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Quick Skim
Slowing home sales, a tightening credit market, record-high foreclosures — how did we get to this point? Richard Bitner's book Confessions of a Subprime Lender (Wiley, 2008) gives a close-up look at how the worst credit crisis in modern history came to be. Bitner, who founded a subprime mortgage company in 2000, left the business in 2006 after foreclosing on a subprime borrower that never should have been approved for a loan in the first place. While being careful not to blame any single source, Bitner gives an interesting view on what went wrong in the subprime mortgage market and how to fix it.

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From the Book: 5 Reasons the Subprime Market Crumbled

In 2000, as housing prices grew out of reach for buyers, more creative financing crept in and subprime lending became big business. Wall Street wanted its hands on more of these loans, and the hot housing market spawned a wave of new subprime companies. By 2004, 75 percent of borrowers were buying a home without using a down payment or proving income.

But by 2006 the subprime market started falling apart; Borrowers were defaulting on loans and subprime companies were going out of business. Bitner says these are some factors that caused the subprime market to crumble:

1. Greed. Mortgage brokers made more money if they sold loans with higher fees and interest rates. So borrowers would often be steered toward riskier products, even if a more traditional (and less risky) loan were available. "My income was directly proportional to the revenue I generated, and subprime was three to five times more profitable than any other type of loan we securitized," Bitner says. "I saw no logical reason to sell something that made less money and carried no competitive advantage."

2. Rampant fraud. Bitner estimates that more than 70 percent of all brokered loan applications submitted to his company were in some way deceptive, which meant everything had to be double-checked and verified. "The practice of massaging loans, making them appear different

from what they are, became standard operating procedure," Bitner says. "With little accountability for their actions, brokers [were] left to decide how far they're willing to go."

Common cases of fraud included altering income documentation, giving a borrower an adjustable rate mortgage without explaining how it works, or disclosing lower rates and fees to a borrower but then increasing the figures right before closing.

3. No standards. Everyone wanted to cash in on the subprime business, even if they didn't know how the business worked. "With few rules and minimal consumer protections, abusive behavior flourished," Bitner writes. The number of mortgage broker companies increased by 50 percent between 2001 and 2006, peaking at 53,000 in 2006. Meanwhile, the number of new loan originators working for mortgage brokers grew by 100,000.

Yet no national standard existed for licensing mortgage brokers and loan originators. Bitner says the industry needs to raise its standards and develop a system for accreditation. "The recent debacle has given brokers a reputation similar to used car salesmen," Bitner writes. "Although the bankers and brokers associations don't have a history of working together on issues, a collaborative effort to accredit loan originators would be a key step to rebuilding credibility for the industry."

4. Securitization of mortgages. Mortgage securitization fragmented the industry, Bitner says. Previously, banks would provide the money to fund a mortgage, but with securitization, the funding got divided into several components.

Here's how it works: Brokers originate the loan, a mortgage lender funded it, and a lender then sold it to another financial institution or used an investment bank to package it into a mortgage-backed security. Investors then bought them for their portfolio. "The problem in today's housing market exists because the investment banks packaged high-risk loans into securities and the rating agencies assessed them as investment quality," Bitner writes. "If the investors who purchased the securities understood what they were buying, the outcome would likely have been different."

5. Ultra-relaxed underwriting standards. As the subprime market took off, a pricing war among subprime lenders emerged. In order for lenders to keep their revenues up, they needed to fund more borrowers, leading to less restrictive underwriting. "It's easy to lose sight of what constitutes a good credit risk when you spend all day looking at marginal deals," Bitner writes.

Indeed, riskier products emerged, such as loans that required no down payment, proof of income, or even a history of paying rent. One loan product even allowed borrowers with credit scores of 580 and a 90-day-late payment in their housing history to qualify for 100 percent financing.

