AZDuffman's Blog

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Mortgage Greed? Part II--Mortgage Fees and the "greedy" people they supportSeptember 24th, 2013 at 1:13:36 pm
There is always talk of banks and the "fees" associated with getting a mortgage. A residential mortgage will run you about $3,000 or so in fees, more if you pay points to buy down your rate and maybe some "paid outside closing" fees, which you often have to pay even if you do not close.

Lets look at all this "greed" more closely and who the money goes to.

Your first step is to apply for the loan. There may or may not be a fee here. When there is, people often complain about paying $20-50 just to apply then pay more fees and interest. While this might smart, the fact is a mortgage application is not the same as an auto or credit card application. Pulling credit alone can cost $7. The application takes some time to enter, and if it needs to be looked at by an underwriter that person must be paid. The chances that a person will never close the loan are great, so all of this sunk cost may be lost. $50 is probably the real cost to just get your loan moving.

Your appraisal, processing, and underwriting will cost on the order of $200-450 each. $400 for an appraisal? $400 to process the loan? That money must be going to some greedy, overpaid person--right?

Well lets look at things. The appraiser by law cannot be directly chosen by the lender anymore. So he or she is giving a fair chunk of that $400 to the service that hired them. This appraiser is going to be an independent contractor. This means car, gas, license, health insurance, error insurance, and G&A all comes out of their kick. There is no paid vacation and no paid days off. You do not work you do not eat. And there is no steady supply. This week may be booming and next week dead. And while they may just spend an hour at your home taking photos there is another 2+ hours getting comps and preparing the report. More than one appointment has canceled at the door. When work is not steady you simply have to score more when the work is there, and when you are not hiring steady you have to pay rack rate.

The processor does not have life much better. Same deal with feast or famine. The processor may work for the bank as a real employee or may be an indie as well. If they are an employee they need to generate $400+ per day to cover their wages and other costs. If they are an indie they need to have a home office and as the abstractor they must provide everything for themselves with no time off. Realistically they need to generate almost the same $400 per day. One file a day finished day after day is not easy. And they only get paid when the file closes! All the work to get to final underwriting but to be declined is wasted effort and materials.

At every step this repeats. Abstractors and signing agents need to make $75-100 per order because they may only be able to do 2-3 orders a day. And they like all the rest only get paid when they get work. Yes, the life was chosen even if they "backed into" it. This does not change what they need to earn to make a living.

Then there is the salesperson who got the process moving. A very good salesperson gets 3-5 deals a month. This person needs to hold licenses and take ongoing training. 1/8 of a point may lose a deal.

Add it up and of that $3,000 the bank has $1600+ in labor without the salesperson. They may make $1,000 on the front end of the deal, but this is still 1-2% margin only. How many businesses have margins that low?

September 25th, 2013 at 6:16:32 am
Honestly I don't know who is harping about mortgage system greed outside of bundling the mortgages and allowing speculation to get out of hand ... can you cite somebody who is going on about these things outside of the one biggie?
September 26th, 2013 at 3:37:48 am
I have seen comments about all of the "greed" issues I have posted. Earlier I posted how bundling the mortgages and having a liquid market are a benefit to the consumer. Those "speculators" you are complaining about provided the funds for mortgages to be written.

What caused the problem was selling homes to people who could not afford them and eventually defaulted, and this was caused a great part by regulations requiring banks to do so. The regulations were mostly the CRA and laws about "disparate impact" of underwriting policies.

Banks were not totally blameless, Neg Am products helped cause problems, as did accepting inflated appraisals. But the latter was again partly a product of banks worried about their CRA and other ratings. FHA allowed the banks to sell homes with little money down.

My point is that all this talk of banks being "deregulated" is incorrect. Talk of "speculators" causing the problems is incorrect. The problem was caused by government policy encouraging too many loans to too many people who would eventually default. Just because you sell a good mortgage does not insure default, but writing a bad one will.
September 26th, 2013 at 6:56:28 am
>The problem was caused by government policy encouraging too many loans to too many people who would eventually default

I agree, and I have to say I even saw this coming. Oddly enough, I am not in that business.

