September 13, 2011
I was out of the office last week on a due diligence trip for a large package of non-performing loans. All these loans were originated in 2005 or 2006 and are owned by a household-name bank. They have all been effectively charged off (some with unpaid principal balances of over $200,000, by the way). After digging through a handful of files and their servicing notes, that one word (in the title of this blog) kept popping up in my head.
One file in particular stands out almost a full week later. It was a zero down payment purchase on a house in Florida. (A zero down payment purchase? BRILLIANT!!!) The buyer had all of $37 in his bank account when he applied for the loan. (Giving a loan to a guy with $37 in his bank account? BRILLIANT!!!) He had no other assets to his name, but did have over $80,000 in revolving debt. (Giving a loan to a guy with a negative net worth of over $80,000? BRILLIANT!!!)
The borrower's only source of income was social security. Taking into consideration all his revolving debt and his soon-to-be new house payment, he had virtually no money left from his monthly income to eat. (Making a loan with a 100% debt-to-income ratio? BRILLIANT!!!) Oh, but I haven't even gotten to the best part. The borrower was 85 YEARS OLD when the loan was given. (A 30-year mortgage for an 85-year-old man? BRILLIANT!!!)
This isn't make-believe, folks. This was an actual loan made by really BRILLIANT people who earned a big fat commission before shuffling off the loan to the government-sponsored entities Fannie Mae and Freddie Mac. But here's the rub: These banks were only making loans that Fannie and Freddie already said they would purchase. If you knew you had a market to sell your dog's landmines in the backyard, wouldn't you take the easy money and sell them??? What happened here is really no different - the mortgage industry made dogcrap loans because Fannie and Freddie said they would (and did!) buy dogcrap loans. BRILLIANT!!!
Fast forward to 2011. None of the borrowers in this non-performing package have made a payment in three or four years. Many still occupy these houses with no threat of being removed from them anytime soon. (Keeping your home without paying for it? BRILLIANT!!!) In fact, despite being owed almost $18,000,000 in unpaid principal balances, the bank has decided it has no realistic chance of collecting any of the debt. They have CHARGED IT OFF. (Charge off $18MM (and that's just for this one deal)? BRILLIANT!!!
To clarify one thing: Even though Fannie/Freddie bought most of these loans, the banks continued to service the loans. So even though it looks like the banks are taking these huge hits to the bottom line, the reality is TAXPAYERS (that would be you and me) are taking these huge hits to the bottom line. Why do you think Fannie & Freddie are in such dire straits? (Putting the government in charge of a for-profit entity? BRILLIANT!!!)
This is just one example of what I saw on my trip. Trust me, most of these loans had similarly appalling underwriting standards (or lack thereof). The fact so many people were allowed to get loans who simply did not deserve them is a travesty. However, the silver lining to this entire mess is the whole new market that has developed for people like me to help pick up the pieces and make a few bucks in the process. (Making lemons out of lemonade? That truly is BRILLIANT!!!)
Make it a great week,
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