Dalrymple column: Mortgage lenders dig themselves a hole amid boom times
It seems that in banking we tend to demonstrate our lack of sanity by doing the same thing repeatedly and expecting a different outcome. Mortgage bankers, those who originate, process and fund home loans and, then in one way or another pass that paper on to become mortgage backed securities, are no exception.
I’m reminded of this repeatedly of this tendency toward insanity, as in the instance of the one, two, three failure of three big, but not too big to fail, banks earlier this year. They were big enough: they were the second, third, and fourth biggest bank busts in the nation’s history. These institutions did the same thing that lenders did in the last two banking meltdowns of the past 50 years: borrowed short, lent long, and make loans to borrowers without sufficiently identifiable cash flow to service the debt.
So what have mortgage lenders done to join the crazy club? First, they figured that low-interest rates were normal, just like everybody else from commercial real estate developers to, well, yes, banks, when history shows that low interest rates have been a very rare aberration.
Then, to take advantage of people borrowing to buy or refinance homes with new loans featuring the lowest-interest rates, by far, in the last 50 years, they hired a lot of people and then, as was the case in the years leading up to the Great Recession of 2008, they made devil’s bargains with the most adept and sought after dogwaggers in the annals of commerce. What? Oh, sorry class. I forget that you’re not as versed as I in the esoteric patois of finance (I actually just made the word up).
A dogwagger is the tail that wags the dog. It can often describe Mortgage Loan Originators (MLOs). Don’t get me wrong; I’m not disrespecting these people who work with borrowers to find the best loan for home buyers or homeowners. They’re bright, professional, focused and dedicated. They’re also exceptionally well paid.
There’s nothing wrong with that; but mortgage lenders historically dig themselves a hole in boom times when consumer earnings are high and interest rates are low. It’s all too easy to give away the store to the people who produce the product — mortgage loans — from processors to underwriters and finally to the franchise players, the rockstars of lending, the MLOs.
My memory was jogged when I read a recent Wall Street Journal article about top mortgage companies seeking to claw back signing bonuses paid out to elite MLOs. According to the piece, in a few instances those payments reached a million dollars.
As I read the story it was, as Yogi Berra would have said, déjà vu all over again. The five years between 2003 and 2008 saw a frenzy of loan production on the part of banks and mortgage companies, first to make a lot of money and then to stay afloat; so many of the mortgages went bad that new bad loans had to be made to earn fees for more capital, which was never enough because so many new bad loans were being …
I think you get the idea.
There’s an odd dichotomy at work between the mortgage company and the MLO. The latter is very definitely the employee of the lender, and paid as a W-2 worker, but the loan originator’s focus is on the borrower. Because the MLO doesn’t get paid until the loan is funded, all of their efforts are directed to getting the borrower the loan. So, you might say, the MLO or mortgage broker works for the borrower.
Which is kind of neat if you’re looking for a home loan. It might be added that it’s rather nice for the broker, because all of the risk is with the lender.
Which quite a few banks learned to their sorrow during the Great Meltdown.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is email@example.com
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