There's an interesting story about the mortgage business on Bloomberg.com today. By interesting, I guess I mean weird. That's what sometimes happens when we try to write stories about our industry for a more mainstream audience.
The bottom line seems to be that subprime ARMs are resetting and some folks are getting payment shock, as predicted. Many folks who may only have qualified for a loan due to lax underwriting standards are now at risk of losing their homes. Delinquency and foreclosure rates are already rising and the industry is attempting to tighten up its guidelines before legislators step in and rain on everyone's parade. A fairly typical story you might have already read a few times in our own industry's trade press.
But Bloomberg speaks to the masses, which must be why the story starts out not with the fact that foreclosures on subprime ARMs rose to 2.19% in the third quarter of last year (talk about a lagging indicator), nor the fact that investors are demanding 1.6 percentage points more than benchmark rates to buy BBB-rated bonds backed by subprime mortgages, both of which were mentioned in the article, but rather the story starts with Prince Jones, Jr.
Mr. Jones is a barber who took out a subprime ARM loan for a $170,000 house in St. Paul a year ago, we're told. We're not given any FICO information (that might confuse a non-industry business person, I guess), but we are told that he has debt and doesn't make much money. I guess we're supposed to assume that he shouldn't have been approved.
Now, Mr. Jones knows he's in a risky situation. The article makes a point of explaining that he planned to use his good payment history to refinance into a new loan before the ARM adjusted. It's risky, but this is America and we often take risks if we believe it will better our situation in the long run. In millions of cases, this same risk has paid off and people who had been renters are now part of the largest pool of homeowners (read American Dream achievers) in history.
Not so for our poor hero. Sure enough, Mr. Jones gets hit by a drunk driver and can't make his payments and gets into trouble. He's still trying to catch up when the ARM adjusts and now he's really in trouble. So, you can clearly see from this story that the mortgage business is in for trouble. There are a lot of bars and liquor stores out there.
I have another story for you. A guy I know--we'll call him Peter--was never all that good at making his payments on time. Nothing serious, mind you, just not what we would call A-paper in our business. He got a subprime ARM and then sold off a big chunk of his business to a foreign investor who just happened to own a lot of media companies in Europe. Overnight his products were all the rage on the other side of the big pond and he couldn't spend his money fast enough.
Like Mr. Jones, Pete planned to go shopping for a new loan before his ARM adjusted and his payments went through the roof, but he never got the chance. As soon as his banker (and insurance agent and financial planner and accountant) figured out he was in the money, he was flooded with low-interest-rate mortgage offers. So, what should this story tell you about the mortgage industry in the United States? Exactly as much as Mr. Jones' story does.
Don't get me wrong. The industry is facing a fairly tough time and more companies will tank as we make our way through it. There were plenty of companies that probably should have tightened up their underwriting standards earlier, but for every 2.1% that went into foreclosure there were 97.9% that paid a whole lot of fees, points and interest for those loans. You don't even have to be an executive in our business to know that means profit.
If you want to tell me that the industry better make an adjustment or face more painful, harmful federal, state and local legislation, then tell me that. Don't try to amuse me with a pointless story about one data point out of millions that doesn't really even illustrate your point. The story could have come in 500 words shorter and more valuable with some good editing.