Orange County, CA may be in trouble. The OC is home to the subprime lenders of America. The subprime mortgage market is collapsing like a bluff on a beach in a tsunami. Bubble bloggers dance on the graves of the fallen. What I find amusing is that nobody feels bad for a collapsed lender. I mean, come on, everyone knows that it's just a bunch of rich people playing with the Wall Street's money, right?
Now Main Street's whitewashed windows and vacant stores
Seems like there ain't nobody wants to come down here no more
They're closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain't coming back to your
hometown
Your hometown
Your hometown
Your hometown
Lyrics from My Hometown by Bruce Springsteen
Well, let me tell you a story of the real estate industrial complex of Orange County. It may not have a happy ending. Most lending employees are not highly-paid. Sure, I've mentioned that the subprime wholesale account executives were paid like starting pitchers for the Angels but the bulk of the folks who crank out the loans are the rank and file, clock-punching, lunch-box carrying, worker bees. These are folks who were tossed into an industry some five years ago, learned their jobs by their wits and excelled during booms. They stayed late, worked on weekends, and sacrificed vacations, to get the job done.
Now they won't have jobs. "The Boss" opined in the mid '80s about industries leaving small towns and the effect on the local economy. You have to wonder about the effect on the subprime mortgage capital of the country, Irvine in tony Orange County. Most of the employees came from the Southern California counties of San Diego, Orange, and Los Angeles. The subprime mortgages were not only originated there, they provided affordability for the starter homes in those counties.
Let's look at the ripple effect:
(1)- lending guidelines tighten so residential mortgage capital is becoming more scarce.
(2)- loans default in record proportions in a lighting-quick time frame
(3)- lenders announce massive layoffs or simply close the doors
(4)- home building starts drop
(5)- construction jobs become less plentiful
I think it's quite possible that we could see an exodus of young, non-college educated people from the coastal Southern California counties to areas like San Bernandino, Riverside, And Kern counties. The average family needs an income of close to $100,000 to afford a starter home in the coastal counties. The inland counties provide housing options for a family with a $65,000 income.
I know most people won't shed a tear for the "worker bees" that worked for lenders. I, however, thank you all for your hard work, dedication, and professionalism during a trying decade of lending. I wish you the best of luck no matter what you pursue.
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There will definitely be a lot of folks hurt by this. I wonder how many of their employees will be forced to join the ranks of those who get foreclosed on.
Brian... great post and tribute to those that did put in the sweat and tears that go into this business, that goes unnoticed.
Now get some rest and sleep..... ;o)
I agree Brian. Less we not mention that some of the folks I've talked to had loans fund and when the companies they worked for went out of biz....whether they get paid or not on these is still up in the air. As John Lennon once said, "Nobody told me there'd be days like these."
Agreed - tough to be the worker bee and then just get axed. They had to know, going in, that real estate is a very up and down business....didn't they?
Great article--Is there a way to email these post without just copying and pasting? I would love to forward your blog.
Sandra Williams
I am so embarressed that I didn't see the email link----anyway all is well that ends well and I did get to send this great blog to someone---Sorry for the question.
Amen, Brian. My Dad was a union man. Until the real estate price run-up of the early 2000s many of our buyer-clients were rank-and-file workers.
A shake-out will ripple deeper throughout the social fabric of an area than many people realize. Unemployed workers usually don't buy stuff; and companies that manufacture and sell stuff start slipping under, then workers in those industries become unemployed....
But an income of "close to $100,000" to buy in the O.C. ? Wouldn't closer to $120,000 or $130,000 be more like it?
It is not just the OC. Those Subprime lenders have operational offices all over the country. That means there are huge pockets where multiple companies are going out of business flooding the job market with competition for the few remaining companies and positions. It is the Account Reps, who are the lenders sales people to mortgage brokers, then it is also their entire inside support staff, underwriters, appraisal reviewers, managers, closers, funders, and those are just the people we have contact with as Loan officers. Just imagine what else goes into running a local hub/branch of one of these subprime lenders, maintenance, technical support, operations, HR, Document storage, QC/QA departments, legal departments, the list goes on and on. Many of these people are out of a job. Some get paid on some form of commission too. If your company files for Bankruptcy, do you think you are getting paid the commissions on loans that funded last month?
When a sub-prime mortgage company goes into bankruptcy - what does that mean for people that have loans with them? Do they call these loans? Auction them off the highest bidder?
Gosh, Ben...that is a GREAT question. The short answer is no they aren't "called". The loans are usualy bought in bulk by another company. The long answer will be a post.
Just who is being hurt by this callapse of the sub-prime market?
Sure, the home owner who did what they had to do to "get in"? I'm not sure. Many of them would have defaulted anyway. Marginal borrowers paid a premium to get on what was perceived as a "gravy train" of rapidly escalating home values. They took risks and lost because they overextended. No one forced them.
Sure, the investors who purchased the equities backed by these sub-prime bundled loans are losing. But, they are risk takers and made their own decisions. No one forced them.
