is one of them. Traditionally, the “origination fee” on a loan is the lender’s overhead, which includes commission to the loan officer or profit to the broker. Because it was traditionally expressed as a percentage of the loan amount, it is referred to as a “point,” but it is very important not to confuse it with a discount point: it does not “buy down” the interest rate.

Brokers (or lenders) don’t have to charge origination points; you can and people do just throw in a bunch of flat fees for this and that which end up being profit to someone. I bring this up in part to highlight a real problem in “predatory pricing” land, which is the concept of the “bona fide discount point.” Things have gotten so bad that we actually have to use that term, because you see loans where a borrower got charged one origination point and one “discount” point (they show up separately on the disclosures and settlement statement), but the rate didn’t get discounted appropriately. A whole lot of brokers seem to think that you can charge “discount points” without reducing a premium rate. A whole lot of consumers can never know whether this is happening or not, since, of course, the consumer doesn’t see this rate sheet.

You will notice that, in our example, we picked 7.375 as the “base rate” because we are an honest broker who will get compensation for this loan on the “front end,” by charging some kind of origination fee to Tanta. However, we could have chosen 7.50 as our base rate, which paid (1.750) in premium. If we had done that, after our price adjustments, there would be 0.125% of the loan amount to end up in someone’s pocket. If the broker applies it as a closing credit, Tanta’s closing costs will be reduced by that amount (she would, say, pay a 0.875 origination fee instead of a 1.00 fee). If the broker doesn’t give it to Tanta, it becomes YSP or compensation to the broker. If Tanta doesn’t know that 0.125 is on the table someplace, Tanta doesn’t know whether she should be paying 0.875 or 1.00 in origination fee (or the equivalent in flat fees). She also probably doesn’t know that it doesn’t have to be on the table, because she could have gotten that 7.375 base rate.

Does Tanta have any idea whether that 0.75 add-on for LPMI compares favorably to paying MI herself? Not unless somebody runs some “scenarios” and gives her the figures, carefully explaining the advantages and drawbacks of LPMI. Does she know whether CCB’s add-ons for LPMI are going to be the same at any other lender or not?

Does she understand that the biggest impacts on the price she was offered were her FICO and the fact that she’s taking cash out at a high LTV for cash-outs? If the amount of cash she’s taking is rather modest, does she know that it might not be worth it, considering that she might be able to save up that modest amount of cash in a fairly short time by doing a rate/term refi at a lower rate and therefore lower payment? On the other hand, does she realize that if she reduced her loan amount significantly, her loan amount adjustment would increase?

Does she know she’d get a better rate/price with 5 more FICO points? Is there a way for her to manipulate her FICO in the short term to squeeze 5 more points in? Is there a “credit counseling” company who would be willing to extract some fee from her for assistance in this matter? Will that fee be worth the rate/price break on a 660+ FICO loan?

If this whole rate quote blows up when the appraisal comes back, showing that unfortunately our LTV is over 90%, what will happen? Will the broker go back to Tanta and tell her she has to borrow less, which reduces any of the broker’s compensation that takes the form of a percentage of loan amount, or will the broker lean on the appraiser until a “better” number comes back (or fool around with the inputs on an AVM until it complies)? In the latter case, will Tanta even know that that is going on?

An important thing to bear in mind is that we just looked at one rate sheet by one wholesaler. For some if not most of you, this will be the only exposure to this sort of thing you’ve ever had. If you are now thinking something along the lines of, “OK, so 75 bps is a normal market price adjustment for a FICO in the 620-659 range,” you are making a logical error. It would be a profound logical error if you then assumed that a different wholesaler’s rate sheet with a higher or lower FICO adjustment were “overcharging” or “undercharging.”

