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Blame the mortgage brokers

A recent column by Tyler Cowen (of Marginal Revolution fame) in the New York TImes caused a little flap in the econoblogosphere recently about whether lenders or borrowers are more to blame for the recent credit crisis/subprime meltdown/imminent recession. Inhis piece, a sort of year end wrap up of things that surprised economists, Cowen offered this

item:

IT’S NOT JUST THE LENDERS

There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.

Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.

In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years.

Perhaps because this plays faintly echoes a particularly repugnant free-market talking point -- caveat emptor ad omnium -- or because Cowen was sounding like an apologist for a typically exploitative and greedy industry, Barry Ritholtz of the Big Picture went apoplectic.

Anyone who works in this area knows that the reality of the situation was far more blatant. To begin with, most people are naive when it comes to any financial product. They rely on the experience of the professional they are working with, even if this person is a SALESMAN or another party in an ADVERSARIAL NEGOTIATING ROLE.

I work with many builders and mortgage lenders; I take personal responsibility for a major builder selling much of his company's stock in 2005 (more than $100 million worth). The rest of the family hated me -- for about 6 months. I know how their company works, and I know what they and others in their field do in actuality.

During the hey day of the no-income verification, "No Doc" loans, the builders finance people, as well as other mortgage brokers walked people through the application process. Mr. Cowen writes that "Too often, mortgage originators and middlemen looked the other way." That's a rather generous read on it. The reality is that THEY TOLD PEOPLE WHAT INCOME TO WRITE. They used sentences such as "Put down $150k." OTHER TIMES THEY APPLICANTS LEAVE THE INCOME SPACE BLANK; The reps later conveniently filled in the data on the own.

To claim mortgage originators and middlemen only looked the other way is putting too fine a point on it. THEY WERE ACTIVE COLLABORATORS IN ANY FRAUD.

Oh, and, don't take my word for it -- find some people from the industry and ask them yourselves. This is a very well known fact amongst real estate agents, mortgage brokers, and builders.

I side with Ritholtz here, because I think in order to commit fraud, you have to understand the meaning of what you are doing, and most people, I'd guess, have no idea what is going on in the midst of the mountains of paperwork necessary to secure a mortgage and buy a house, something we are all led to believe is as fundamental to being an American as pledging allegiance to the flag and eating hamburgers. And unlike the brokers, the borrowers have the loans in their name and ultimately would be held accountable for the lies by having to pay the consequences, while brokers skate away relatively scot-free -- at least until they started becoming unemployed -- permanently if our society has any justice.

Housing blog Calculated Risk today excerpted comments by Chase CEO Jamie Dimon in which he seemed to imply that brokers were not doing such a good job assessing risk, to put it euphemistically.

James Dimon:

This is a lesson that's been learned over and over about broker originations, they perform much worse than our own originations, and if you separate home equity into we call it kind of good bank, bad bank, and broker so I would say it's less than 20%, but a lot of the losses are coming from that 20%, which is high LTV [loan-to-value], broker originated businesses. High LTV business is also bad in its own.

Analyst:

And the 20% you referred to a minute ago in round numbers is the sort of specifically high LTV and originated away [by brokers] is that right?

James Dimon:

It's been very consistent In both our own originated and broker originated, high LTV, stated income is bad. It is three times worse in broker than it is in our own.

Analyst:

Wow.

Wow, indeed. This suggests that banks were constrained by the size and nature of their institutions, but brokers had no such scruples; they behaved like the fly-by-night operators they so often seem to be. The Caluclated Risk post prompted Felix Salmon to wonder why brokers have not yet been disintermediated (to use another fun euphemism), drawing the same conclusion that prompted me to start this entry:

Frankly, in an era where people can get mortgage quotes online almost as easily as they can buy car insurance, I fail to see why mortgage brokers should exist. It would be an industry crying out for disintermediation even if it weren't obvious that mortgage brokers are top of the list of people to blame for the current mortgage crisis. In the debate about "predatory lenders" and "predatory borrowers", the bigger truth is that the real problem was predatory brokers - people who abused the trust of both lenders and borrowers. If they do disappear, they shan't be missed.

In the wake of Malcolm Young's passing, Jesse Fink, author of The Youngs: The Brothers Who Built AC/DC, offers up his top 10 AC/DC songs, each seasoned with a dash of backstory.

Editor's Note: Originally published 30 July 2014.

10. “Bedlam in Belgium”
(Flick of the Switch, 1983)

This is a massively underrated barnstormer from the boys off the much-maligned (unfairly, I think) Flick of the Switch. The album was missing Mutt Lange, but the Youngs did have his very capable engineer, Tony Platt, as co-producer in the studio at Compass Point in the Bahamas. Tony’s a real pro. I think he did a perfectly fine job on this album, which also features the slamming “Nervous Shakedown”.

But what I find most interesting about “Bedlam in Belgium” is that it’s based on a fracas that broke out on stage in Kontich, Belgium, in 1977, involving Bon Scott, the rest of the band, and the local authorities. AC/DC had violated a noise curfew and things got hairy.

Yet Brian Johnson, more than half a decade later, wrote the lyrics with such insight; almost as if he was the one getting walloped by the Belgian police: He gave me a crack in the back with his gun / Hurt me so bad I could feel the blood run. Cracking lyrics, Bon-esque. Unfortunately for Brian, he was removed from lyric-writing duties from The Razors Edge (1990) onwards. All songs up to and including 2008’s Black Ice are Young/Young compositions.

Who’ll be writing the songs on the new album AC/DC has been working on in Vancouver? AC/DC fans can’t wait to hear them. Nor can I.

