Page 1 of 3 BOOK REVIEW Subprime - an (im)morality tale Confessions of a Subprime Lender by Richard Bitner
Reviewed by Julian Delasantellis
In 1949, the hard-boiled American crime writer Raymond Chandler observed that
"Such is the brutalization of commercial ethics in this country that no one can
feel anything more delicate than the velvet touch of a soft buck." It wasn't
that "velvet touch of a soft buck" that the subprime mortgage business felt,
and fell victim to, these past few years; it was the creamy caress of about 3
trillion of those soft bucks. It was the heady intoxication of this sensation
that caused the industry to abandon all pre-existing standards of banking
probity and morality, and this is the story
that Richard Bitner tells in his new book, Confessions of a Subprime Lender.
By 2006, Bitner, co-founder of subprime broker Kellner Mortgage, had seen so
much of his industry's blatant balderdash, howling half truths, and malevolent
mendacities that he could stand no more. Walking away from a business that had
made him, and everyone in his business, insanely wealthy in an insanely brief
amount of time, he pledged to write a book that would tell the truth about this
business. Amazingly enough, considering the dross that winds up in the business
sections of the bookstores these days (The Way of the Bushido Method to Sell
Your Timeshare or, 12 Apostles=12 Successful Salescalls - The New
Testament Sales, Commission and Wealth Plan) Bitner could not find a
publisher for his work, so he self-published.
Buzz spread and word got around, John Wiley and Sons put out an edition in
early summer. On Amazon.com, the book is now ranked number 4 in the "mortgages"
sub-category of Business and Investing/Real Estate. In much the same way that
epidemiologists traveled to Africa to investigate the origins of the AIDS
virus, Bitner's book traces the current world financial crisis right back to
its first bad loans.
What a strange embrace Americans have with the word, indeed, the very concept
of, morality. Should you inform them that the first definition of the word in
the Oxford English Dictionary is "ethical wisdom, knowledge of moral
science", most of them will wonder how you've gotten rid of your French accent
. Since at least the sexual revolutions of the 1960's and 1970's, and
especially since Bill Clinton's fateful sibilations with Monica Lewinsky,
Americans limit their conception of morality to the middle of the OED's third
definition of the word, "Moral virtue; behavior conforming to moral law or
accepted moral standards, esp in relation to sexual matters; personal qualities
judged to be good."
In other words, morality is something that you do, or don't do, with your
genitals, especially the proximity and frequency that they are placed in an
unclothed close propinquity with those of others.
With references and notations the OED's definition of morality closes in on
3,000 words, but mine only involves one. Morality is denial; denial of
pleasure, denial of some sort of personal advancement, denial of personal gain.
If, in order to adhere to some abstract code of moral order, you deny yourself
something that you would clearly enjoy, whether it be the readily available
charms of your new administrative assistant, or maybe the $20 bill that fell
out of the purse of the person in the checkout line in front of you, you are
making a moral choice. Doing another 20 minutes in spinning class or forgoing
your morning donut for a bran muffin may be good for you, but they're not moral
choices; they're decisions made out of self-interest. Morality is having
something that is a pleasure to you right at your fingertips and ready to be
enjoyed and then pulling away, and this is what proved such a challenge to the
US real estate and real estate finance industry these past few years.
After World War ll, the United States morphed from a place where people
basically grew up and lived their lives where their parents had, on farms or in
the closely packed cities of the industrial northeast, to a place of new
suburbs outside the cities, and the whole new metropolises of the south and
The banking industry saw this as a problem. With the previous era's static,
relatively immobile society, a banker could judge the credit risk of any
prospective borrower simply; if the family tree was OK, the apple was judged to
be unlikely to fall all that far from the tree. But in the new areas, this
methodology would not work; their populations might be amalgamations of people
from hundreds of other communities, from all corners of the country. No banker
could be expected, basically, to make prudent educated guesses as to credit
worthiness in this new, polyglot environment. A better way had to be found to
make objective decisions as to who was and who was not a good credit risk.
Thus was born the credit score, the standardized mathematical tabulations that
rolled credit history, employment and other factors into a single number that a
banker could use to make the decision to reward or deny credit.
About five companies compute and report credit scores in the United States, but
the most prominent of these is the so called "FICO" score, from the FICO
Corporation, which in 1981 started selling to financial institutions the first
FICO scores can range from 300 to 850; the company reports the American median
at 723. In the days before the subprime industry, and the subprime borrower,
how this framework was applied to real estate was simple: if a borrower's score
was above a certain number, maybe around 625, they'd get a mortgage, if not,
they'd forever be renters.