Just as an example, the Washington Post kept printing articles that tried to make the point that the percentage of loan approvals to minorities was comparatively low and that this proved racism. You'd read the whole article and if you were from Mars you wouldn't realize minorities filled the poverty percentages too. That can be blamed on a lot of things, including racism even, but to say the lenders were practicing racism was an exercise in circular fallacy. Nonetheless, incredibly, this became a cause for government involvement. Clinton and his people were deeply involved but you have to admit George W. Bush did nothing to correct it.
September 26th, 2013 at 2:45:37 pm
Bush made such a half-hearted attempt to correct things it might as well have been nothing. It is a product of race-baiting being allowed. If I had my way there would be no race information collected at all on applications. Too bad the USA has such a fixation on race.

Mortgage Greed? Part II--Mortgage Modifications and why they are not working as plannedSeptember 12th, 2013 at 5:50:24 am
A California City has taken steps to seize underwater mortgages. This comes amid several years of asking why the "greedy banks" will not help keep people in their homes. But lets examine what is involved, what really happens, and why it rarely works out.

First how we got here.

In 2001 the USA was it the beginnings of a natural recession due to the end of a long boom and collapse of the "what were we thinking" dot-com bubble. While high by today's standards, mortgage rates were a historically average 6-8% or so. Then 12 years ago yesterday, the shock of all shocks came and scared the nation about everything.

The Fed cut its discount rate immediately after 9-11 and the era of cheap money started. With the fall in mortgage rates that followed it, housing became more and more affordable. Home buyers are "payment buyers" and instead of pocketing the savings most people bought more house. More and newer. Anecdotally I remember noticing that just about everyone else my age was buying new homes, not older stock. Either custom built or in a new plan. They wound hardly consider anything else. Many new mortgage products from 80/20 to neg-am popped up, being used incorrectly 98% of the time.

Those that owned homes saw their value increase a great deal. The Home Equity Loan industry never saw, and may never again, such good days. Debt was piled on, and everyone simply expected the"prime" rate on their loan. I processed many loans at prime or below. But by 2006 the Fed decided, correctly, that the economy was doing well again and it was time to get back to more normal rates. This was called "taking away the punch bowl." The prime rate went from 4-6%. People were so shook up that I had to explain to my boss' boss that what we were seeing were "normal" rates and late in 1999 the prime rate was about 9%.

But what happened was when mortgage rates went up by 1% the payments on a $100,000 home went up by almost $100 per month. Not only could the average home buyer not buy as much house, the speculators had a harder time carrying the loan. Housing demand proved to be very elastic, and prices declined in some places while crashing in others.

So here we are. Now the call is "keep people in their homes!" But this is the wrong answer. The better answer is "find a way to get them out and into something they can afford." Here is why. Individually there is call to "modify" the mortgages. Jerry Homeowner is six months behind on his mortgage, the bank cannot take partial payment for various reasons, and he is unable to catch up. So he calls the loss mitigation department to work things out.

Most of Jerry's payment is interest and escrow. The bank cannot forgive the escrow, this is money owed in taxes and insurance. Likewise, the mortgage has been sold, as we saw yesterday, so the interest is not the bank's to forgive. But it can all be "recapitalized" and paid in a new loan.

The bank will add up all the interest, taxes, and insurance in arrears from the payments. They take the total and add it to principal owed. The new amount is then recorded with the county and often Jerry will be given a competitive rate at today's pricing. Sounds good? Not to me!

First, Jerry is a deadbeat but is being given among the best rates on his loan. Second, Jerry now probably owes more on the home than he bought it for! I have seen many times where the "new' mortgage is 110%+ the sale price of the home! Finally, Jerry is still in a home he cannot afford! Perhaps he lost his job as an exec at his trucking company, perhaps he never could afford the place. It does not matter. All the other costs of ownership are still there. With his other debts, Jerry can be one flat tire from disaster.

Now, to the city thinking they can just seize underwater mortgages and make a better deal with the homeowners. There is a word for this, "communism." The homeowners made a deal, now they think because it was bad they should be able to change it. If you were a banker, would you ever loan money for a house in this town again? What would stop them from doing it a second time. A

And it is just not right. Banks are people. Would you accept going to the ATM and seeing 1/3 of your funds gone to pay for this? Because if you support it that is what you are asking someone, somewhere to do.

Five years in and still a mess. If we let the foreclosures happen yes, people would have to move. There would be disruption. But I guarantee there would be lines of people waiting to buy the foreclosed units, and make it all productive.

Greedy banks? Not here.

September 13th, 2013 at 2:05:10 pm
>I guarantee there would be lines of people waiting to buy the foreclosed units

I dunno about that.

