2008: Lending Practices in Review

For quite a while now, I have been writing articles regarding the mortgage and real estate industry. Just recently I decided to publish them, superseding the apprehension that I may spark controversy with my realistic and unbiased views on the industry and the big players in the sector. As a caveat to this article: this is my honest and humble opinion; this is not to be taken as a factual statement, and is being protected by the right to free thinking and right to exercise free speech and press in any form, be it verbal, written, or via internet.

I have always harped on the fact the big players, such as Countrywide, have always done business the wrong way and have ultimately led us to the turmoil we are in now. Why so? Good question. Well, to point out a few interesting facts:

1. Big players originated the business of selling mortgages, on a grand scale, to Wall Street and other investors. You see, the lending industry began with the concept that you walk into your bank, they know you, you know them, they like you, you like them. Based on the relationship they would lend money. They did so because it was a personal and caring relationship. However, this all changed when the fork in the road was presented. The big players decided to take the road not quite traveled. Subsequently, the lending industry transformed from serving the clients' best interest to serving the lenders' best interest, who now sells mortgages. These big players began selling mortgages wrapped up in pools to investors overseas, who simply believed the high rate of return on these pools of money (hence the concept of global market). This leads to my next point.

2. Big players do not truly give clients the best product on the market. You see, Big players, are in the business of making lots of money. Obviously, everyone is in the business of making money. However, the nice high-rise office, and the company-expensed corporate functions, the commercials with the nice man who mentions "no-cost loans," and the executive Ferraris lined up in the parking lot...who pays for them? Ultimately, the client pays for them. This occurs in the form of higher margins and profits which the clients/borrowers will acquire on their financed money. This leads to my next point.

3. Big players qualify clients at a rate that is higher than the clients originally qualify for. Let's use an example based on John Doe (fictitious name) and C-Wide (fictitious name). John Doe has the option to work with an independent broker/independent banker and also the option to work with a big player named C-Wide. Independent broker/independent banker does not lend his own money, and if he/she does, it is funded by an investor. C-Wide lends its own money, in order to sell it off on the secondary market (also known as Wall Street). Independent broker/independent banker, since not necessarily lending his own/her own money, can really keep John Doe's best interest in mind and look for/capture the best and lowest rate on the market, be it through his own funds or other investor funds. C-Wide initially lends the money and in hopes of selling for a profit, will raise the margin to make it profitable for itself (seller) and the secondary market (buyer). So, independent broker/independent banker finds a source of funds that can deliver a 5% to the client. C-Wide can deliver the same 5%, but since there has to be a profit margin (remember the high-rise office, commercial with the nice man, and Ferraris), C-Wide will raise the 5% to a new 6%. At the end, if the client goes with C-Wide, he/she will have paid more in overall interest than he/she could have captured with independent broker/independent banker. This leads to my next point.

4. Clients often mention: well you are not my bank. Great point! But I ask: what has your bank done for you lately, other than give you a higher rate, sell your loan, and use your payment to finance the high-rise office, commercial with the nice man, and Ferraris? Good question, right?

Readers, the simple point here is that the concept of banking is much distorted in America. During this time of recession, ask yourself who the most profitable businesses are. You may answer: the oil industry, tobacco industry, pharmaceutical industry, and banking industry. What do they all have in common? When I think about it, thoughts of monopoly, manipulation, greed, and corruption all come to mind. Whose best interest is really kept as the number one priority?

Wouldn't you expect an industry that promotes the notion of homeownership for all Americans to have your best interest in mind? Well, since it does not, you should work with an advisor and a company that does have your best interest in mind. And remember, just like anything else in life, if it sounds too good to be true (e.g. "a no-cost loan"), it probably is!

Cheers.