Then, according to Bitner, somebody had a bright idea. Instead of making the
decision whether or not to grant a mortgage a simple, yes/no judgment based on
credit score, why not start to delve into the low FICO score market (borrowers
with good FICO scores are called "prime" borrowers; that makes low FICO score
mortgage applicants "subprime" borrowers) by making mortgage loans to this new
class of prospective borrowers?
The enhanced prospect of default implied by the low FICO scores of these
borrowers would be compensated by having the borrowers pay higher interest
rates than standard borrowers, and, especially, by charging much higher fees to
the borrowers just for the privilege of advancing these loans.
To me, how this industry worked in the recent past reminded me a bit of a
passenger's experience upon arrival at an airport. If you're going first class,
if, that is, your FICO and down payment details are sufficiently standard that
your mortgage will eventually be eligible for purchase by Government Sponsored
Enterprises Fannie Mae and Freddie Mac, then you probably wouldn't be dealing
with a mortgage broker such as Mr Bitner and his ilk. You could walk right into
a standard bank, and, once your financial bona fides had been checked, be
greenlighted right into your mortgage.
But, if your FICO score was too low, or, if you didn't have much of a
downpayment, or if you were seeking to borrow more than the GSE's statutory
limits of around US$420,000, the standard banking system might very well turn
you down. Off you would go to the world of the mortgage brokers, those small,
three- or four-person bucket shops that suddenly appeared on the sides of the
roads like weeds in spring, and now, as the winds of the current financial
crisis blow hard and cold, have basically died and disappeared from the
You submit your subprime mortgage application to the mortgage broker, and, as
it leaves your hand, it, like our air traveler, begins its tortuous journey
through the system. Like the passenger transiting from one moving walkway to
another, the loan moves through and up the system, from one mortgage broker to
another, then to another after that, until it reached its "gate", the actual
lender, what Bitner would call the "investor", who would actually fund the
loan. For Bitner, this might be Countrywide, Citigroup, or the Household Bank
subsidiary of HSBC - it was the reporting of bad quarterly results from
Household by HSBC, which served as an early-warning flare marking the existence
of the monster that is now devouring the financial system (see
Rocking the subprime house of cards, March 6, 2007, Asia Times Online.)
Once in the hands of one of the big banks, the mortgages would be rolled up and
made into the mortgage backed security (MBS) bonds that we now know so well.
These would get sold into the markets (now they are soon to be bought by the US
Government as part of the $500 billion mortgage security purchase plan
initiated by US Treasury Secretary Henry Paulson), freeing up the banks'
capital, so that the process could ramp up again for another round.
Since these mortgages carried such high interest rates, they were massively
profitable, and so popular with banks such as Countrywide, and with the
investors who bought their securities. They wanted as many of them as the
brokers could write, and mortgage brokers like Bitner were more than happy to
oblige them. As Bitner described it:
As the appetite grew for these
securities, so did the price to purchase the mortgages. By 1994, investors were
paying upwards of 700 basis points per loan, or 7 percent of the loan amount.
Even a small company had enormous profit potential; a total monthly volume of
$10 million, multiplied by 7% (700 bps) would result in a gross profit of
$700,000 … a subprime could earn in monthly revenue $400,000 in monthly net
revenue. To be able to produce this income with fewer than 50 employees was
Of course, it was this, the insanely profitable fee
structure and investor demand for the final product, that caused all those
boarded up ice-cream stands and shoe-repair shops to re-open as mortgage
brokers. Why didn't the market work its magic and force down the fee and
interest rate structure through competition? Well, one thing that became
obvious was the difference in outlook between the prime and subprime borrowers.
The prime borrowers knew they had the system by the short hairs; if they didn't
like the offered terms from one bank they could walk down the street and get a
half dozen others. The subprime borrowers were grateful for, and accepted, the
terms on any mortgage they were offered; community organizers are only now
learning how many less-educated and minority borrowers were offered, and
accepted, subprime loans when they would have otherwise qualified for prime.
Bitner specifies three government policy changes that stoked the subprime fire.
Interestingly enough, not included in his list is the current Republican Party
talking point that the whole crisis is solely attributable to liberals and
African-Americans at Fannie and Freddie having the unmitigated gall to attempt
to put poor Americans in their own homes.
The Depository Institutions Deregulation and Money Control Act (DIDMCA) of 1980
made the subprime business legal by allowing lenders to charge higher rates and
fees to borrowers.
The Alternative Mortgage Transaction Parity Act (AMPTA) of 1982 allowed the use
of variable interest rates (ARMs) and balloon payments.