The Texas mortgage industry needs to take a hard look in the mirror

After reading Richard Bitner’s new book, Confessions of a Subprime Lender: An Insider’s Tale of Geed, Fraud and Ignorance I regret ever saying anything good about subprime lending.

I used to parrot the party line that it was not subprime lending per se we object to, it was predatory lending.

According Bitner I was dead wrong about subprime lending. For the most part, this was an amoral, highly opportunistic industry that was out to make a quick buck regardless of the consequences. The problem is that in a virtually unregulated environment a bunch of people acted with no accountability to anyone.

At the same time I am proud that through Robert Doggett’s work before the Texas Legislature on behalf of the Texas Low Income Housing Information Service we have for many years been advocating for reforms of the type that are now (belatedly) almost certain to be enacted by Congress,  To bad the Texas Legislature chose to adopt very few of the reforms we urged and that Bitner now endorses in his industry tell all book.

It was not the idea of subprime lending that was the problem, it was the execution by mortgage brokers and some subprime lenders.  In extending credit to marginal borrowers, many of whom are not financially literate, it is important that mortgage brokers acted in the interest of the client/borrower to prevent people from getting into a loan they could not afford.  But, in too many cases that did not happen.  The broker was looking to sell the most expensive loan that rewarded the broker to the greatest extent.

Bitner should know all about the subprime lending industry’s dirt linen. He was president and co-founder of Keller Mortgage Investments, a subprime mortgage company that peaked at sixty-five employees and $225 million in annual loan volume.

Bitner’s book is of particular relevance to Texas because his company was headquartered in Dallas and many of the horror stories that fill the pages chronicle the actions of Texas mortgage brokers. Someone should mail a copy of this book to every state elected official in Texas in hopes that they will read it, come back to Austin in 2009 for the net session of the state legislature and fix the system that allows this stuff to happen.

Bitner proposes some solutions for the subprime melt down that make some sense.  Some of the reforms lie at the top end of the industry in reforms to investment banks and rating agencies.  I don’t think he goes far enough in this area but I hope someone deals with the top end of the subprime lending food chain.

I prefer to focus on the problem we have raised consistency with state legislators for over six years, namely mortgage brokers fiduciary duty to the client, or more accurately the lack thereof.

A root cause of so many people getting ripped off with ARMs and predatory loans and just too high mortgage interest rates lies in the failure to compel Texas mortgage brokers to at least offer their clients the best loan terms available.  Mortgage brokers get paid a higher fee by subprime lenders offering the most expensive product.  So guess which product they often offered the clients who came to them in good faith thinking the broker would acting in their best interest? Yep, the worst deal for the borrower but the one that paid the broker the most money.  In Texas, mortgage brokers operate on the same basis as used car salesmen.

Outrageous?  You bet it is. Even basic consumer protections were repeatedly resisted by the Texas mortgage broker lobbyists and the entire Texas mortgage and banking industry.  The Texas Legislature listened to them and never approved our suggestions in this regard.

Bitner also endorses the idea behind a bill that Senator Eddie Lucio carried for us last session that would have required mandatory HUD mortgage counseling to any poor soul who signed up for a subprime loan with really outrageous terms. This is already required for elderly folks who want to take out reverse mortgages.  We proposed to expand the protection to subprime borrowers who were preparing to enter into to the worst possible loans. Despite a valiant fight on the Senate floor Senator Lucio last the vote on his bill because of the pressure from the Texas banking lobby.

In interim hearings before the House Financial Institutions Committee this Spring, reported elsewhere in this blog, the Texas banking industry was counseling state lawmakers to continue to do nothing to provide consumer protection from subprime and predatory loans but to wait for Congress to fix the mess.

These guys need to read Bitner’s book and look at themselves in the mirror.

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