In any case, I wonder just how great foreclosing is for the bank, too. Why do they want to be stuck with all those homes?
September 15th, 2013 at 4:57:43 am
The banks don't "want" foreclosed homes, but it is a process that must happen when people either can't pay or start refusing to pay. And the later *is* happening as people somehow think they should have their principal reduced to meet the current market value. Or by outright fraud.

And yes, people will line up to buy them. Sharps know when money can be made on a REO house, and non-sharps out there line up because they think, "the banks almost give away the houses because banks don't want to keep the houses." While the later is true to an extent, banks will work to get maximum value from a REO property. Money can be made, but it is not automatic.

Mortgage Greed? Part 1--the secondary market and what the news does not explainSeptember 11th, 2013 at 5:43:33 am
Instead of hijacking a thread for debate, I thought that a few blog posts explaining things might be better. So here we go.

There is all this talk of "greed" and "speculators" on Wall Street somehow costing all of us more money for everything from coffee to gasoline. It has lately even been made into at least one movie, "Margin Call," as it affects the mortgage industry. But is it any more "greed" than any other business?

Lets start with something simple. You are a farmer and will have a crop of corn in August, it is now May. Instead of worrying about the price of corn then you prefer to sell now. Or you want to get some kind of insurance. So you sell the crop at a fixed price now, which is a "future," or you buy the right but not the obligation to sell it at a price, an "option." At the same time, the local corn mill needs to lock in supply, so they want to do the exact opposite.

This is well and god, but what if the mill is not interested the same day you sell? And what if you change your mind? This is where the speculators come in and provide a service. They have a market and say, "show up any day between 12 and 4 and someone will fill your order." So the farmer and mill can watch conditions and buy when either the price is right or they want to hedge their risk. The speculator takes a big risk here. He may live in a condo and end up owning a truckload of corn! But he charges a fee for his services, and it works for everyone. Many small gas stations buy contracts with no intention of taking delivery because the money they make or lose in the market offsets their local contract, and the fuel in their tanks.

Now lets look at mortgages. With the median home near $200,000 it would take the checking, savings, and CD accounts of many depositors to make just one mortgage. And when they did, the bank has a huge risk as if that one loan goes bad then he has to make up the deposits of 200+ people. It will take years before enough comes back to make another mortgage available. Then what if rates rise and he has to pay 6% on the CDs with a loan at 5%?

So he calls up a friend on Wall Street and says, "Help me out!" The friend buys the mortgage from him, leaving him a fee to service it. He can then make another mortgage. Of course, he needs to make profit somewhere, so this is why you have to pay fees and points to get your loan. The banker and the stockholders need to eat and as well deserve a return on their investment.

The Wall Street guy does not want the risk of one loan, so he packages them into many loans for diversification. Again he deserves a fee for his work. The investors there are still worried about defaults so they find another person who, for a fee, will make good on any defaults that happen. All along the line there are risk management people ("math people") who will figure what to charge. If the risk of default is 1% they may charge 1.2%. At each level, risk is reduced.

Now where the problem happened was people got into loans they could not handle. A 1% default rate became a 4% default rate (all these numbers just for examples) and that 1.2% that was charged now became a loss instead of a profit. So that person had no more money to insure the risk. The guy buying the loans would not do so without the risk insurance. So he told the bank he could not take any more loans. Without those funds, the bank could not write any more mortgages. Without a mortgage available, fewer houses could be sold. At the same time, bank profits fell because the income from selling a new mortgage was gone so the bank's stock falls. Then it feeds on itself.

September 11th, 2013 at 6:04:59 am
>Now where the problem happened was people got into loans they could not handle

the ability for that banker being able to get rid of the dubious mortgage he wrote led to the irresponsible lending IMO. People got into 'loans they could not handle' because those loans got approved... the dynamic of caution had always [mostly] been the province of the loan giver, till that time.

Having gone through the process recently I can tell you these banks are being very cautious now, it has all changed. But in the news, it's frustration about Dodd-Frank not getting fully implemented after all this time ...
September 11th, 2013 at 8:27:34 am
A lot of the dubious loans were made based on laws that required loans be made based on location and not on good underwriting principled (Community Reinvestment Act.) You are correct that standards are tighter now. In reality we are just going back to where things used to be.

