The Moral Hazard and Choices of Mortgage Lending
Lance Brofman's, The Federal Budget Outlook and Implications for the SP500 spawned this comment from Moseharper: "As a former mortgage lender for 30+ years- yes- you were basically forced to make such loans. I doubt from your comment you were ever a mortgage lender, a consumer loan lender or a federal bank examiner. Yes- many banks did not get in trouble - simply because they were located in areas where deposits did not come from targeted census tracts."
We Nattered: the only "forcing" was making sure management made their quotas and got their quarterly bonus... and if they had not already, when the shit hit the fan, like the parasitic frat boy country and yacht club vermin they are, they quickly moved on to the next viable sucker or victim. The failure was due to: a lack of risk mitigation, led by absurd underwriting standards for insane loan products, begat by a change in the model: originate to sold, rather than to hold. leading to a total disregard for downstream portfolio consequence, repeat and rinse.
Mose responded: "You're getting it. I was not too popular in my bank, as I was against all this nonsense since the early 90s. Sell, sell, sell was the constant topic. This would not, could not have occurred without the GS Act repeal. There were only portfolio loans at one time, and then it went absolutely nuts when "everyone was entitled to a home."
After reading some of our blog posts Mose comments: "You make "managing your risk" sound so simple. It wasn't. I doubt CRA was a problem for the Beverly Hills Bank & Trust, but was likely a different story at the Watts Savings Bank.
Bank examiner: You have a large deposit base in CT 43 but yet not mortgage loan. Why?
Bank Officer: We had no qualified applicants from that CT.
BE: Well, you better FIND some or you won't be making ANY loans any more.
A simplification, but the truth nonetheless. Bankers live in the real world, not as commentators from the sidelines."
The Nattering One muses: Mose, I don't know where you worked or when, IMO sounds like you got a full dose of the 1998 - 2006 run up, replete with Home Mortgage Disclosure Act (HMDA) and U.S. Federal Financial Institutions Examination Council (FFIEC) "oversight".
As for redlining (which caused urban disinvestment), reverse redlining and predatory lending, I want to make one thing perfectly clear, I did not personally have the dis-privilege to participate in excluding or targeting minorities with sub prime vs prime... read overpriced (origination fees, pts and rate bps) and "fog a mirror" (stated) to qualify, "no skin in the game" (low/no down) or stretched 120% LTV product. Let me emphasize, this was a personal choice and made me somewhat unpopular as well.
Mose comments: "You make "managing your risk" sound so simple." Risk mitigation is common sense in knowing when, where and how to draw the line. The science is proactive, the art is reactive. If you don't let bank examiners influence your lending policies or disintermediation, deregulation, forbearance or securitization override your common sense with greed, then you don't wind up in moral hazard by making unsound and imprudent lending choices. And like anything else in life, that's what risk mitigation is, sometimes making hard choices, but the right choices, and let me emphasize, regardless of moral hazard.
Rinse and repeat..Trebek queries: This new paradigm played a major part in the demise of localized mortgage lending. Answer: What is originate to SOLD, rather than to HOLD. In this new paradigm, when one borrows from their neighborhood lender, oftentimes that local bank does not make the decision about whether to extend credit or hold onto the loan once it is made. In reality, since loans, and their attendant risk, are sold on the secondary market, borrowers no longer really acquire loans from their neighborhood bank. This circumstance has created a disconnect between borrowers and the holder of the mortgage loan, usually a TBTF or investment bank. Again, moral hazard and choices.
"Bankers live in the real world." Thats why the brown shoed boyz that ran the banks and S&L's I worked for in the 70's/80's and consulted for in the 90's/new millennia, created asset liability mismatches by using short term funds for long term loans and later, had wanton disregard for downstream consequences of their securitized loan portfolios. Again, moral hazard and choices.
Coming back to your simplification, some of these country and yacht club denizen's actually allowed policy to be influenced by federal and state examination and supervisory staffs (oversight and lender) who were grossly insufficient in number, experience, or competence to deal with lending operations in such an environment.
In your simplification, I don't know if you refer to the Fair Housing Act, the Equal Credit Opportunity Act, or the Community Reinvestment Act, as these were given lip service and hardly enforced. I do know this, where there were deposits to be lent, nobody had to hold a gun to anyone else's head. If Watt's didn't want to lend there, Beverly Hills would and vice versa. During the 1998-2006 runup, redlined neighborhoods, which are to this day under served by traditional lenders, were new markets for subprime lenders. The choices to lend in those targeted census tracts were made only because, they were backstopped and it was profitable to do so. Again, moral hazard and choices.
Having worked every phase of loan servicing and origination, 1st and 2nd TD's and consumer loans, IMHO, blame for the MBS fiasco should not just go to the lending institutions but also those who profited in the supply chain: investors, speculators, flippers, realtor's, escrow, title, appraisers, mortgage brokers, secondary market participants and loan servicer's. Again, moral hazard and choices.
As happened in the transportation and in particular, trucking industry, when deregulation hit, lending management literally and figuratively got caught with their pants down around their ankles, because they were too busy making bonus and hitting the links at the country club to line up their next employer to bed hop with. Yeah, we know all about their special brand of "reality", and the choices they tend to make, which later, we all wind up paying for, as they sail by whilst giving the "princess wave" from the deck of their yacht named "Bad Choice 4 U" with a dinghy named "Moral Hazard".