 
9. “Spellbound”
(For Those About to Rock We Salute You, 1981)

"Spellbound" really stands as a lasting monument to the genius of Mutt Lange, a man whose finely tuned ear and attention to detail filed the rough edges of Vanda & Young–era AC/DC and turned this commercially underperforming band for Atlantic Records into one of the biggest in the world. On “Spellbound” AC/DC sounds truly majestic. Lange just amplifies their natural power an extra notch. It’s crisp sounding, laden with dynamics and just awesome when Angus launches into his solo.

“Spellbound” is the closer on For Those About to Rock We Salute You, the last album Lange did with AC/DC, so chronologically it’s a significant song; it marks the end of an important era. For Those About to Rock was an unhappy experience for a lot of people. There was a lot of blood being spilled behind the scenes. It went to number one in the US but commercially was a massive disappointment after the performance of Back in Black. Much of the blame lies at the feet of Atlantic Records, then under Doug Morris, who made the decision to exhume an album they’d shelved in 1976, Dirty Deeds Done Dirt Cheap, and release it in-between Back in Black and For Those About to Rock.

In the book Phil Carson, who signed AC/DC to Atlantic, calls it “one of the most crass decisions ever made by a record-company executive” and believes it undermined sales of For Those About to Rock.


 
8. “Down Payment Blues”
(Powerage, 1978)

This is one of the best songs off Powerage -- perhaps the high point of Bon Scott as a lyricist -- but also significant for its connection to “Back in Black”. There are key lines in it: Sitting in my Cadillac / Listening to my radio / Suzy baby get on in / Tell me where she wanna go / I'm living in a nightmare / She's looking like a wet dream / I got myself a Cadillac / But I can't afford the gasoline.

Bon loved writing about Cadillacs. He mentions them in “Rocker” off the Australian version of TNT and the international release of Dirty Deeds Done Dirt Cheap: Got slicked black hair / Skin tight jeans / Cadillac car and a teenage dream.

Then you get to “Back in Black”. Bon’s dead but the lyrics have this spooky connection to “Down Payment Blues”: Back in the back / Of a Cadillac / Number one with a bullet, I’m a power pack.

Why was Brian singing about riding around in Cadillacs? He’d just joined AC/DC, wasn’t earning a lot and was on his best behavior. Bon had a reason to be singing about money. He was writing all the songs and just had a breakthrough album with Highway to Hell. Which begs the question: Could Bon also have written or part written the lyrics to “Back in Black”?

Bon’s late mother Isa said in 2006: “The last time we saw him was Christmas ’79, two months before he died. [Bon] told me he was working on the Back in Black album and that that was going to be it; that he was going to be a millionaire.”

 
7. “You Shook Me All Night Long”
(Back in Black, 1980)

Everyone knows and loves this song; it’s played everywhere. Shania Twain and Celine Dion have covered it. It’s one of AC/DC’s standbys. But who wrote it?

Former Mötley Crüe manager Doug Thaler is convinced Bon Scott, who’d passed away before the album was recorded, being replaced by Brian Johnson, wrote the lyrics. In fact he told me, “You can bet your life that Bon Scott wrote the lyrics to ‘You Shook Me All Night Long’.” That’s a pretty strong statement from a guy who used to be AC/DC’s American booking agent and knew the band intimately. I look into this claim in some depth in the book and draw my own conclusions.

I’m convinced Bon wrote it. In my opinion only Bon would have written a line like “She told me to come but I was already there.” Brian never matched the verve or wit of Bon in his lyrics and it’s why I think so much of AC/DC’s mid-'80s output suffers even when the guitar work of the Youngs was as good as it ever was.

But what’s also really interesting about this song in light of the recent hullabaloo over Taurus and Led Zeppelin is how much the opening guitar riff sounds similar to Head East’s “Never Been Any Reason”. I didn’t know a hell of a lot about Head East before I started working on this book, but came across “Never Been Any Reason” in the process of doing my research and was blown away when I heard it for the first time. AC/DC opened for Head East in Milwaukee in 1977. So the two bands crossed paths.

 
6. “Rock ’N’ Roll Damnation”
(Powerage, 1978)

It’s hard to get my head around the fact Mick Wall, the British rock writer and author of AC/DC: Hell Ain’t a Bad Place to Be, called this “a two-bit piece of head-bopping guff.” Not sure what track he was listening to when he wrote that -- maybe he was having a bad day -- but for me it’s one of the last of AC/DC’s classic boogie tracks and probably the best.

Mark Evans loves it almost as much as he loves “Highway to Hell". It has everything you want in an AC/DC song plus shakers, tambourines and handclaps, a real Motown touch that George Young and Harry Vanda brought to bear on the recording. They did something similar with the John Paul Young hit “Love Is in the Air”. Percussion was an underlying feature of many early AC/DC songs. This one really grooves. I never get tired of hearing it.

“Rock ’n’ Roll Damnation” was AC/DC’s first hit in the UK charts and a lot of the credit has to go to Michael Klenfner, best known as the fat guy with the moustache who stops Jake and Elwood backstage in the final reel of The Blues Brothers and offers them a recording contract. He was senior vice-president at Atlantic at the time, and insisted the band go back and record a radio-worthy single after they delivered the first cut of Powerage to New York.

Michael was a real champion of AC/DC behind the scenes at Atlantic, and never got the recognition he was due while he was still alive (he passed away in 2009). He ended up having a falling out with Atlantic president Jerry Greenberg over the choice of producer for Highway to Hell and got fired. But it was Klenfner who arguably did more for the band than anyone else while they were at Atlantic. His story deserves to be known by the fans.

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