What has also tightened is UW certification. At one bank the UWs were treated as near gods because as our "ambassador" stated, "we can't find enough people who can pass the UW test as well as the background screen." Bad credit and you cannot be a UW, ditto other things. It can be almost like getting a casino work card.
August 19th, 2014 at 9:21:12 pm
If so many loans were given to those people whom couldn't afford them, then almost all the loans were given to those people whom couldn't afford them, since the prices were inflated. Still not a period to be looked fondly about in American history because it shows so much desperation and lack of wisdom.

Jury Duty--Day 7December 5th, 2012 at 5:45:47 pm
Day 7 is here. I am tired of telling my boss "hopefully it is close." Lets remember that I have spent 1 day on my new job and now 8 at Jury Duty by this point.

The group has mostly said "something happened" and knows we should convict on something. 4 have flipped to convict on the least serious charge. The foreman got a woman who flipped earlier to plea to them why they should switch. They switch, but very, very tentatively. Too much pushing on the other charges may flip them back. Annimated and forceful before, I kind of clam up here so as not to upset them. They are done deliberating, I can tell.

I suggest we go around one more time and state our feelings in a free-form way. Foreman likes the idea. I have the longest statement--it was my idea so not suprising. The hanger goes second and says he will never believe the victim and never change his mind. The "flippers" are kind saying under their breath "why are we even doing this?" They are still in a nullification mode. By now we have acquitted on 2 charges. We get one more free lunch and tell the judge no use going on. As court is still going on we have to wait, again, but this is the last wait, it is over, well almost.


When it is done we get sent to judges chambers. This is when it gets real surreal. Judge comes in and just talks to us like people. Thanks us. 10 minutes ago we could only ask serious questions in writen form--and anything above "I can't hear, can he speak up?" merits writing. Now she is just a person same as us. She even lets us ask questions about court in general. I ask a question about Grand Jury, thanking her adding constitutional things and court interest me. For the first time we can walk out of line to the jury room.

Now it gets really surreal. The "hanger" bolts out, but both attorneys come to thank us. That is fine, but then they ask what we thougtht, where they may have went wrong, things like that. I mean, both of them were there in the same conversation. It was as if we were grading moot-court. It was so casual we might as well been having a few beers.

Prosecuter said they expected to lose. Defense said when we were hung the first time he thought he was toast. I told the prosecuter where and how I had problems, a little less to the defense but just because he had less to correct and he was talking to some other jurors. I told about the "jury nullification" problem and that I was "NOT GUILTY" until the defendant took the stand.

Per PA law this must be retried, the charges may not be dropped. There can be a plea, but some jury will get 8 charges to try sometime in March. If the defender is not public he will keep billing hours. The ADA will keep the case in his file. The judge gets to hear it again. And the wheels of justice grind on.

December 7th, 2012 at 2:51:35 pm
Thanks for writing about this! I have not been on a case longer than a few hours...the defendant copped a plea at lunch time when he realized he was toast and the prosecutor was not quite sure he the conviction...
December 8th, 2012 at 6:03:40 am
Always glad when someone enjoys. I figured this was longer than 90% of what anyone else might have sat on. Thanks for the reply.
December 10th, 2012 at 12:04:33 am
Then let me add my name to the appreciation list. Very interesting and well written, I could've read more.

Honestly, jury duty is one of maybe two things this athiest ever prays about, and it's always that I'll never have to go. 2 for 2 so far ;) After reading, I don't think I'll mind if I get stuck with it.

You said it took longer than anticipated. Did you notice a change in your thought process during this time? Maybe you began kind of black and white, keeping the law in mind, trying to be "professional", did you find a change, like letting jurors comments influence your thoughts, or falling into a "let's just get this over with" state of mind?
December 14th, 2012 at 6:25:11 am
AZ.... I have tried a number of cases...only civil and not criminal...but this was extremely interesting to me. They let lawyers serve on juries here in KC....but I have yet to enjoy the experience myself. Thanks for your service!
December 15th, 2012 at 5:42:46 am
@Face: I noticed a slight change. You start by weighing the facts and who you think is credible. You try to figure "what really happened." When they give you the charges they do tell you some legal things. One of ours was that there is a difference between "deviant" and "deviate." The former is not a legal term, the later is. Another charge involved, "a continuing course of acction, no matter how short...." Now, weigh that!

Notice I remember this stuff a week later, this is how many times we had to read, re-read, and think about it.

In our case we took a day or more to get a format going. There are no "Robert's Rules" in the Jury Room, but eventually you have to have a format. To the "let's just get this over with" thing, we did get to where 11 of us agreed on one charge (see entry) and felt we needed to do something becuse something was done. But I will say we never had a, "lets vote on this, I want to beat the traffic" moment.

