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	Andrew Gordon

From the responses I got to my article on why so many mortgages are going bad, many felt I placed most of the blame on mortgage brokers and lenders (as opposed to borrowers). That wasn’t my intention. As I said in my article, I’m not interested in blaming anyone.

My feeling is that there’s plenty of blame to go around. Pointing fingers is, well, pointless. Nobody’s blameless – especially the borrowers. Apart from them, nobody could walk away from this mess without smelling just a bit malodorous – from the brokers and lenders ... to the investment houses which sliced and diced these loans into derivative instruments nobody understood ... to Freddie and Fanny that backed these dubious loans ... and to the Fed which looked the other way.
 
Are there individuals who borrowed smartly during the past 10 years? Of course. And are there individual brokers and lenders who tried to do the right thing? Again, of course. And if I gave you an impression otherwise, that’s on me.

I was lucky enough to get some feedback from people in the mortgage business who know a lot more about this stuff than I ever will. I’d like to share some of their thoughts with you. Let’s hear Africa’s take on who does and doesn’t have “skin” in mortgages.

I enjoyed reading your article; however, I was concerned when you mentioned brokers have "no skin" in mortgages they originate.  Each agreement mortgage brokers sign to do business with a wholesale lender has a buy back clause.  At minimum, the buy back clause requires brokers to buy back a loan if it goes into first payment default.  Other buy back clauses require brokers to buy back a loan up to a year later.  All of the agreements require buy back if the reason for the default was fraud on the mortgage broker's behalf.  So Andrew, mortgage brokers do have "skin" in each loan.

Warmest Regards,
Africa A.

Jeremiah says that lenders have plenty of “skin” in mortgages and in some cases unfairly so.

It is true that most of the loan officers do not have skin in the game but the mortgage company does, though not to the extent of the investors.  If I close a loan for John Doe and rates drop down in the next year so that he refinances his home, then my investor/lender can require me to refund to them all of the closing costs from that initial mortgage... [or] if the investor/lender determines that fraud was committed on the loan, then they require the broker to pay that loan in full.  It doesn't matter if it was the borrower that committed the fraud...

Even though I work in the mortgage industry I have hated most of what it stands for the past 7-8 years.  Thanks to good advice from guys like you I am getting completely out. 

Jeremiah Wiser
Principal Lending Manager

Phil said he tried to steer borrowers away from risky loans, but they wouldn’t listen.

I am a DRE licensed Ca. loan broker and have been in the mortgage business for over 20 years. While there were unscrupulous loan brokers that were taking advantage of consumers, I don’t think it was that widespread... the root of the problem was ridiculous loan programs being offered to the public by the banks and mortgage companies with super lax underwriting standards...

A good percentage of my clients were offered a fully amortizing fixed rate 30 year loan but chose interest only or pay option ARMs because of easier underwriting or they could qualify for a bigger loan. When 100% loan programs were being offered to loan brokers with questionable credit, I was shocked at the risk the banks were taking on... To close, every time I met with a client, I offered them several loan programs and let them make the final choice.  So, in the final analysis, it was their choice.

Thank you and I do enjoy all of your articles.

Phil W

Thanks Phil, Jeremiah and Africa. It’s good to get these insights from people inside the mortgage industry.

I remember when I bought my first house some 22 years ago. The golden rule back then was your mortgage payment couldn’t be more than 25% of your take-home pay. Somewhere along the line, that rule got smudged along with a lot of others.

So I stand corrected. Lenders and mortgage companies do have some “skin.” But let me make a little prediction: When Congress is done “reforming” the finance structure, they’ll have a lot more skin than they have now.

I have to thank another reader for the title of this article.  John U. sent me this:

Great article.  Very clear cut explanation of the cause of today's market woes, in addition to the deficit "W" and Congress had already created, which is ongoing and never ending.  May the fleas of a thousand camels find all their tents.
John U.

Thanks John, the last line is priceless and I couldn’t help but use it as the title.

Good Investing,
Andrew Gordon

PS: Thanks, John, for the pithy quote that sets the exact wrong tone for the article. Still, I couldn’t resist.

P.P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.