Writing Shotgun

HOW THE HOUSING, LENDING, STOCK, BOND & CURRENCY MARKETS GOT SCREWED, AND US ALONG WITH THEM

Rachel PowersTue. March 18
 

A Local Example

It’s fall of 2006 and a loan application for $565,000 lands on a loan officer’s desk. The applicant, real estate agent, mortgage broker and loan packager are all from Long Beach, and the home being purchased is located in the 90804 area code. Over half of a million dollars–well, that’s a lot of money, but the loan officer sees on the application that the applicant makes $13,000 per month. The applicant–who is in the US on a green card–has a manufacturing job, but the loan officer doesn’t fret over the details: he’s dazzled by the credit score. The applicant’s credit rating is in the high 700’s, in large part due to his prompt and regular payments to Costco on a wide-screen television. The loan officer doesn’t wonder how it is that someone making $170,000 per year has to buy his electronics on a payment plan. The cascade of zeros in the “Assets” column doesn’t give him pause either. Perhaps the applicant prefers to travel light…

But the applicant’s W-2 statement and pay stubs accompany the application, and they state clearly that the applicant grosses just over $3,000 per month. The applicant’s spouse, who cleans houses, can’t possibly make up the $10,000 discrepancy.

But whatever the disposition of the applicant, the loan officer knows that this loan isn’t exactly unsecured: there is a $550,000 home that can be seized in the unlikely event that the applicant isn’t able to meet his commitments. The house–1,100 square feet fronted by chain-link and squashed between two looming apartment complexes–has been appraised as absolutely, positively being worth $489 per square foot, and the appraiser has the comps to prove it. Loan applications must be accompanied by the details of six comparable sales, and this application has only three. They are also, on average, six months old, which indicates some cherry-picking considering that there were at least fifteen comperable sales in August, September and October alone.  But no matter.

Somehow the loan agent sees his way clear to approve the applicant for 100% financing: a $565,000 interest-only adjustable rate mortgage.

—

The mortgage, appraisal and sale were coordinated by a Long Beach real estate agent working out of a Long Beach office. The applicant’s story is unfolding as anyone could have predicted: currently in default, the homeowner is headed towards foreclosure. Other details are emerging, some of which indicate fraud.

Money is tight. Everything costs more, employers are paying less, credit is almost impossible to obtain, the dollar is in such trouble that currencies which used to be pegged to it are finding shelter elsewhere, corporations are busting like pinatas, and the cost to the US taxpayer is being reckoned in the billions. As for foreclosure rates: well, they’re bad. In 2007, 1.3 million properties went into foreclosure in the US, a 148% increase from 2005. In California…are you ready?…249,513 properties went into foreclosure, up 681% from 2005.

And now you know how we got there.

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