My thoughts didn't waver much, but then again I was believe it or not mostly in the middle the entire time. I believed some kind of molestation happened and the mother knew. But I could not say exctly when and how, which knocked out the deviate behavior convictions. I will repeat that three males seemed to have a "there but the grace of God go I" feeling of the guy being charged wrongly and held out on almost everything.

@all: again, thanks for the feedback. To repeat, I seriously enjoy when someone says they liked what I wrote. This was one of the most emotional criminal cases anyone I know has been involved with so your comments make me glad I shared.
January 30th, 2013 at 5:54:02 pm
Every jury is a craps shoot. Newly minted lawyers often have to be reminded, your job is not to win in court, your job is to keep your client out of a court room. I remember being a spectator at one short trial and talking to a few of the participants. Oddly enough I think justice was done that day, but one of the witnesses to the bar room incident was not even there that day (pure perjury), one witness displayed her hands and gestured towards her rings as the defense lawyer was summarizing, thereby improperly presenting evidence to the jury. Just about everyone lied (including one man who said that despite the town having only 150 residents he had never met his son's common-law wife), but over all I think the Not Guilty verdict was proper. I remember this solely because one of the witnesses had worked for famed fire fighter Red Adair and I wanted to shake his hand.

Child abuse cases? I was in California during the McMartin Day Care nonsense and I was in Washington State during the Wenatchee Witchcraft charges: editors and therefore potential jurors will believe anything! The woman who brought the original McMartin accusations was an alcoholic mental patient who accused a local teacher, the Mayor of Los Angeles and The Pope!

Jury Duty--Days 5/6December 5th, 2012 at 5:23:41 pm
Day 5 is here, consolidation prize is by now we are getting the "long term" rate of $24 a day vs the $9 or so for a short-term service. We earn every cent.

By now we are reading and understanding all of the 10 charges. Some are what I later called very "technical" involving body parts and penetration. Others are what I called "broad" meaning broad terms like "endanger." The group is split. Oddly it is mostly split by sides of the table, though that was not planned in any way. One woman is ready for a 100% guilty on all counts, one guy (my lunchmate) is 100% not guilty. I am in the middle, saying I belive inappropriate things happened but maybe not to the level we think.

Lunch is free and not bad, not great but not bad, and free!

One clear issue is some jurors have a major, major concern about sending this guy up for these charges. This is Pennsylvania. This is the state where Jerry Sandusky is still on everyone's mind. The defendant is 57. Conviction on the most serious charges means an effective life sentence. It means he will be branded a "Chester" upon arrival, where his life will be worse than the wreched until his dying day. He could be in the same cell tier as Sandusky--this is Pennsylvania and Sandusky is in a ChoMo unit. None of us takes that lightly, especially the men.

However, justice has two sides. I am one that reminds that there is a victim here, that the defendant has a 12 year old daughter at home, same age as when the defendant stated the abuse of her started. We are deadlocked on most items. We are trying to find rational ways to deliberate as we are reading each charge. they are very instructive as to what must be found in a legal sense.

Eventually we go home.


Debate has taken a turn. My former lunchmate I could once see us being friends, now he is getting tired of me and I of him. He is a holdout who has his mind made up. Fine, that is how the system works.

One charge is "endangerment." It is broad. It is a charge that you can use if you are not comfortable with the biggies, and it is NOT a sex-charge. We have 4 holdouts on it, and they are holding out on not for reasonable doubt, but other reasons. They say "endangering" is not definate, that it is a "fishing" charge, and that "by the way it is worded I could be charged for leaving a butterknife on the table."

I retort that the Commonwealth would throw out something so silly at the arraignement. And that it is not for us to decide the charge, only the guilt. I ask if they would feel better if we got a definition of "endanger" from the judge. They say they doubt it will matter but agree. Turned out it was a waste of time, there is no definition, the judge said *we* make the definition.

We tell the judge we are deadlocked. Some hope that is it. I state there is no way after a 3 day trial the judge accepts the first deadlock, she will send us back. The foreman reminds she can do it as many times as she wants. He and I are of the same mind on this case and the process, even if we do not say so. He will be the last other juror I see when it is over, our cars being the same direction before we part.

Judge does just as he and I suspect. Politely says try some more.
Eventually we can go home. Come back tomorrow, which is Thursday.

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