The fact is, it depends on how you calculate that base price up in the rate/lock days matrix. A competitor of CCB’s could easily calculate a base price that is better, relative to CCB’s, by 25 bps. That competitor’s FICO adjustments could, then, be worsened by 25 bps, so the FICO adjustment for 620-659 might be 100 bps, not 75 bps, although the end price to the consumer is the same. Even those things that are fairly consistent throughout the industry—like the classic 25 bps adjustment for escrow waivers—can confuse the unwary: some lenders calculate the base price assuming that all loans have escrows, and then worsen the price by 25 bps if escrows are waived. Some lenders calculate the base price assuming all escrows are waived, and improve it by 25 bps if escrows are established. You might see the same value but different signs on different rate sheets.

A casual comparison of price adjustments across even a large number of wholesaler rate sheets will not tell you what the “going market price” of a given risk factor is; you have to analyze the base prices together with the adjustments to get that. “You” in this case are a broker or a loan officer; “you” are unlikely to be a consumer.

You must also remember that risk adjustments are tailored to the guidelines of the loan program being priced. Why is there no adjustment for cash-outs over 90%? This loan program does not allow an LTV that high, so it does not price one. If you wandered over to an Alt-A or subprime rate sheet, you would see additional risk adjustments because crazier things are allowed; you might also find very different values in those adjustments, because the “base price” is set very differently.

I’m guessing by now that you all have spotted the trouble with the idea that risk based pricing is “individualized”: it is, but what an individual loan gets are adjustments based on average performance of loans of that type. How reliable those calculations are will be a matter, among other things, of how a pricing model considers variables singly or in conjunction. In other words, these adjustments you see may be “net of” a lot of factors that aren’t obvious to consumers.

Let me observe that I purposely picked an example loan with a lot of risk-based adjustments on it, so you could see how the process works. But if you hypothesize a loan with fewer adjustments, you can see that a broker could end up with a lot more than 0.125 in YSP off of this CCB rate sheet (and there are, or at least were until recently, wholesale rate sheets out there paying a lot more premium—quoting much higher rates—than CCB’s. We are looking at a “post-turmoil” rate sheet.). It may seem counterintuitive to you, but quite often it is the borrowers with the best credit history and the most conservative loan terms who are most at risk for getting a high interest rate—as long as they stay ignorant about what “YSP” is and why it is showing up as a charge on their settlement statement.

It is perfectly true that a similar mechanism works in retail loan origination; in that context this additional premium is generally referred to as “overage” rather than “yield spread,” and it can, depending on the lender’s practices, be additional profit to the lender or additional commission to the loan officer or (frequently) a split. However, it is even less visible in a retail environment, since "overage" isn't disclosed on the settlement statement the way YSP is. On the other hand, depository retail lenders (so far) face a great deal more regulatory pressure to keep "overages" under control than brokers do.

But to get back to the question raised by the Fed analysts, does every borrower with good credit and conservative loan terms think of him or herself that way? Does the rest of the world, or a vocal subset of it, think that way? How widespread is the belief that minority and low-income people are almost always “subprime” borrowers? If you can make a 110-pound adult believe she’s “fat,” or a college student who gets a C believe he’s “stupid,” can you convince someone who makes $30,000 a year fixing cars and happens to have a Hispanic surname that a 655 FICO makes you “subprime”?

I think you can. If I tried to link to every media article that defines “subprime” as “loans to low-income people,” I would blow the server. A loan to a low-income person that the person cannot, patently, afford is certainly subprime. That is not the same thing as saying that all low-income people are “subprime credits,” but how often do you hear that distinction being made?

How often are prime-credit borrowers given subprime loans? Good question, and I am not making or endorsing a particular claim about an empirical matter for which I don’t have satisfactory data (see the Fed's analysis for the difficulties in sorting that out). I am pointing out that we have the necessary if not always the sufficient conditions for predation when we have “risk based pricing” that is opaque to consumers, and consumers who are not educated about what constitutes “risk.” We are not exactly making it hard for discrimination or predation to occur here.