Sneak Peek

"During the first six months in business, I felt no more qualified to pilot the Space Shuttle than to be the president of a subprime lending company. Seven years in mortgage banking provided a solid foundation, but coming from the ranks of companies like GE Capital, my schooling was largely driven by a conservative mind-set. Lending money to borrowers with bad credit was never a part of the curriculum. When I first learned about subprime mortgages, the high-risk nature of the business made me think it was best suited for those who suffered from low morals or head trauma. Lending money to people with bad credit just seemed like a terrible idea. It wasn't until I got a taste for this business that my feelings started to change."

About the Author

Richard Bitner has more than 14 years in the mortgage industry. In 2000, he founded Kellner Mortgage Investments, a subprime mortgage company with 65 employees and $225 million in annual loan volume. Bitner got a distaste for the business in 2006, leaving his business about a year before Kellner closed and the subprime market started to crumble. He is now the managing director of Housing Wire. Visit his blog: www.lendingsanity.com

Listen to a podcast with author Richard Bitner >

Posted on August 21 at 11:46 AM | Permanent Link | Add a Comment (2)

Here are the latest top selling books in sales and marketing from Amazon.com:

1. Yes!: 50 Scientifically Proven Ways to Be Persuasive, By Noah J. Goldstein, Steve J. Martin, and Robert B. Cialdini

2. The Tipping Point: How Little Things Can Make a Big Difference, By Malcolm Gladwell

3. Influence: The Psychology of Persuasion, By Robert B. Cialdini

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6. Sway: The Irresistible Pull of Irrational Behavior, By Ori Brafman and Rom Brafman

7. The New Rules of Marketing and PR: How to Use News Releases, Blogs, Podcasting, Viral Marketing and Online Media to Reach Buyers Directly, By David Meerman Scott

8. The Mary Kay Way: Timeless Principles from America's Greatest Woman Entrepreneur, By Mary Kay Ash

9. Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant, By W. Chan Kim and Renée Mauborgne

10. Principles of Marketing, 12th Edition, By Philip Kotler and Gary Armstrong

Posted on August 11 at 10:56 AM | Permanent Link | Add a Comment (2)

The National Association of Real Estate Editors is accepting entries for its first Robert Bruss Real Estate Book Awards. Authors of books published in 2007 and 2006 on such real estate topics as home buying, selling, renting, mortgage finance, green building, urban design, architecture, government housing policy, and construction are eligible to apply. Get more information on how to apply at www.NAREE.org. Four winners will be announced, including for a first-time author award. Winners will receive cash prizes from $1,000-$250. Deadline: Sept. 2.

Posted on August 4 at 11:00 AM | Permanent Link | Add a Comment (0)

Favorite Pick: Sell with Soul: Creating an Extraordinary Career in Real Estate Without Losing Your Friends, Your Principles or Your Self-Respect, by Jennifer Allan
"Jennifer is such a nice change from the regular 'numbers game' authors. Her message is simple: be good at what you do and spend time and keep in contact with your SOI. No need for begging for referrals, they’ll come naturally."
—Heather Oberhau, e-PRO, Prudential Fox & Roach REALTORS®, www.SoldbyHeather.Blogspot.com


Favorite pick: I've Heard it All and so Should You: Confessions of a Real Estate Columnist, by Edith Lank
"There are not many real estate books that tickle the funny bone as much … while consistently revealing human nature at its best (and worst), as well as a confirming the general lack of knowledge about most things related to residential real estate as does I've Heard It All And So Should You: Confessions of a Real Estate Columnist by Edith Lank," Jim Zirbes, a Phoenix real estate associate broker, writes on his blog, The Realty Blogger – Jim's R.E. Journal.


Favorite pick: The Millionaire Real Estate Agent, by Gary Keller
"This book gives you step by step tips to help enhance your career. If you are new to the business or have been in the business many years, this book can help you maintain your focus and become goal driven."
—Ann Grant, SRES, Keller Williams Realty, White Plains, N.Y.,
www.AnnGrantRealty.com


Tell us what you’re reading. Send an e-mail to bookblog@realtors.org that includes the title of the real estate book and its author, along with your name, contact information, and what you like or dislike about the book.

Posted on August 1 at 10:11 AM | Permanent Link | Add a Comment (1)