dollars on the backs of hopeful home buyers who couldn't actually afford the 100% mortgages they were getting.For a small window of time, I was part of the fun.
After I graduated from Northeastern University in 2002, I scored my first full time reporting gig at the Sentinel and Enterprise in Fitchburg, MA (a.k.a the armpit of the Commonwealth) earning a fat $18,000 a year. The editor worked us lowly reporters to the bone for peanuts every day, so after about a year I moved to a newspaper in Providence for an increase in salary - about $30,000/yr. Of course, supporting myself and paying back $40,000 in student loans on that salary still didn't cut it, so I moved to the dark side; I became an account manager for a subprime lender called SouthStar Funding.
My friend Stace already worked for them as a sales rep, and her boss was recruiting big time so they gave this inexperienced gal an interview. Actually, it wasn't a real interview; Stace and I met SouthStar's Northeast Regional Sales Manager at a bar in Providence called the Hot Club for drinks, and he hired me pretty much on the spot.
He said I would make about $80,000 a year as an account manager. That was about a $50,000 pay increase, so it was a no brainer for me.
Looking back, I shouldn't have taken a job from someone who interviewed me at a bar, especially from someone who proceeded to get drunk. And the fact that he tried to convince us to go to some local strip clubs with him should have been another red flag, but I was young and broke and blinded by dollar signs, so I ignored the glaring lack of professionalism. (We didn't go, by the way).
My first real day on the job I took a call from a mortgage broker whose loan was tied up in underwriting. She wanted to close a loan that day and was screaming and swearing at me over the phone. I told her "it isn't wise to scream at someone who can help you," and she eventually calmed down. The other girls in the office commended me for handling her so well and said I would do great there, since dealing with screaming brokers was a big part of the job. It served as a glimpse into what I would deal with just about every day.
Besides that hell, working at SouthStar, and most mortgage companies from what I heard, was a big party because most people were making tons of money. There was even a refrigerator in our Connecticut office full of beer, and many days I could hear the regional sales manager cracking the first one open at about noon. There was also a beer fridge in the Ohio offices where I trained for the job. I thought this is crazy, but what a cool place to work.
I quickly realized that the brokers and most of our sales reps were motivated by money and had no regard for whether or not their clients could actually afford their homes once they got them. They let greed guide their decisions.
I would imagine most of them had to were ski masks to their closings, because they
were robbing home owners blind. Most brokers wanted to add two to three points (1 point is 1% percent of the total loan). SouthStar only allowed brokers to add up to two points on the back of a first loan, and some brokers didn't work with us because of that. Other companies let brokers add points on the front of a loan and on the back, so they could charge four points on a $400,000 loan and earn $16,000 on it.Most of the loans I had to pre-approve were from people with credit scores of 620 or below. If they had a 620 score - which means they had lots of delinquent accounts on their credit report - they could "state" their income and get a 100% loan in the shape of an 80% first mortgage and a 20% second. Of course, with a low credit score their interest rates would be sky high - maybe 9% on the first and 14% on the second loan.
So a potential homebuyer could 'state' that their income as a convenience store clerk was $75,000 a year, and as long as that salary was within 15% of the earnings listed on a site like Salary.com, we would accept it. Often times, the mortgage brokers would coach the home owner and tell them to state their income as a "manager" instead of a clerk to get away with more income, but our underwriters would find out and the loan wouldn't get through. The 'cool' underwriters would throw that false employment information away and let the mortgage broker come back with something more reasonable.
So, say a Wal Mart cashier wanted to buy a $275,000 home, and their credit score was 640. The broker would state their income higher than the $22,000 Salary.com listing, and then add someone else to the loan who would supposedly be living in the home with them, so that person's income could be counted as well.
Of course, our underwriters knew these tricks and killed a lot of loans, but they also let plenty of them slip through.
SouthStar allowed people to break a 100% loan into two parts so a buyer could get 100% financing and avoid having to pay Mortgage Insurance, which was required on loans over 80%. So on a $200,000 first loan and a $75,000 second loan the interest rate might be 8% and 13% respectively, which equals $1,467.53 a month on the first mortgage, and $ 829.65 a month on the second.
With a 640 credit score they also had the option of paying interest only for up to ten years. Many people used this "perk" because they couldn't actually afford the home they bought at the income they really brought home.
Brokers would tell the home buyers to refinance when their interest only period kicked in to avoid paying the full payment if they had to.
These 100% mortgages were popular because it gave people who couldn't afford a home access to the American dream. Unfortunately, the subprime lenders giving them these loans didn't give a damn that the dream was built on quick sand.
After a year and a half at SouthStar, I couldn't stand being there anymore. Besides the fact that I hated doing mortgages and dealing with angry brokers everyday, I wasn't making what I expected. I was an account manager for the top sales team in the region, and I barely made $50,000 a year - about $30,000 less than I was told.
About three months later in April 2007, SouthStar Funding closed down along with a number of other lenders because investors stopped buying pools of crappy loans they were selling. I got out just in time.
A year later the subprime mortgage collapse has hit banks we thought were bullet proof, like has Fannie Mae, Freddie Mac, and Lehman Brothers.
Now the government is asking us to forgive the greed of subprime lenders and bail them out with $700 billion of taxpayer money. What about the people who were given a mortgage they couldn't afford? Are we bailing them out as well? No.
The bailout plan didn't pass yesterday, and the Dow Jones plunged a record 777.68 points, losing $1.2 trillion dollars.
One of the main reasons the plan wasn't passed is because we don't know if it is a good idea; many analysts say it isn't. President Bush says it is imperative for us to pass the bailout plan quickly, but he also said there were weapons of mass destruction in Iraq and sent us to war there. Fool us once, shame on you, fool us twice, shame on us.
Generally, the American people don't want to bail out private companies. If there is a bailout plan, it needs to be in the form of a loan that us tax payers will make a large return on investment (ROI) with, the same way these mortgage lenders made interest on the backs of people who couldn't afford the loans they were approved for.
Former President Bill Clinton was on The Daily Show last week and he made some good points about the plan. A strong ROI on the $700 billion bailout was one of them. He also said there should be a moratorium on foreclosures; those loans should be reviewed and re-written to avoid foreclosures. This would be less expensive to America than a foreclosure. Makes sense.
The bottom line here is that our economy is in a lot of trouble because of the mortgage industry was drunk. Now it is time to pay the piper, and they want detox help from the taxpayers. I'm not buying it.
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