Another Blinding Glimpse of the Obvious!

If an industry calls an Initiative a Liar Loan, shouldn't alarm bells go off all over the place? Can you imagine sitting in on a meeting where a leader in the organization actually says we are going to grow our business with Liar Loans. Was there not anyone anywhere in that room or anywhere in the organization who said, hey wait a minute, that may not be such a good idea?

For those who who don't know what Liar Loans are, according to an article in the Arizona Republic, they are mortgages that were approved without requiring proof of the borrowers income or assets. Per the article, the worst of those loans are called Ninja Loans for no income, no job, and no assets.

Now I don't know about you, but, every time we bought a house, we had to produce documentation out the wazoo, including pay stubs, tax records, proof of assets, and we had a good income and an excellent credit rating. The institutions had the house as collateral but the mortgage companies made me feel guilty that I had the audacity to actually ask for a loan.

Now I am learning that mortgages were approved without income, without assets and even for people without jobs. That is insane. What is even more insane is that a lot of institutions did this. It just wasn't a bank or two. Some of those financial institutions are now out of here...American Home Mortgage, Bear Stearns, and IndyMac Bank. There may be more to come.

Through the years, I have learned that if I don't understand something to follow the money trail. The money trail tells us a lot about how these institutions managed to get into this situation.

Everyone could charge higher fees and higher interest rates for these. Per the Arizona Republic article, a broker who signed up a borrower for a liar loan could reap as much as $15,000 in fees for a $300,000 loan. Traditional lending would get them about $2,000 to $4,000 in fees for a fixed-rate loan.

The trail gets even better. These loans were bundled and sold to larger institutions or hedge funds given the higher interest rates and the amount of money these loans were going to make everyone. So, the local institutions make a boat load of money initially and then sold the loans to someone else.

I can visualize that meeting. Your local bank executives are meeting and one of them says we are going to write a bunch of Liar Loans. Another bank executive, says, wait a minute, those could be risky. Another executive shrugs his shoulders and says, why should we care, we are going to sell the loans anyway so we are not going to have to deal with that.

Mystery solved. Money, Money, Money. Greed came into play up and down the transaction line.
Unfortunately, this whole mortgage mess is going to cost all of us a lot of money. Our tax dollars are being used to bail out the industry and some of the companies that created the mess. Additionally, your home value may have gone down, your stock portfolio may be down and your retirement funds, if you had a lot of financial institution investment, is probably down as well.

All of this has occurred due to a lot of people ignoring some basic values and truths that have been around for years. Many of you have heard me say some of these things for years. None of this is new. It is truly a blinding glimpse of the obvious in my opinion.

1. Hogs get slaughtered. Greed played a large role here. Everyone thought that house values would continue to climb. If these people getting these Liar Loans defaulted, the equity could cover them. Institutions looked at $2000 in fees or $15,000 in fees. People became hoggish and wrote more of these than they should have. They passed them on. Too many people could not make their mortgage payments and all of sudden house values plummeted and these financial institutions were left trying to get some value from these houses. Hogs get slaughtered and indeed the biggest hogs have been slaughtered.

2. Walk away from business if it isn't going to be profitable. You have to have courage to lead and sometimes you have to say no, we are not going to do that even though everyone else is doing it. Honestly, there were institutions that took the stance that if we don't write this business someone else will. We will lose out. In reality, if your initiative can be called Liar anything, you should probably stay away from it. You don't trust liars. You don't let them any where near your family or your business. Let the other guy write the business. They will pay the price in the long run. You will end up solid financially and will end up with one less competitor. There were many times in my insurance career when I had to make a decision my reps didn't like, no we are not going after that piece of business and if the other company is crazy enough to write it, let's send anyone wanting that kind of business to them and hasten the competition's demise. There were execs and financial institutions who stayed out of the Liar Loan business and will survive quite nicely because they had the courage to say no and I am sure many of them were catching some grief from stockholders and directors for not venturing into the Liar Loan business.

3. There are long term implications for your decisions that go beyond the short term gain. If you operate your business with the view of only this quarter's results, you are going to be in trouble. Long term success requires a commitment to making decisions for the long term.

4. There are still no shortcuts or silver bullets to being successful. While the cash flow was nice for a while, many are failing because they relied too much on this type of business. The institutions that stayed away from this business and still required solid risk management in their loan approvals, are going to win long term.

5. Never lie, cheat, mislead, or misrepresent your offering. There are going to be people going to jail for a long time by the time all of this is said and done. There are lawsuits galore claiming that some of the companies who sold their portfolios to other institutions did not disclose that these were Liar Loans. If companies withheld that information, someone should go to jail.

6. Everything you do should pass the Front Page Test. How would this look on the front page of the newspaper? Someone in those meetings should have said wait a minute... if the local newspaper finds out we are charging more fees and higher interest rates to people with no income, no jobs and no assets and we are not worried about it because we are selling those loans to someone else, what would they report? My friends, this would not pass the front page test.

7. If you sleep with big dogs, you will get big fleas. If you were the executive in charge of buying a portfolio of these loans because the interest rates were higher and did not ask the questions about how they approved these loans, you deserve the fleas.

This whole scenario to me is a Blinding Glimpse of the Obvious. Any initiative that can be called Liar anything, should be avoided. Now, in reality, I really don't know if these were actually called Liar Loans prior to the meltdown or if that has been coined after the fact. I am not in that industry. What I do know though, is that a lot of people in the process knew they were not getting any income verification, nor employment verification, and no asset verification. That does not allow for prudent business decisions.

It truly is what you do everyday that counts!