We also have an industry which hasn’t done a particularly fine job lately proving that it really knows how to price risk anyway. Do price adjustments (of any amount) for FICOs “make sense”? Are they enough? Too much? Beside the point? Are you sufficiently convinced of the predictive power of a FICO score to want to justify pricing a loan on that basis? Particularly when an entire sub-industry of various forms of more or less “respectable” FICO manipulation has grown up around this practice? In the midst of all of that, are you confident that putting the onus on consumers to “shop around” still makes the most sense as a “solution” to the problem of pricing distortions? I’m not.

by Tanta on 9/14/2007 03:11:00 PM

Maybe readers of this blog will knock out the Federal Reserve's server. We are nerds.

Some highlights:

On consolidation and concentrations in the industry:

For both the 2004 and 2005 HMDA data, nearly 80 percent of the reporting institutions were depositories (commercial banks, savings associations, or credit unions); independent mortgage companies or mortgage companies affiliated with banking institutions or their holding companies accounted for the rest. Although mortgage companies represented only 22 percent of the reporting institutions, they submitted information on more than 60 percent of all the reported loans and applications.

Most lenders reported relatively little home lending. The most active lenders (those providing information on 5,000 or more loans or applications) accounted for about 5 percent of the reporting institutions and nearly 90 percent of all the reported loans and applications.

On the composition of 2006 originations:

For 2006, lenders covered by HMDA reported information on 27.5 million applications for home loans. Almost all the applications were for loans to be secured by one- to four-family (so-called single-family) houses, as follows: 10.9 million applications to purchase a home, 2.5 million to make home improvements, and 14.0 million to refinance an existing home loan. The balance (about 0.1 million) was for loans secured by multifamily dwellings—those for five or more families (table 1 [tables appear after main text]). These applications resulted in nearly 14 million loan extensions. Lenders also reported information on 6.2 million loans they purchased from other institutions and on 411,000 requests for pre-approvals of home purchase loans; the pre-approval requests either were turned down by the lender at the time the pre-approval was sought or (not shown in table) were granted but not acted on by the applicant.

The total number of reported applications and purchased loans fell 2.3 million, or 6 percent, from 2005; most of the decline was for refinancings. The number of applications for loans to refinance an existing loan fell 1.9 million, or about 12 percent; the number declined most likely because short-term interest rates increased from the end of 2005 through much of 2006 and thereby reduced the number of existing loans that could be refinanced at a lower rate. Slower house-price appreciation and, in some areas, outright declines in property values also likely diminished the attractiveness of refinancing or the borrower’s ability to refinance.

On denial rates:

The HMDA data for 2006, like those from earlier years, indicate that lenders approve most of the applications they receive, although the proportion approved or denied varies by loan purpose, type of loan and property, and lien status. In general, denial rates are higher for refinancings and for home-improvement loans than for home-purchase loans, perhaps because of the prequalification and financial counseling activities that many prospective borrowers go through before purchasing a home (table 4). Denial rates are lower for government-backed loans than for conventional loans but are especially high for loans to purchase manufactured homes. Overall, the denial rate for all home loans in 2006 was 29 percent, compared with 27 percent in 2005.

On loan size:

For 2006, about 90 percent of conventional loans for purchase and likewise for refinancing, whether higher-priced or not, were within the conforming loan limit (table 6). Higher-priced loans tended to be somewhat smaller than others; for example, among conventional home-purchase loans, the mean size of higher-priced mortgages was $209,000, compared with $246,000 for others. . . . Among those obtaining conventional home-purchase mortgages, the mean income of individuals [Tanta: I believe this means the total income of all borrowers on an individual loan] with a conforming loan was $82,400, versus a mean income of $258,000 for those with a jumbo loan. And, again among borrowers using conventional loans, those using higher-priced loans either to purchase a home or to refinance had a mean income about 20 percent lower than borrowers not paying higher prices.

On owner occupancy:

After declining in the early 1990s, the share of non-owner-occupant lending among first-lien loans to purchase one- to four-family site-built homes began rising in 1994, and it has risen in every year between 1996 (when it was 6.4 percent) and 2005, when it reached 17.3 percent (table 8). For 2006, the share fell somewhat, to 16.5 percent. Further, in line with the experience for home purchase loans to owner-occupants, the number of conventional first-lien loans to purchase homes by non-owner-occupants fell about 17 percent from 2005.