We Nattered: the only "forcing" was making sure management made their quotas and got their quarterly bonus... and if they had not already, when the shit hit the fan, like the parasitic frat boy country and yacht club vermin they are, they quickly moved on to the next viable sucker or victim. The failure was due to: a lack of risk mitigation, led by absurd underwriting standards for insane loan products, begat by a change in the model: originate to sold, rather than to hold. leading to a total disregard for downstream portfolio consequence, repeat and rinse.
Mose responded: "You're getting it. I was not too popular in my bank, as I was against all this nonsense since the early 90s. Sell, sell, sell was the constant topic. This would not, could not have occurred without the GS Act repeal. There were only portfolio loans at one time, and then it went absolutely nuts when "everyone was entitled to a home."
After reading some of our blog posts Mose comments: "You make "managing your risk" sound so simple. It wasn't. I doubt CRA was a problem for the Beverly Hills Bank & Trust, but was likely a different story at the Watts Savings Bank.
Bank examiner: You have a large deposit base in CT 43 but yet not mortgage loan. Why?
Bank Officer: We had no qualified applicants from that CT.
BE: Well, you better FIND some or you won't be making ANY loans any more.
A simplification, but the truth nonetheless. Bankers live in the real world, not as commentators from the sidelines."
The Nattering One muses: Mose, I don't know where you worked or when, IMO sounds like you got a full dose of the 1998 - 2006 run up, replete with Home Mortgage Disclosure Act (HMDA) and U.S. Federal Financial Institutions Examination Council (FFIEC) "oversight".
As for redlining (which caused urban disinvestment), reverse redlining and predatory lending, I want to make one thing perfectly clear, I did not personally have the dis-privilege to participate in excluding or targeting minorities with sub prime vs prime... read overpriced (origination fees, pts and rate bps) and "fog a mirror" (stated) to qualify, "no skin in the game" (low/no down) or stretched 120% LTV product. Let me emphasize, this was a personal choice and made me somewhat unpopular as well.
Mose comments: "You make "managing your risk" sound so simple." Risk mitigation is common sense in knowing when, where and how to draw the line. The science is proactive, the art is reactive. If you don't let bank examiners influence your lending policies or disintermediation, deregulation, forbearance or securitization override your common sense with greed, then you don't wind up in moral hazard by making unsound and imprudent lending choices. And like anything else in life, that's what risk mitigation is, sometimes making hard choices, but the right choices, and let me emphasize, regardless of moral hazard.
Rinse and repeat..Trebek queries: This new paradigm played a major part in the demise of localized mortgage lending. Answer: What is originate to SOLD, rather than to HOLD. In this new paradigm, when one borrows from their neighborhood lender, oftentimes that local bank does not make the decision about whether to extend credit or hold onto the loan once it is made. In reality, since loans, and their attendant risk, are sold on the secondary market, borrowers no longer really acquire loans from their neighborhood bank. This circumstance has created a disconnect between borrowers and the holder of the mortgage loan, usually a TBTF or investment bank. Again, moral hazard and choices.
"Bankers live in the real world." Thats why the brown shoed boyz that ran the banks and S&L's I worked for in the 70's/80's and consulted for in the 90's/new millennia, created asset liability mismatches by using short term funds for long term loans and later, had wanton disregard for downstream consequences of their securitized loan portfolios. Again, moral hazard and choices.
Coming back to your simplification, some of these country and yacht club denizen's actually allowed policy to be influenced by federal and state examination and supervisory staffs (oversight and lender) who were grossly insufficient in number, experience, or competence to deal with lending operations in such an environment.
In your simplification, I don't know if you refer to the Fair Housing Act, the Equal Credit Opportunity Act, or the Community Reinvestment Act, as these were given lip service and hardly enforced. I do know this, where there were deposits to be lent, nobody had to hold a gun to anyone else's head. If Watt's didn't want to lend there, Beverly Hills would and vice versa. During the 1998-2006 runup, redlined neighborhoods, which are to this day under served by traditional lenders, were new markets for subprime lenders. The choices to lend in those targeted census tracts were made only because, they were backstopped and it was profitable to do so. Again, moral hazard and choices.
Having worked every phase of loan servicing and origination, 1st and 2nd TD's and consumer loans, IMHO, blame for the MBS fiasco should not just go to the lending institutions but also those who profited in the supply chain: investors, speculators, flippers, realtor's, escrow, title, appraisers, mortgage brokers, secondary market participants and loan servicer's. Again, moral hazard and choices.
As happened in the transportation and in particular, trucking industry, when deregulation hit, lending management literally and figuratively got caught with their pants down around their ankles, because they were too busy making bonus and hitting the links at the country club to line up their next employer to bed hop with. Yeah, we know all about their special brand of "reality", and the choices they tend to make, which later, we all wind up paying for, as they sail by whilst giving the "princess wave" from the deck of their yacht named "Bad Choice 4 U" with a dinghy named "Moral Hazard".
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