plausible deniability, exotic loans and pulling off bandages

[walkitout]

I went for a walk today with A. and L., which I haven't done for weeks because of travel and then illness. Nice walk; I even got to stick my feet in a lake, which I haven't done for a while.

I babbled about a variety of things, and A. had an incredibly insightful remark about why the housing bubble is being handled the way it is. It's not for any economic reason. It's because even though most people realize that pulling a bandage off all at once quickly is less painful, in practice most people sort of do it slowly in hopes that this time it'll be different. Psychology. Good description of reality. I'm going to chalk the 90 day cooling off period in Mass for foreclosures to the bandage theory. And the slowness of lenders to write down principal, or engage in any kind of loss mitigation at all, for that matter.

Nevertheless, I still was wondering how we could be living in a world with negative amortization loans (Pick-a-Payment being the current form, I _think_ aka Option ARM). At least the _last_ time we had negative amortization loans there was a reasonable explanation (double digit interest rates in the 1980s). Neg am loans AND historically loan interest rates seems crazy bizarre to me. I was also deeply suspicious of mortgage brokers. I kinda figured you should get a loan from a bank which would then be where you sent the payments. Sure, you had to pick a bank that _kept_ a lot of its loans, or you were up against the same who-is-servicing-me-now problem. But with a broker, there was no question that your loan was getting sold. Repeatedly. Was it really worth the lower rates? And for that matter, how did _adding_ another layer to the chain of people _save money_?

This is where we learn that fundamentally, I am naive and optimistic about human nature.

Did it occur to me that banks operating a wholesale mortgage business wanted the loan origination to occur outside so they could deny responsibility? Hoocoodanode that the borrower was lying about their income? Hoocoodanode that the borrow was lying about their savings? Hoocoodanode that the broker brought different paperwork to the closing than the borrower had expected and then told the borrower they had to sign anyway?

And, best of all, hoocoodanode that the borrower had no understanding of what the ramifications of picking the lowest payment on the Pick-a-Payment loan product were? I mean, just because people like, say, _me_ have a heckuva time understanding this product doesn't mean ordinary people have trouble. They're all, like, _way_ more financially savvy than, say, me. Right?

I learned this because Calculated Risk (the blog) had a little bit about Wachovia calling borrowers that were brought in by brokers to double-check and make _sure_ they understood Pick-a-Payment; Tanta was pointing out that this made no sense, duplicating effort like this, and besides, they were just going to find out what everyone knew all along, which is that virtually no one should be using this product and you aren't going to find the people who _might_ use this product through brokers anyway.

Comments

[ethelmay.livejournal.com]

It never really occurred to me that anyone's loans *didn't* get sold all over the place, so I wouldn't have known where to go to get a loan that wasn't.

R. notes that you can't guarantee your loan won't get sold

[walkitout]

So I'll qualify that the best you could do in my world was to pick a bank where the odds were in your favor.

I think this is another one of those things I knew from (a) my father complaining and (b) temping in the subbasement of Rainier Bank when they were packaging loans up for sale.

Both incidents twenty years ago, give or take. For all I know, _all_ banks sell _all_ loans now. *shrug* Altho when I got my loan around 1997, I picked a bank that had a reasonably high rate of not-selling.

Re: R. notes that you can't guarantee your loan won't get sold

[ethelmay.livejournal.com]

So given a general atmosphere of loans being sold hither and yon, what's the benefit of being an exception? I can see that loans *not* being sold all the time might be better as a general practice, but not that it's necessarily a particular benefit to an individual, apart from minor hassles about changing automatic payments and what not. The only thing I can think of that was ever a problem was finding out that there was a miscommunication between the insurance company and the new mortgage company over how the insurance was getting paid, and that was quite easy to straighten out. (The insurance lady rolled her eyes and said something to the effect of "We always have this problem with X, don't worry about it, I know what to do and you're not in trouble.") If the new mortgage company could change the terms of the loan, that would be a different matter.

Re: R. notes that you can't guarantee your loan won't get sold

[walkitout]

In addition to the benefit you note (hassle of changing automatic payments and what not), there is the hypothetical benefit that if your loan is held by a single lender (as opposed to held by a group of investors), you are more likely to be able to develop a workout/loss mitigation/etc. plan in the event of something Very Bad happening to you individually and/or the market collectively. One of the issues with the sold-to-investors loans is that it is very hard to do loss mit in that context.

Depending on the kind of person someone is, there might be a benefit to their loan being repeatedly sold. Back In the Day, the paperwork used to have to follow the loan around AND be all present and correct in order for the loan to be transferred legitimately (that's what I was doing as a temp clerk in the subbasement). More recently, the paperwork has often not kept up with the computer records. Once a loan is in default/delinquent/etc. foreclosure proceedings involve courts who are Big On the Paperwork. Some borrowers have successfully halted (for months or even years) proceedings because people who are servicing the loans for investors, and the investors themselves, are unable to produce the backing paperwork on the loans.