There's a great deal more in here, including a lot of information on high-priced lending and minority/low-income lending patterns which needs to be digested by your intrepid blogger. But if you don't have a date lined up for tonight, there's 77 pages of HMDA data analysis waiting for you in the Nerd Cave . . .

by Tanta on 9/13/2007 08:20:00 AM

The NYT has an article on prepayment penalties this morning, that almost but not quite arrives at the core issue:

The lenders say the trade-off is the only way to offer low monthly payments initially because otherwise borrowers would flee when rates adjust upward and make the loan a losing deal. The fees usually equal several months’ interest, and they decline over a few years before disappearing altogether.

The "traditional" prepayment penalty is, indeed, a way of putting an "exercise price" on the "imbedded call" in a mortgage loan. A mortgage borrower always has the right to prepay the loan (in options lingo, that's a "call"). Without a prepayment penalty, the price of that call is always par: you may refinance at any time by paying the lender just the principal due (and any accrued interest to the payoff date).

A prepayment penalty, in essence, forces you to "buy" your loan from the original lender at an above-par price. Looking at it in terms of yield, which is more a more everyday way of going at it, the prepayment penalty collects the interest that the lender gave up by making the loan at an originally discounted interest rate. If you "survive" the prepayment penalty period, the discount is in your pocket; if you don't, the lender is "reimbursed" for the discount out of the penalty interest. You give up mobility in return for lower interest costs. Is the theory.

In an environment of "traditional" underwriting in which people actually qualify for the loans they get, prepayment penalties can certainly be construed as "fair" (assuming they're fully disclosed and the penalty is no more than the value of the initial discount). The problem we have here is that the "discount" is a teaser: it crosses the line from "initial rate break" to "hook," as qualifying on the teaser rate is the only way the borrower can get the loan. Then it becomes just "back-loaded" interest payments, because these loans are structured to either force the borrower to refinance (and pay the penalty) to avoid the way above market reset, or to pay the way above market reset, which quickly "erases" the initial discount. That's some "call option."

The Nontraditional Mortgage Guidance, insofar as it put paid to qualifying borrowers at anything other than the fully-indexed, fully-amortizing loan payment, has already indirectly cut out most toxic prepayment penalties, since it takes away the incentive to artificially discount the start rate of the loan. Indeed, the 2/28 expired as a product not all that long after widespread adoption of the Guidance. From a certain perspective, this does, exactly, mean what all the industry lobbyists so plaintively warned us it would mean: the cost of mortgage credit went up in response to regulatory action.

But it is always worthwhile to look at it from another perspective, which is that the cost of mortgage credit just got smoothed out, not increased: borrowers are now paying their interest load from the beginning, at a tolerable level, rather than paying it "at the back of the loan" in a way that breaks the borrower's back. Insofar as it is still "unaffordable" to get a mortgage loan, we can return to the subject of insane home prices and lagging incomes.

We close, as does the Times article, with words of wisdom from a mortgage broker:

That is what happened to Dorinda Weisman, a social worker in Elk Grove, Calif. In 2005 she borrowed $353,000 from Pacific American Mortgage to buy a home in Sacramento with a small down payment. The prepayment penalty, of $9,000, expired in just a year.

“One of the things I always wanted was to own a house,” Ms. Weisman said in a telephone interview. “I was a single parent, and my son is a hemophiliac. I had been living in a middle-class African-American neighborhood that went downhill after the drugs came in.”

By the time the penalty expired, her house had declined in value. Refinancing was no longer possible.

Her interest rate had shot up to 9.8 percent from 4.75 percent. She says about 85 percent of what she brings home — her salary is $60,000 as a social service consultant with the state government — now goes to the mortgage.

She is trying to negotiate a new loan with the help of the Neighborhood Assistance Corporation of America, a nonprofit home ownership organization based in Jamaica Plain, Mass.

