There are a lot of pieces to my story, a lot of things that bring me here and make me want to laugh and cry—and fight—with all of you. But I want to spend a moment talking about the mortgage crisis from the perspective of someone who was in the business at the time.
I worked in retail banking for nearly eight years, from 1997 to 2004. I did just about everything you can do in a client-contact retail banking environment. I originated mortgage loans. I originated, processed, approved and closed consumer loans from home equities to boats and everything in between. I handled deposits and sold annuities. I dealt with bonds and audit issues and participated on committees that advised different banking issues from a retail perspective. I am not an economist, and I put paid to the business sector four years ago and will never return. But anyone with two brain cells to rub together and create a spark should have known that no good could come of the "irrational exuberance" in real estate lending.
I'm not going to explain mortgage-backed securities or the function of the Fed or theorize about the behavior of the market.
I'm just going to tell you what I saw, and what I did.
When I started in banking in the spring of 1997, rates were high. At the bank that I worked for, I saw the portfolio loan (a loan that is retained in the bank’s portfolio, not backed by Fannie and Freddie and sold to investors) rate hit ten percent. One of the loan originators in my office offered her first-born child for a good-looking refinance application at a branch meeting. We brought in all kinds of deposits and did zero lending for awhile—that’s the nature of the beast.
Those of you who are up on this, forgive me for simplifying, but there are a lot of people who don’t really understand how this works and I want to make sure everyone is with me. And those of you who are up on this, if you wish to correct me in the comments, please do—as I said, I am not an economist. This is only the perspective of someone who lived through it inside the industry.
In 2001, two things happened in inverse proportion that created this perfect storm on the lending side. The first was that rates fell to historic lows. Between January 2001 and June 2003, the Fed funds rate—the rate the Fed charges banks on its money—fell from 5.5% to 1.0%. That’s what determines the prime rate. Mortgage rates aren’t tied directly to the prime rate, but credit cards and home equity rates are. And mortgage rates were historically low as well. Low rates... lots of consumer borrowing... lots of consumer spending... it’s a good thing.
The second determining factor is that the real estate market went bananas. Housing values appreciated steadily. People became house-rich in a very short period of time. In the small town that I lived in, my grandmother lives in a house she bought in 1956 for $17,000. When I started in banking, I bet it was worth about $85K. In 2001 she told me she was thinking of selling it for $100K, and I showed her comparable sales in the area that showed that her little house could be worth no less than $210K. She decided not to sell, because taking that much money for "that tiny little house" was "wrong." The point is that the real estate market was working overtime and offering people an unbelievably fast and lucrative return on the biggest investment of their lives. Also a good thing.
For a while.
When things are that good, there is always an "and then."
And then I started to see some things that scared me. I have to say that I worked for a good bank, a smart bank, that knew how to handle itself—but I had a lot of contacts local to me who started to give me the willies.
All the people who hadn’t owned homes during the initial boom wanted them. And no one had much to put down. We wrote so many Maine State Housing and Rural Housing and Federal Housing Authority loans that the programs ran dry. We wrote a lot of loans to people who put 3-5% down and paid through the nose for private mortgage insurance—required by Fannie and Freddie in the event that a borrower has less than 20% of the purchase price of a home to put down. A lot of those people knew it would be tight, but they figured that values would increase and in six months they would be able to refinance out of their PMI. The bank that I worked for dealt with only A paper—loans to borrowers with assets, and clean credit histories, and verifiable income. We had one no-doc program, but at a cost of 2 or 3 points at closing and a percentage point on the rate, most people were willing to provide me with tax returns and paystubs. But I also had ten lenders in my rolodex who had more loans available than I did, so I was able to refer borrowers we wouldn’t touch to Jim at Mortgage Company X or someone like him... someone who would write a loan for a three-bedroom cape to a stray dog to get his commission.
You see, it wasn’t just the people who wanted these homes. Mortgage lenders, working on commission, wanted the people in them too. During the initial phase, commissioned loan originators got used to their lifestyles. I was once invited to a party for a mortgage originator who was celebrating an $11K commission check. That would be a biweekly check. And we’re talking about a relatively small New England area.
