Stated Income B-paper Angst

There is a fair amount of concern among a certain set of mortgage lenders. Some companies are closing operations or trying to sell them. In essence this is a consequence of some significant changes in the B-paper (poor credit) mortgage industry.

B-paper mortgages had long been profitable. The yields are high and loan officers tend to make more commission. Incentives existed at both ends. But in the past few years a twist occurred. Traditionally, B-paper mortgages had to be fully-documented. The lender wanted to know that despite the borrower's bad credit they did have the ability to make the payments.

The twin forces of greed and stupidity rose up and lenders (and the investors behind them) started to do stated income, B-paper. It worked for a bit but now the late payment and default rates are so high that the lenders are having to create such large loss reserves that they could be approaching insolvency.

So Who's to Blame?

Good question. I would start with the investors who created these products. Between them and the borrowers is a chain consisting (more or less) of the lender, the loan officer and his broker. The fact is that if you are going to create this product it is going to find its way to you.

Look at it from the other end - the borrower. This is the work of a 24 year old relatively naive young man who took courses on how to get rich in real estate and then sort of let his imagination take over. He bought 8 houses in 8 months with no money down.

See: http://iamfacingforeclosure.com/33/will-i-go-to-jail-for-mortgage-fraud/

What I found compelling is the fact that he was so open about what he had done. I would guess that there are a few folks who have done nearly identical things but maybe no one quite so willing to be so public about it.

His take on stated income loans: "I am not a mortgage specialist, but as I understand it, stated income means you state (or make up) how much you make" and "So the lender DOES take an additional risk with these "liar loans" but they balance that risk with higher fees." What is scary is that there could be some truth in his point of view.

What will probably happen will be that the lenders blame the folks who brought them these loans and attempt to get the brokers to buy them back. It is unlikely that that will have any direct effect because the brokers simply do not have the deep pockets that the lenders and investors do.

The deterrent effect of threatening the broker and the loan officer with loss of their license by contending that the loan officer fabricated the income will discourage usually honest participants from doing this but the reality is that if stated income B-paper is going to exist bad loans will find their way to the investor. Some lenders have already weeded the brokers with a high percentage of non-performing loans from their list of folks who can do business with them.

In short, look for an end or at minimum a very large decrease in supply of stated income B-paper.

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Dick Lepre

The Good Old Boy-sans Come to Daytona

On February 18 there will be a major fluctuation in the force. On of the bastions of American culture - NASCAR - is about to be invaded by Toyota. While NASCAR was until recently a Southern sport with mainly regional interest it has grown gigantically in the past few years. It is now a monster money printing machine. Here in the San Francisco Bay Area the NASCAR race is in Sonoma County which culturally is about as far away as you can get from the South.

Toyota will be racing the Camry at Daytona. Calling this a Camry is like calling the other cars Chevys and Fords. NASCAR employs a body design that has the rough shape of the car named and an engine manufactured by said company but the rest of the car is anything but stock. The engines specifications try to stay true to stock engines demanding such things as carburation and steel blocks. But I digress.

Most of the Camry's sold in the US are made in Kentucky. Toyota has become an American car - sort of.

In addition to the coming of Toyota the 2007 NASCAR season will also feature Colombian driver Juan Pablo Montoya. In short it looks as if NASCAR is planning on taking over the planet.

There are two things happening here: 1) NASCAR is broadening its appeal probably in an attempt to inculcate international interest and 2) it is recognizing that Toyota makes cars in the U.S. and should be part of the sport. It also sends a signal to the Big Three auto manufacturers that they'd better keep playing in the NASCAR game.

This is the reaction of Jack Roush, one of the heavyweight team owners, "Americans shouldn't buy Japanese cars," Roush said. "When we're faced with the prospect of having somebody come into our world and strip our economy of its essence, and go convey that for interests that are abroad, then we're not doing the right things for our country. If we're forced, based on the fact that we can't be competitive or that their consumers won't buy as many things from our manufacturers and our workers as we buy from theirs, well, then there's a train wreck coming."

Really Roush may be concerned about the increased cost of remaining competitive when another player particularly one with deep-pockets shows up.

In 2007 Toyota will for the first time probably surpass GM in world auto sales. The American automobile industry is no longer the dominant force which it once was. The reasons are myriad. Some of it is economic: American car manufactures are locked into pension agreement which add significantly to the cost of production and Japanese manufacturers has simply passed them both in design and in manufacturing technology and in attention to quality.

The key to success at Toyota is the Toyota Production System created by Sakichi Toyoda based in part on the work of W. Edwards Deming. (Links are http://en.wikipedia.org/wiki/Toyota_Production_System
and http://en.wikipedia.org/wiki/W._Edwards_Deming.)

The United States is not totally behind is advanced production techniques. The best known may be Six Sigma a series of practices developed by Motorola. (See: http://en.wikipedia.org/wiki/Six_Sigma)

NASCAR is all about money. Toyota has a lot of money to spend and this is going to create angst not just for the American auto manufacturers but more so for the big teams which need to spend a ton of money (Hendrick, Rouch, Gibbs).

The success of NASCAR has been largely a secret in the mainstream media. 17 of the top 20 sporting events by attendance last year were NASCAR races. The two brothers who own NASCAR are each worth (according to Forbes magazine) more than $1.2 billion.

In a sense the coming to NASCAR of Toyota and the success that is likely to have is another step on the road to globalization. The folks in North Carolina are going to have to learn to deal with it.

One of the most interesting aspects about NASCAR is their ability to change rules and specifications as often as necessary to maintain competition. While "parity" may have made the NFL boring the ability to have a 500 mile race decided by tens of feet is what makes NASCAR compelling. Once the season starts if one body design or engine spec has a clear advantage it is nerfed to make it less dominant.

The relevant issues here are the economic power of NASCAR, the blurring of the line between US and foreign cars and the importance of not just technology but of sophisticated manufacturing methodologies. Some of this is about auto safety. These are cars which can have accidents at speeds of 160 mph and have the driver walk away.

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Dick Lepre