[quote=UCGal][quote=eavesdropper][quote=bearishgurl][quote=UCGal]
For the life of me (I wasn’t working in RE when this practice became common), I HAVE NO IDEA WHY ANY LENDER (either the one holding the 1st TD or a diff. one) would subordinate themselves to themselves or to the 1st TD holder at the time of purchase and make a 2nd “purchase money” loan (for a dn. pymt. perhaps?) and obtain a 2nd TD (purchase $$ NON RECOURSE paper) from the “buyer” in their “favor.” How risky is that??? It’s effectively 100%(+) financing and makes absolutely no sense at all to me.
These lenders must have been two jokers short of a full deck.[/quote]
I don’t know, bg. Do you think it has anything to do with the fact that about 10 or 15 years ago, banks stopped hiring rather forbidding-looking pinstripe-suited people actually educated/trained in finance, accounting, and risk management, and replaced them all with friendly and approachable 22 year-olds, clad in polo shirts and khakis, who had proven track records in…..SALES?[/quote]
I don’t think the personel at the retail outlets of the banks are the cause – they’re the symptoms. What triggered the lower underwriting standards was the money being generated by writing loans, selling them to the secondary market, bundling them into mortgage backed securities and selling them as investment grade vehicles… Profits were taken at every step – and they wanted more mortgages to feed the MBS beast… pretty soon you barely needed a pulse to get a loan and downpayments… pppht… who needs that. There was little risk to the banks originating the loans since they were sold off as soon as they were written and the borrower only had to make payments for the first 2 years… so underwriting standards looked for 2 years worth of solvency on a 30 year loan.
The khaki/polo clad folks at the bank were a symptom, not the cause. The underwriting standards were lowered by the corporate officers, not the clerks in comfortable attire.[/quote]
UCGal, exactly what I meant, even if I phrased it poorly. I meant no harm or insult to the khaki-clad friendly folk at the banks (actually, they seem to be very nice people). What I was trying to say was perhaps it was when the senior management of the financial institutions decided that their primary (dare I say “only”) goal was to create, market, and sell low-overhead products to the masses. With cheap money available to them courtesy of the Federal Reserve, their message changed from “save for a rainy day” (or kids’ college, or retirement, or a house) to the siren call of “You can have it NOW!” I listened to a lot of classical radio while at work back in the 90s, and I remember being disturbed by the incredible increase in bank advertising, almost all of it having to do with home equity loans. Those ads were alternated with commercials from luxury automobile companies and dealerships, jewelry stores, and high end electronics retailers, almost always with some variation of the line “Never has it been more affordable…” The financial institutions got astounding results for their advertising dollars, and as customers for loans began flooding bank branches, major philosophical shifts were inevitable, and these institutions shed their traditional “responsible stewards of your money” roles and responsibilities, and went after the “real” money to be made in selling loans, thus creating the personnel changes I mentioned. You’re absolutely right: the khaki-clad staff were just a symptom of the fever that had seized senior management.
Problem was that no one at the banks thought to tell the general public that they should be paying a lot more attention to their own money, and perhaps they should also enroll in the MBA curriculum at Wharton or Harvard, because, lord knows, that’s not what we do here at Bank of America and Wachovia anymore.
Believe me, I’m not making excuses for the hundreds of thousands of borrowers out there who are saying that they thought the bank would have warned them if they were taking a larger mortgage than they could afford. Aside from clear-cut cases of predatory lending, most people should have known that they couldn’t afford an $850,000 house on a $70,000 household income. But the while the banks were clearly engaging in the aggressive marketing of loans in the complete absence of responsible lending practices and banking standards, they still presented themselves to the public as sincere, knowledgeable, and skilled stewards of their money.
In truth, the financial institutions had shifted their focus completely, from making profits via sound financial management practices to making astronomical profits from the changing housing market. The guys who had the financial brains and education should have recognized the beginnings of the boom for what it was, but were instead blinded by the money to be had. At that point it became necessary to shed personnel who were skilled in fiscal management and replace them with those who could create new products when conditions that had created earlier boom markets became unsustainable (interest-only mortgages and negative amortization loans are two of them that come to mind) and those who could sell them.
There’s plenty of blame to go around in this mess. But the financial wizards are the ones that were supposed to know better. At least that’s what they told us for as long back as I can remember.