Risk takers win some and they lose some. I don't believe the entire housing market needs to crumble to cure a problem that could have been avoided with some commone sense, budgeting and less risk taking,
One thing we surely do NOT need is Congress bullying their way in to make it hard for sensible home buyers and ethical lenders to be able to do what we have always done, buy and sell real estate and get loans that make home buying better than renting.
I have many friends and associates that work in OC subprime lending. Many will and are looking for new jobs. This kind of thing is not new, though, by any means. Nor is it restricted only to subprime lending. I have a mortgage background, primarily in "A" paper, but I've been through the washing maching a few times myself. I find it hard to believe that anyone is expressing shock over this whole thing. It's not like it hasn't happened before, and it's not like there hasn't been enough media coverage out there for consumers. Just my opinion.
Brian, those words sound like a familiar tune by the "Boss" when he sang My Hometown
and he referring to the rug mill closing, the song is about FREEHOLD, NJ, these jobs are leaving town and they ain tcoming back....this is your hometown, my hometown
So the sub prime loans are kaput. I guess my take on it (and I'm open to being taught otherwise) is that the loans were given to people who gambled that it would work. These same lenders could be doing prime loans no? But now the pool of people is smaller because those who should not have a loan will not be as likely to get one. Yes? I'm still seeing up sides here. It of course does make me sad that so many people are jobless. But it's like getting involved in a pyramid scheme and hoping it's all going to work out? Or am I wrong?
It's not like it hasn't happened before, and it's not like there hasn't been enough media coverage out there for consumers. This is pretty huge, Kelly. Almost as big as the S&L crisis of 89
Carole... Brian, if you don't mind me jumping in. Not all of the problems were because big lenders were trying to jump into a saturated market to make money.... hoping things would stay its course a little longer. Some of the problem were because loan officers were putting clients into marginal deals that could have been approved for FHA and or some of the FNMA high end financing programs. And then told, come back to me a year from now, I'll lower that payment. Making future promises just to get a client now. And oh yea Mr & Mrs client, it will cost the same to do this again... but what they would say is, it will be cheaper.
Overall, there are many various reasons why this went downhill.... and this could stem back from 2 years ago. Anyone just listening to loan officers and lenders the last 2 years had to know that it would come to an end. Too buttons were pushed, to much credit was over-extended in the format that lenders wanted the business, hoping to still have buyers on Wall Street.
Look at Decision One... they survived because they are backed by HSFB. Some of these lenders not only have companies backing them, but that they are a little more experienced in the lending business. Just my .02. Blame is being slung all over, but we need to dig deep down to as why. For now? Just baby steps, if your company is still around. And as someone mentioned, will this drive home values down even further? Possible.
Thanks Jeff I really am looking for a conversation on this. Can we also expect this to ripple off into the FHA 100 percent loans? Some of those programs have come and gone anyway. I wrote a Neighborhood Gold deal last month; although my client has a better financial situation than many of the people who are foreclosing. Just curious.
and btw, I hum that song sometimes, Brian, when I'm driving by a steel mill lol. Bruce knows what he is talking about doesn't he.
The loans were made by lenders who pushed the envelope because they never had to "own" them. I'll post on that tonight. Wall Street gets left holding the bag (the MBS holders).
Yeah I get the 'no owning' lender part, have for a while now. And I guess I can wait for the post if I have to LOL
Brian,
This was a very thoughtful and appropriate post. There is a human side to almost everything. While everyone is keyed in on the "meltdown" and how awful it may be to not be able to get some buyers qualified or ....well they done it to themselves...they deserve it one can easily forget that the worker bees are consumers and contribute to our economy. Kudos to you for your insight!
Brian, thirty years in the business, as a Lender, I am one of those busy bees, and had to take a different line of work for the last year. I was offered a position a week ago with a Mortgage Broker, all the time sub prime was crumbling. I am in the middle of a war is just how it feels. I cannot go back to what I was doing as the job at a call center was meaningless to me, and had no satisfaction, nor was I really helping anyone that really cared what service I was giving. I am back in lending as I was in 1978 thru 1982, tough times when we were making loans at 21.00 percent. We were making purchases regardless of rate because we had a product to help people, and we had the old time service to boot. My hat is off to all those who have or are losing their jobs, most are highly qualified, personable people who do care about their clients. Good luck gang, and lets hope our higher ups do something about our economy before it is entirely too late.
Thanks for sharing your thoughts, and for your compassion for the "busy bees" !!!!
I appreciate all of the good comments on this post. Originators can sometimes be mercenaries (can you blame us in times like these?) BUT, and this is a huge BUT, talented originators know and understand that the back office types in the mortgage business make us look good to our customers.
Loan closings blow up and terms are changed at the last minute...SOMETIMES. Mostly, a loan originator sends in an app with supporting documentation and a loan spits out EXACTLY as she wanted . That efficiency in this market is unchallenged by any other market in the world. It is the dedication and ingenuity of the back office personnel who made the American mortgage market the envy of developed countries everywhere.
The commitment and digestion of the huge learning curve by the "newer" back office personnel these past 5-6 years is nothing short of fantastic. Let's hope we find a new wave to catch so that these talents are not wasted.
