Subprime Loan Proposal, Plus Some Thoughts on Brand

I am just fine with prosecuting mortgage brokers for fraud  who deliberately misrepresented the payments and risks of the loan products they were selling.  However, to be fair, we must then also prosecute borrowers and home buyers who deliberately misrepresented their assets and income to lenders, actions that are equally fraudulent.

Or, we could just let the whole foreclosure and bankruptcy system sort everything out and let bygones by bygones. 

Interestingly, it seems to be advocates for borrowers who want to stir the whole fraud thing up and are reluctant to just let the system play itself out.  I find this odd, for a couple of reasons:

  • Fraud by lenders will be hard to prove, since they all are covered by written disclosures that I am sure reveal all the terms of the loan.  The government itself has designed a number of written disclosures lenders must use  [by the way, if reformers want to start somewhere, they might begin with these government disclosures.  My experience is that they are silly and uninformative, and were put together by someone in the government who does not actually understand loans].  Fraud by borrowers, on the other hand, should be dead-easy to discover - they signed their name to an income statement and list of assets and liabilities which are quite easy to check.
  • The current foreclosure and bankruptcy system is pretty fair to borrowers.  In particular, in the case of subprime loans where the borrower has little equity, foreclosure costs almost nothing in current dollars - all the loss is on the bank, with absolutely no come-backs on the borrower in the future.  The borrower must endure years of difficult credit and rebuilding trust in the system, but that is the kind of minimum cost we should expect a foreclosure or bankruptcy to carry.  We always seem to get worked up about foreclosures, because we have this picture of someone losing a home they have lived in 20 years and losing all their equity.   But in these subprime cases, where the buyer has been in the home only a few months and put in virtually no equity, I think our mental picture of the costs, at least to the borrower, of foreclosure are overblown.

As an aside, I am easily convinced that there were many mortgage brokers offering their customers atrociously bad deals and rates.  I can't imagine personally not shopping around for mortgage rates from multiple suppliers, but there are clearly people who want to walk into one guy's office and buy something from that first person.   And a number of these people chose to do business with firms that gave them really poor service (if service is defined as getting the best possible loan for the buyer).  Which gets me to the subject of branding.

I know that there are a lot of folks, particularly on the left, who hate large corporations and national brands, but to a large extent the uneven and unpredictable quality of mortgage brokers may be due to a lack of national players and national brands in mortgage brokering. 

Mortgage brokers, stock brokers, and real estate brokers are all licensed by the government.  By statist thinking, that should be enough to ensure quality.  But while stock brokers and real estate brokers can be independent, most of them have organized themselves into groups under a brand name (e.g. Merrill Lynch or Century 21).  Few such national brands, if any, exist in mortgage brokering.

These brands exist because they have proven themselves useful and valuable to consumers.  Presumably they communicate some form of quality or reliability or capability beyond the level that having a government license affords.  This is not necessarily a gaurantee of perfection, of course.  Certainly Merrill Lynch brokers, form time to time, have been accused of fraudulent behavior.  But Merrill has been very fast to act on these occasions, taking actions designed to save its brand from being tainted.  It is this incentive, plus the history such brands carry in the collective memory, that gives consumers extra confidence to use brokers with these brands rather than individual practitioners.

If I was a contrarian with a load of money and a knowledge of mortgage brokering, I might be thinking about building a Century 21 or Remax-type brand in mortgage brokering.


  1. Erik The Red:

    There were a few, like Countrywide. I think the biggest problem was that there was no disincentive for the mortgage brokers to create crap loans. Everyone had legally CYA'd themselves to death, and the stupid morons who bought these loan packages are left holding the bag (or house, as it were). I don't use the phrase "stupid morons" lightly (well, that's not entirely true), but it does fit here. Anybody who understood how these things worked could see the train wreck coming (my brother-in-law who's a mortgage broker for one), and anyone who was going to drop a few $Billion in this sort of security should have understood it backwards and forwards and upside-down. These days Wall Street is ruled by the Quants who allegedly take pride in looking at things at a purely mathematical / statistical point of view with no attention paid to the underlying fundamentals. Wall Street handed the keys to these fools and deserves all of the pain they get as a result. That's not to say there's no value to the ultra-eggheaded analysis, but it should be tempered with a little bit of "been-there, done-that" reality check.

    But back to my original point - the brokers were just selling a product by the rules put forward by the people who created the product, and got paid everything up-front. Yes, they were doing a great disservice to their customers when they sold them loans they couldn't afford and most of them deserve to go out of business. The loan products existed, though, and as long as they existed somebody was going to sell them. This has happened before - if somebody sets up a system where people get paid for the initial transaction and suffer no consequences for problems in the long-term execution, you'll get a bunch of scam artists cranking out as many transactions as possible.

  2. Anon E. Mouse:

    re: Branding.

    You got it on the nose, C. Trademark law is an amazing thing.

    Chinese toys with lead? From Mattel? ha! Stop buying Mattel!

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