Rates continued to fall, and people continued to refinance. People who had been a little overenthusiastic—or deeply overenthusiastic—with their credit cards starting refinancing or taking out home equity loans to consolidate their debt. People realized they had more equity than they’d ever dreamed, and they bought boats and SUVs and campers with their low-interest home equity lines of credit. I had clients for whom I increased home equity lines six times... or more. I had clients for whom I refinanced loans against rental properties three or four times. Business was still good. But I became aware that it couldn’t continue—it couldn’t last forever.
I got out of the business in 2004, when I was pregnant with my second child. AT the time, I had four kids in the house, and I took a part-time job in municipal government to get out of the race and spend more time with my battalion of children.
But there were a lot of people who stayed in the business... and the business started to change. Truthfully, the change started before I left, but my old cronies have told me that it got much worse. At first, it wasn’t anything you could put your finger on. But as time passed, the patterns became painfully obvious. Mortgage companies were lending to people who didn’t have the credit history or the income to support the houses that they wanted. People ran up their home equity lines and refinanced again and again. And when rates climbed, people lived with it for a while... and then found that they wanted to get off the merry-go-round. It was the real estate equivalent of the dot-com bubble. It was still years away from the point at which juggling investors dropped the ball, but it was obvious—at least to me—that it was coming.
And frankly—if it was obvious to a 25 year old girl from Maine with no formal education in economics, it should bloody well have been obvious to a lot of wiser and more experienced people. And I cannot explain to you why the people who are supposed to guard us against this kind of catastrophe stood by and watched it happen, except to say that money talks.
I did see my bank take some action. Our 100% loan to value—no money down—mortgage went away. Then our 100% LTV equity loan went away. Eventually, the 90% equity went away too. Our consumer lending division wrote a new policy—for people who wanted to refinance a home equity within one year of closing, we had to use the appraised value of the original loan. It was billed as a cost-saving measure, because the net interest margin (the difference between what a bank makes on deposits and what it pays investors) on deposits had gotten so small that we had to be careful about the money we spent on everything we did. But looking back... I have to wonder if there was more to it than that.
Now I’m out of the industry, but I see what’s happening. The loans were packaged and sold to investors who were hurt by record defaults. The insurance companies who had to pay for it—remember that private mortgage insurance I talked about?—were hurt too. I swear before God and fellow Kossacks, I did not know how big this was going to get—I didn’t understand the enormity of the problem. I would have driven to Washington with my hair on fire if I had for one moment understood the enormity of the problem. But I—and everyone else in the industry—remained silent. And I can’t express how deeply sorry I am that I didn’t step back and take a look at reality.
There’s more coming. When rates started to climb, many people took out adjustable rate mortgages in order to get into homes they couldn’t really afford. Those loans are going to adjust and promptly default. And, as the net interest margin turned into something you needed an electron microscope to find, banks started turning to their new investment divisions to make some money for the shareholders. Because, you see, if you buy a CD, all the money the bank makes is in that net interest margin... but if you go in and talk to the bank’s investment advisor from the affiliated investment firm, you pay a fee for those services. So there are a lot of people who invested—with the bank investment companies and with independent firms—in the very companies that are now failing because of the mortgage crisis. Those people were just looking for a better return on their money than was available in a five year CD, but because of the problem created by the financial sector, those same people now stand to lose. It’s a cyclic, awful mess.
For the part that I played, for the loans that I wrote that I knew could be bad news and for the loans I referred to Jim at FlyByNight Lenders, for the little old ladies that I sent to the investment counselor believing that I was doing them a favor... I am sorry. I am so sorry. I was only doing my job. For whatever it’s worth, those couples in too-big houses, those blue-collar workers who bought boats and went on deluxe vacations on money I helped them to borrow, those parents and seniors and working people I sent to the investment company who could be in trouble now—they keep me up at night. I loved being in banking when I thought that I was helping people--it was rewarding to help families move from apartments into homes, or to secure a real retirement income for a senior living out of a savings passbook at a half-percent interest. I know I did a lot of good. But it appears that I had a hand in hurting people too.
If anyone stayed with me through this diary, I appreciate it. It feels good to tell the story, and I hope it helps some of you to see the issues from a real-America perspective. I didn’t work on Wall Street, but on Main Street, where the people are hurting now.