Jeff The funny thing is, I read a stat yesterday about default rates, FHA has a higher percentage of people who have made a late payment than subprime. Conforming was like 4%, subprime was around 12% and FHA was 13%. So it doesn't look like those people who went subprime and defaulted would be any different if they went FHA. It is just that FHA is government backed/insured so if it goes bad, the only people it hurts are the tax payers.
Are the percentages higher on FHA loans, meaning are there more people using them than used the sub primers? Just curious if that skews the results
Jeff, You post says it all. Many forget that there is alot of people affected by the recent developments in the market, especially those who are employed with these lenders. The processors, underwriters, post closing, you name it. They are the ones who ensure the loan closes, that help the AEs look like heros to their brokers. I mean I feel bad for the AEs too, but less be honest, the money that alot of them make I'm hoping that their were smart..... like not buying the Porshes, Mercedes, exotic vacations,...
Great Job on the post and thank you for pointing out the human and emotional side of this changing market.
Carol, it was percentage of loans with a late payment. The percentage was not a percentage of all loans, but a percentage of loans for that source. Meaning it was 13% of all FHA loans that have late payments, and 12% of all SubPrime Loans. Not 13% of all loans with late payments are with FHA. At least that is the way it reads. I wouldn't put past any type of news, including print, to misrepresent the information in a way like that, that would skew the information to portray a particular image.
Carol I created a related blog about the foreclosure and default rates for Subprime compared to FHA
Brian's Blog: FHA vs. Subprime: Foreclosure and default rates
It also has links to the articles where I got the data from above.
Brian, very informative and deserving of
I really do feel for them, this happened to be back in 98-99, I am worried for a lot of my friends.
Brian... again, great post. I mentioned this in a new post of mine. Just wondering what it will be like in about 6 months from now.
The employees of these companies will be back in the industry sooner than later. Its unfortuante what happened but its just part of the cycle. Their respective companies didn't fail because of their employees it was their aggressiveness that got them in trouble.
Eddy
I hope so, Edyy. If we roll back the production to pre 2003 levels (which we should), close to 33% of the indutry will be out of work
Brian yeah i remember 2003 , i was fresh out of college so to speak...............
Eddy
Brian, thanks for the insightful and informative blog. I am new to AR and will definitely follow your blogs closely.
Thanks, Tracy! That's a nice compliment, I'll do the same; I'm looking forward to your work.
Eddy:
Brian yeah i remember 2003 , i was fresh out of college so to speak
Way to make me feel old.
Brian,
Thanks for this well written post. I've spoken with Jonathan about this too. I do wonder how OC will fair.
I love the subprime people. They did a great job. But there is not one need in the world for any of them to suffer. I have written about this 100 times and no one listens. People and businesses must be able to adapt. When the car was invented, it was time for people to get out of horseshoe making and into auto repair and tire manufacturing. If you've noticed, you don't see those Di-tech TV commercials anymore or BofA's 80% less paperwork. What you see now are thousands of commercials about ING, AIG, and TV commercials with a retiree and an 800 pound gorilla in an elevator talking about it's time for some financial strategizing. Also the TV commercial with the financial advisor on the beach with the woman and her husband saying "we made it". This is because baby boomers are retiring by the millions and moving around their 401k money into INCOME PRODUCING retirement investment accounts. This over the next 10 years according to the government is a 1.4 trillion dollar market. I've sold 3 homes this month. Each deal, the person wanted to put around $100,000 to $200,000 down on the house. I convinced them to only put about $40,000 down on the house and the rest in an ING account. That makes the home loan bigger which means a larger commission, plus double that commission for the retirement account, plus independent financial advisors get paid on cumulative interest on those accounts every year for 20 to 30 years. I make $8,000 on the house and $10,000 up front plus $30,000 over time on the financial account. It's simply time to adapt to a new kind of market. It may be time to start thinking about less deals, but the possibilities of a $40,000 commission average per customer. My firm will hire any account exec tomorrow. **THIS IS THE NEW WAVE TO CATCH AS BROKER BRADY MENTIONS HOPING TO FIND ABOVE.
more_than_loans@yahoo.com
Thanks for the comment, Broker Bolton.
Brian, I completely agree and feel very badly for the majority of subprime originators who are now looking for new jobs. It's scary enough for us brokers, trying to find a subprime loan in this market, but to be out of a job so suddenly is awful.
Brian...This is a great blog. I have two friends that lost their jobs and one of them still has not been able to find a new one and she is single mother of 2 kids. This sub-prime market or lack there of also affects title and escrow. I am hoping/trying to buy something myself within the next year and I don't see myself being able to do that if things stay the way they are or get worse.
Sub-prime loans can still be done but CLTV kills all of the deals. Over-aggressiveness by subprime lenders who made a killing during and after the refinance boom are defeitnley suffering the consequences. FHA is the new frontier for subprime or limited credit borrowers.
Eddy
Sub-prime loans can still be done but CLTV kills all of the deals. Over-aggressiveness by subprime lenders who made a killing during and after the refinance boom are defeitnley suffering the consequences. FHA is the new frontier for subprime or limited credit borrowers.
Eddy