An Insider's Look at the Subprime Mortgage Collapse

A few days ago, I finished reading Richard Bitner's new book - the story of his personal experience in the business of subprime lending:

Greed, Fraud, & Ignorance
A Subprime Insider's Look at the Mortgage Collapse

It's also available at Amazon here.

For anyone interested in learning what it was like during those go-go years of mortgage lending earlier in the decade, this is a very good place to start.

A 14-year veteran of the mortgage industry, Richard owned a subprime mortgage company for the first half of the decade and, at the height of the speculative fervor in 2005, he saw the handwriting on the wall and sold the business.

Eighteen months later, it showed up as #43 on the Mortgage Lender Implode-O-Meter.

This book covers all aspects of the subprime mortgage business from a very unique insider's perspective. Though few realized it at the time, Greed, Fraud, and Ignorance were really the forces driving home prices higher at the time - despite what many were saying back then, a new era of "wealth creation" had not been augured in.

Here's one of the sections I highlighted - this one discussing Ameriquest Mortgage:

In my opinion, this lender (Ameriquest) did more to give subprime lending a bad name than any other company. In January 2006, Ameriquest settled a lawsuit with state prosecutors and lending regulators for $325 million, resolving allegations the company defrauded and misled consumers. While their tactics are now well documented, it wasn't until we hired two former Ameriquest employees that I learned of their practices. They explained how every loan was supposed to charge the maximum fees, interest rates, and prepayment penalties to make the company money. The business model focused heavily on cash-out mortgages, which enabled them to collect front-end fees from the borrower's equity. The "stick it to the consumer" mentality they described to me translated into borrowers being charged, on average, 3 to 4 points in loan origination fees.

Recall that Ameriquest was the Super Bowl half-time sponsor in 2004. Just like Pets.com a few years prior, we should've seen that one coming.

Comments

[Joe]

There is a somewhat related article in editor & publisher:
Where Was Media When Sub-Prime Disaster Unfolded?
If we were long on the edge of "disaster" with a "financial nuclear winter" waiting in the wings, why were American news consumers among the last to know? - March 27, 2008
www.editorandpublisher.com/eandp/columns...
display.jsp?vnu_content_id=1003781122

[tcornelison]

Because no one wanted to believe what was going on. The Ameriquest story was widely reported but no one was paying attention. Everything in the article above was in the news in the coverage of the Ameriquest story but no one cared. Lender's knew what they were doing but didn't care. The public just wanted the loan so they could grab that previously unattainable piece of the American Dream.

By the way, it was unattainable previously because they were undeserving of it. Subprime lending was like amnesty at a price (high rate) for all those people who we, the lending community, knew would eventually stop paying their bills because history always repeats.

[notsosmart]

this will continue to happen as long as no one cares or is listened to while things are good. its part of capitalism & those who know how to work this system will do it time & time again.those not on the inside are busy with the final four etc.over 1 1/2 years ago my wife asked how is it possible to give a 1% loan on 125% of appraised value? i said its not. we still laugh about it today.by the way-who won the game last night?

[jackooo]

I applied for a new mortgage to lower my payments by $70 per month. The mortgage company came out, after assuring me over the phone that there were NO FEES. The representatives and I filled out the paperwork indicating the interest rate and zero fees and they left my residence. One month later they returned and I was to sign the inital contract. The terms had changed indicating that I was to pay up to $12,000 in fees. If I did not read the ENTIRE contract I would of been liable for it. Needless to say I did not sign but imagine if I was trying to purchase a house or I did not read or understand the contract. If purchasing another house I would of signed because the old house was sold and the movers are scheduled and my son was set to start school at our new district, etc. etc.
Wrote to the attorney general of Ca. Not interested. Went to Riverside county district attorney. Not interested. Wrote HUD & Real Estate licensing board. Not interesdted. Wrote to the governor. Not interested. Senators Boxer & Feinstein cannot be bothered. Took the mortgage company to small claims court. Showed the judge where the inital terms had been altered. I still lost the case.
Now the government steps in. The corral is empty. The horses have been stolen.

[drmalaka]

jackoo, that bites, but it tells you about our government. They are not going to do anything as long as money is coming in, regardless of what the end result will be. Now all of a sudden they want to help these scumbags.

The truth is that all these costs were usually financed, not paid up front, so the people getting screwed in the end are the banks. I bet five percent of subprime loans were the closing costs that were financed. The mortgage lenders just stole that money from the banks becuase they knew the people they were lending the money to would never be able to pay the loans back.

Let them all drown in a pool of their vomit. The only thing we should care about is that the government not steal one penny from us to pay these lowlifes off.

[jackooo]

drmalaka
What government? Corruption and complacency from the top down.
Most of the lenders sold their mortgages so the majority of lenders came out good. MOST of the banks sold them to Fredie and Fanny. That's you and me. We did terrible. BUT no one is held accountable. Now the jokes in congress and having hearings. Say what!!!!

[Pepe]

Unfortunately, there is no retribution or amelioration for the unethical but legally defendable business practices perpetrated by the lending community. As Jackoo pointed out, the terms of the mortgage are all spelled out in the closing documentation and must be read and understood before signature. I, as did Jackoo, read my documentation on three mortgage closings during the subprime lending era and ended up with mortgage rates of 4% (5/1 ARM), 4.25%(1/1 ARM), and 5.25% (30 yr Fixed).
With the 17 interset rate hikes of Greenspan and the ensuing rate reductions of Bernanke the ARM rates are now reset at 6% and 5.77% respectively. I mention this to disspell the widespread notion that ARMs are a major cause of our repo problem.
I attribute today's sad predicament of the repossessed borrowers to a lack of knowledge of the home buying and borrowing process, overextension of their resources, and addiction to consumption.
I take no delight in their plight. It's a hard lesson learned and hopefully their next venture into homeownership will be preceded with due diligence.
Unfortunately, the Golden Rule is still the mantra of our economy; "He who has the gold makes the rules".

[Negative carry]

Pepe, enlighten me. Where is this place where those without the gold make the rules?

[cariqunyil]

LOL @ Negative Carry!

[nukldrager]

Negative carry... the place is called nowhere, from the hoary past to the hairy future.

[Regina]

no wonder the person doing my loan was to mean to me. I told him none of those crazy loans, 30 years fixed. he wasn't making ANY money off me. I betcha he wish he had my business now. Crooks and thieves. Are you still a criminal if you sell crack cocaine on a street corner, or you sell a mortgage knowing you are stealing from people. I guess it is the perception of the criminal. Nice suit, nice office, good demeanor sign your life, money and soul away, they didn't look like crooks.