“Like a lot of people, the adjustable ate up her equity,“ said her mortgage broker, Antonio Cook of Toneco Financial. “She’s got to ride it out and sacrifice. I tell people, ‘I don’t care if you eat bologna sandwiches, just pay your bills on time.’ If she can ride it out, things start coming up good.”

by Tanta on 9/09/2007 11:37:00 AM

This isn't going to work out well:

Joe Waltuch, the new head of the Nevada Mortgage Lending Division, defended the subprime mortgage industry and downplayed the foreclosure crisis in his first interview.

Although he acknowledged a problem, he said, "You're missing the positive side of all this."

Subprime loans - high interest loans given to people with spotty credit histories - represent just 15 percent of the market, he said. Only 1.5 percent of all mortgages, he said, will end up in foreclosure: "Everybody seems to think we need to protect the 1,500 at the expense of the 98,500 good loans."

"We put a lot of people in homes who wouldn't otherwise be in homes," he said.

The comments were counterintuitive. . . .

It should come as no surprise, though, that Waltuch would defend the subprime lending industry.

He spent seven years as an in-house lawyer for a large subprime lender, with his last position as vice president and senior counsel for regulatory and legislative affairs at New Century Financial Corp., an Irvine, Calif., based subprime lender, once the second largest in the country but now defunct and the target of a criminal investigation.

His appointment, made by Mendy Elliott, who is Gov. Jim Gibbons' director of the Business and Industry Department, has been widely panned by Republicans and Democrats alike.

They're baffled that Gibbons and Elliott would turn to a failed subprime mortgage company official to regulate Nevada's troubled home loan industry.

"It's a terrible appointment. It's mind-boggling," said a prominent Republican in the mortgage industry who asked not to be named , fearing retribution. Republicans are especially bothered, as the appointment follows several flops during Gibbons' young tenure.

Yeah, well, it's "counterintuitive" now. There was a time, oh, a few months ago, when not everybody's intuitions were saying the same thing.

After all we had one Austan Goolsbee, respected academic economist and, I understand, advisor to Barack Obama's campaign, saying this back in March:

[T]he mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, “Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.” . . .

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

It was bipartisan Kool Aid then, and it's bipartisan Kool Aid now. I truly wonder how many business reporters found Goolsbee's op-ed "counterintuitive" back before "the subprime crisis" became everybody's headline.

by Tanta on 9/09/2007 07:33:00 AM

Having complained rather bitterly lately about the quality of a lot this stuff that passes for "financial advice columns" recently, I'm happy to have the opportunity to draw your attention to Michelle Singletary's column, "The Color of Money," in my hometown rag the Washington Post. Singletary's stuff is almost always useful, informed, and no-nonsense in attitude.

The opportunity involves a follow-up to my great sprawling post the other day on mortgage "orgination channels." Singletary writes about the dreadful "net branching" practice:

In a relatively new arrangement, some skirt the law by paying to become part of a "net branch" operation. Net-branching is similar to franchising. It allows individuals to operate their own mortgage loan origination branch using the mortgage-lending or broker license of the branching company. Individuals get assistance in running their businesses and gain access to a network of lenders. . . .

The authorities have stepped up their enforcement actions against operations that do business with unlicensed mortgage brokers, loan officers or loan originators. Most recently, 10 states took action against Apex Financial Group, also called Apex Mortgage. Apex was doing business with multiple unlicensed entities, leaving consumers unprotected, the states allege.

One person who worked with Apex was Frederick C. Lee Jr., founder of Financial Independence Group and other mortgage companies, whom I wrote about in an earlier column. Former insiders, with knowledge of the inner workings of Lee's multi-state mortgage operation, said he has assembled a network of people who arrange mortgages, sometimes through net-branching, even though the officers are not properly trained or in some cases licensed as required by the states.

In an interview, Lee denied that he or his company was involved in facilitating mortgage loans. "I'm not a mortgage guy," he said.

