The Moral Hazard of Housing

Alternative Title: Will Mortgage Banking Find its Soul in the 21st Century?

The multifamily business is a lot like most men, simple.  Homeownership would seem to be a simple thing also, but it is not.  Jerry Seinfeld wonders out loud how any man can attract any woman, we men, being as simple as we are.  Even so, women keep falling for us.  So while no man is deserving, women are attracted to men, even with all our faults.   Kind of like mortgage companies and consumers over the last decade.   Mortgage companies love the mortgage consumer.   Simple as we were….

Queue: Enter Mortgage Banking Giants

In “get-a-mega-mortgage-for-nothing-land” everyday consumers were courted by all manner of companies asking them to sign on for a new mortgage.   Who doesn’t like being courted?    Families that thought an older tract house was their best living could now afford a new 3+3+3 (three-bedroom, three baths, three-car garage).  Did I mention it was a new house!   Multitudes that had never dreamed of home-ownership were now homeowners.  With introductory mortgage rates, the sky was the limit.

Since the house of cards has fallen.  While mortgage rates remain low, the context of these vast home-ownership purchases has changed dramatically with significant decreases in home valuations to go along with stock market losses and high unemployment.

Fast-forward to October 2010.  Foreclosures across the country were momentarily “on hold” as the new systems brought into service by the mortgage giants are found to be void of actual mortgage documents.  You know, things like recorded deeds and notes with original signatures.  Silly judges are actually asking to see the originating documents.  “How rude is that,” says the mortgage servicer with only electronic numbers to convey in court.   JP Morgan Chase has announced a set-aside of one billion dollars to “address” the foreclosure issue.

The Seduction was Real

Washington Mutual was a mammoth of a company (WAMU).  So was Countrywide.  WAMU imploded in the sub-prime crisis.  Countrywide, which at one time had a market cap of $20 Billion dollars, was sold to Bank of America for $4 Billion dollars.  Before the crash, these companies fought over consumers with mortgage rates and terms never before seen in history.  New acronyms were created just to express the vast magnitude of mortgage products available.  A famous story from WAMU underwriting was about a man that claimed to earn a six-figure income as a Mariachi singer.   Since this was a “no-doc” loan the only confirmation of income was a photo in the file with the man in his costume.

 The Blame Game

Mortgage servicers tell consumers all day long that it is their obligation to pay the mortgage debt as described.  Consumers balk at continuing to pay for a mortgage on a home with a valuation less than the mortgage amount.   Lots of finger-pointing.  Lots of lawsuits.  Lots of tears.  I tip the majority of the blame to the side of the mortgage professionals many of whom knew from day one of underwriting that default rates on certain loan types were going to be through the roof.

I’m not referring to retail mortgage brokers.  I’m referring to the upper-tier offices of major companies running billions of dollars.  Those with ultra-sophisticated super-computers running algorithms on default losses.  Those with the ability to determine just how fast they needed to re-package and re-sell loans in the CMBS market before default rates hit claw-back provisions.

In this circle, the Jester is the rating agencies going along for the ride with the rest of the court.   The gauntlet is set against the serfs…   It’s an intellectual battle between an Ivy League-educated lawyer and an 18-year-old who dropped out of school in 8th grade.  Joe Public doesn’t stand a chance.

Part of the American dream is homeownership.   Even so, some blame must remain with consumers who knew in their heart of hearts that the mortgage deals being offered were not sustainable.   It is certain the Puritan ethic was overtaken by the lust of the flesh – at full speed.

Viewed from a purely financial perspective many should walk away from their mortgage.   But this is not just a financial decision, as walking away means also leaving one’s home and the stature that comes with being a homeowner.   Further, it’s embarrassing.   And who really wants to leave their familiar surroundings?  Particularly based on the premise of a  system-wide meltdown?   We all bleed red.  And as has always been true, the lowest man on the totem pole hits the ground first.

So, as women will always love (simple) men, mega-mortgage companies will always love (simple) consumers.

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