Hey, Mark...Old Buddy, Old Pal

{This is my second submission in a weekly series on the financial crisis here in America. I want this to be an honest account of why we are where we are based on my tiny perspective of the mortgage/housing debacle.}

Have you ever had someone call you and pretend like they knew you? You know, like you're long, lost buddies? I'm sure most have y'all have experienced it at one time or another. But usually, it's because someone is making a telemarketing sales call. (I wish I could send an electric shock through the phone to telemarketers. Oh well.)

I get just as many telemarketers calling me as the next guy. But how would you like to have mortgage companies calling you...offering you appraisal business...but doing it just like the smarmy telemarketer? After a few dozen of those calls, you want to go take a shower.

Well in case you just woke up this week, America is in the middle of a huge financial crisis. Part of the problem has been subprime mortgages which are now in default. Subprime mortgages were mortgages offered to borrowers who are typically higher risks to repay the loan. The folks could have had bankruptcies, had a history of slow or no payments on loans, or simply had limited credit history. Enter the subprime lenders. Take my word for it, dealing with them was like dancing with the devil.

Let's take this hypothetical example of what would happen once a risky borrower contacted the subprime lender. A borrower, Joe Sucker, is having problems making payments on his house, on his new truck, and is maxed out on four or more credit cards. Sucker recieves a letter in the mail from Unethical Lending. The letter offers a low mortgage rate and a promise to help him out of his current troubles. So Sucker calls Unethical Lending. Unethical takes financial info from Sucker and this is a synopsis:

Mortgage on house: $80,000
Loan on truck: $15,000
Credit Card A: $ 5,675
Credit Card B: $ 4,450
Credit Card C: $ 6,800
Credit Card D: $ 3,500

Total: $115,425

Unethical immediately picks up the phone and calls an appraiser. The conversation might go something like this:

UL: Hey, Mark...how have you been, buddy? Remember, you helped me on one about a month ago. Man, you did a great job on that last one...really fast. Thanks! Hey, I think I have another one in your area. Before I send it, do you think you could pull some comps? (Let me take this opportunity to explain that "comps" are similar sales in a neighborhood that are used on appraisals to determine market value. When a lender calls for comps over the phone, they want the appraiser to determine the value of a house without ever looking at it. They "fish" for comps so they can determine if they can get enough value out of the house to cover Sucker's loans before they spend any time on the case.)

Mark: Well, I don't give comps over the phone. That would be similar to you calling your doctor and asking him if he thought you were running fever. I can tell you what sales have closed in a neighborhood, if that'll help you.

UL: Yeah, well Mr. Sucker's house is located on 123 Low Demand Street and he said he just renovated the whole house. He's got 2000 square feet in it, a double carport, and 1 acre of land.

Mark: I don't want to know anything about Mr. Sucker's house. Let me just look at sales in his neighborhood. Let's see, ten houses have sold in his neighborhood within the last year. They range from $75,000 to $125,000.

UL: Oh, cool! So you think you could get like $130,000 on Mr. Sucker's house...since he renovated it, huh? Well, really, to make this work, I need $135,000.

Mark: No, I didn't say that. I said the highest sale in the neighborhood was $125,000. It had over 1900 heated square feet and it was recently updated with a new kitchen.

UL: Ok, good...I think we're in good shape here. I'll send the request to you in a few minutes. Remember now, I need $135,000 on this one...$138,000 would really be great.

Well, I get a request to appraise Mr. Sucker's house and I drive to the house to perform an inspection. I find Mr. Sucker's house to be a dwelling with 1500 square feet (didn't someone say 2000?) and it's below average condition (huh...thought it was renovated) and it's located on a typical 75' by 150' lot (1 acre???). Floor covers are dated and worn, the walls and ceilings in most rooms need to be painted, the kitchen...I wouldn't eat there, and the central air conditioner is running on its last leg. Mr. Sucker states that he just repainted his kid's bedroom (oh, there's the renovation). Mr. Sucker just so happens to have an appraisal by one of my competitors...one of the good ole boys that make deals work. The other guy's value...$115,000...three months ago. That's $76.67 per square foot...$10 per square foot more than the highest sale in the neighborhood. I'm thinking, "Why didn't he call that guy again? Oh yeah, he needs more this time. What was that other appraiser smoking?"

Unethical needs a high appraisal in order to consolidate all of Sucker's debt. When the market was rising at a steady rate, many people took advantage of it. I did. Plus, mortgage rates were low enough to make the loan packages worthwhile. Who wouldn't want to lower their monthly housing payment and pay off some credit cards to boot? Unfortunately, many lenders "backed into" the amount needed. Rather than telling the borrower what they needed to hear, the lenders got used to telling the borrowers what they wanted to hear. Like this: "If we can get the appraisal to come in at $135,000, we can pay off most of your bills." Now the borrower has a real incentive to "sweet talk" the appraiser into giving him a "good" appraisal. (By the way, a "good" appraisal usually means that it will match whatever number is needed. It does not mean that the appraisal is truthful, factual, or realistic.)

I get back to the office and call Unethical Lending. I tell them that the house would be lucky to appraise for $90,000 in the condition that it's in. Guess what the lender does next? He picks up the phone and starts the process again...looking for an appraiser that will make his deal work. Chances are, he will find one. These lenders go through a process of finding an appraiser that will always "hit the number". They aren't really looking for an appraisal, though. They are looking for a report written by an certified appraiser that will match whatever magical number they need to make the loan. These lenders, predatory in nature, eventually find exactly what they are looking for. They are like water...they find the path of least resistance. The appraisers that wind up working with them don't really perform appraisals...they take orders. In real life, these appraisers put people upside-down in their houses. In other words, the people wind up owing more on the house than it's worth. I don't know how these appraisers and lenders sleep at night. Sadly, some of these folks might be your friends...your neighbors...or even people that go to church with you.

Some of the best advice I ever got from Angie's father was this: "Beware the man that shakes your hand while he pisses on your leg." Understand? Some people act like they want to help you but don't have your best interest in mind.

If it makes you feel any better, the subprime market crashed and burned over a year ago. I don't get those types of calls anymore. I don't miss those guys either. What scares the heebie-geebies out of me now is I just learned that the Department of Housing and Urban Development (HUD) is poised to replace the subprime market with FHA loans. Oh good, let's put more on the government's back.

Here's an article for further reading:

http://www.bloomberg.com/apps/news?pid=20601109&sid=a0PEnjbC3YMI&refer=home