Yet loan documents I obtained suggest that Lee is acting as a mortgage broker. In one case, a $504,000 residential loan in Maryland lists North American Real Estate Services as the broker. Lee's cellphone number is listed as the originator's contact number. Lee is not licensed as a mortgage broker in Maryland.

by Tanta on 9/08/2007 04:18:00 PM

From Robert Reich's blog (Hat tip, Yves):

One day while sitting on a beach last summer I overheard a father tussle with his young son about whether the child was old enough to take out a small sailboat. The father finally relented. "Go ahead, but I’m not gonna save you," he said, picking up his newspaper. A while later, the sailboat tipped over and the child began yelling for help, but father didn’t budge. When the kid sounded desperate I put down my book, walked over to the man, and delicately told him his son was in trouble. "That’s okay," he said. "That boy’s gonna learn a lesson he’ll never forget." I walked down the beach to notify a lifeguard, who promptly went into action.

Reich has some interesting comments on our rather different treatment of risk-taking by corporations and risk-taking by individuals. The whole thing is worth reading.

I am increasingly troubled by a take on the "moral hazard" problem that sounds to me, ultimately, like a kind of moral extortion. This is the old argument (it has been used before now against any "safety net" provision) that nothing will stop people who are not "needy" from finding a loophole through which to exploit the safety net, and therefore it will have unintended negative consequences. So we should not offer it at all, because while the needy will be helped, the unneedy will also be helped, and this, the argument goes, is an unacceptable outcome.

What this is, of course, is a threat, not a prediction: a way of threatening to make us end up with a politically unpopular "free rider" program by promising to free ride on it before it gets started. It seems quite clear to me that the argument really isn't about "moral hazard," since in order for it to be about preventing hazards there has to be, as Reich notes, a much clearer ability for people to assess certain risks. In other words, the more sophisticated, informed, and powerful the risk-taker, the larger the moral hazard, because that risk-taker can both see the risk and see the potential bailout, which may not be all that obvious to the less well-informed. (Just ask your average homeowner if he or she sees FOMC minutes as a potential backstop against the risk of taking out a home equity loan. You might have to explain what FOMC is first.)

Would I call the lifeguard if I saw a parent apparently willing to let a child drown in order to "teach that kid a lesson"? Yes, and then I might call the police next. It seems to me that there is a certain hazard to that kind of morality.

Is it a useful analogy for the mortgage mess? Well, insofar as lenders should be expected to know more than borrowers do, and thus exercise some reasonable restraint in making loans, then, yes. On the other hand, infantilizing other adults is rarely helpful, in my view. The parent-child analogy gets you bogged down in worries over "paternalism" or "nanny state regulations" that, I think, have more emotional than rational content.

Even worse, though, this analogy calls to mind the infuriating comment Angelo Mozilo--the Tanster himself--made a while back about high-risk lending:

"First-time home buyers were begging us to make them loans because they thought home values were going up significantly, and so they put a lot of pressure on us to make them loans," he said.

Yes, we lenders are just long-suffering parents who finally succumbed to those wheedling, whining children who pestered us until we gave in. Now, the children should blame themselves for their predicament. Sure.

Strangely enough, Countrywide has not yet erased from the web this 2003 presentation, by one Angelo Mozilo, on Countrywide's "mission" to provide "outreach" to first-time homebuyers, with low-downpayment mortgages and flexible underwriting guidelines. I don't know about you all, but I've always thought "missionaries" were the sort who brought their gospel to the heathens, not the ones who were forced to re-write their gospels in the face of intense heathen-lobbying. The very concept of "outreach" implies that they are inhibited from coming to you, so you must go to them. It works well in drug-abuse interventions. It appears to have a possible problem when you apply it to mortgage lending.

Letting "them" founder, in my view, is not "tough love." It's self-serving rhetoric designed to retrospectively shift the real "risky behavior" onto those of whom advantage has been taken, so that they become the ones who need to be "punished" to remove the "moral hazard." I think it's a rhetorical trick that we could usefully resist.