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The Real Poop

You're the gateway, the "No" and the "Yes.” You cause screams of joy and sighs of angst. You and your cohorts in the period before the 2008 market crash almost singlehandedly brought down the entire global financial system. You have crazy power for a group of modestly educated, B+ students with relatively light training and career aspirations that revolve around free time. Who are you?

A loan officer.

Not the cop kind of officer. But rather an officer of money. Couples with a crying baby come into the bank needing money to buy their first home. He's a UPS driver; she's a school teacher. Together, $116k a year. They have $58k hard-earned, scrimped-and-saved dollars ready to put down on their dream home—they need a loan for...$800k.

(And yeah, in California, $800k sadly doesn't buy you a particularly amazing home in some parts of the state.)

As a loan officer, you have to eventually make a decision which lives at the top of the pyramid of dozens of transactors along the way who launched this couple into your cushy chairs in the air conditioned auspices of Bank of Globe or BOG. It must be clear to you that you work FOR the bank. You work for their shareholders and stakeholders. You are there to make money for the bank—but even more so, you are there to protect BOG from losses. Bad loans (where the emotional couple three years later turn their pockets inside out, give you the front door key and leave town after telling you they can't pay their interest costs) are...bad. (a = a, identity principal)

Think about how this couple came to you.

They met in junior college; he went on to UPS because his lats are ripped and he likes country music and driving; she graduated with a full 4-year degree from the local State University, and then got her teaching credentials; luckily, her substitute teaching gig turned into a full-time gig at the local high school. They had a little debt which, with both working, they paid off quickly. Then (impressively), they saved money like squirrels save walnuts in November.

On modest salaries, they saved almost $60k in a little over 2 years, and it's clear that they are serious about wanting a nice home. You as Loan Officer (LO) can't blame them. You wish you had a nice home, too. But you know the grim reality of a moody world and were never personally able to take that leap of faith and/or risk.

So how did they get to you?

It started with a Sunday drive to Open Houses. They started in the $350k neighborhoods. But then they were shot at. So they moved quickly to the $500k neighborhoods on a different Sunday. A kindly realtor lady with fake blond hair and a really nice Beemer "befriended" them and they shopped.

Of course the realtor couldn't resist showing them the homes a notch up (because that's what she is trained to do). And 14 "oh my"s later, they couldn't resist the home listed at $850k. Walk-in closets. Pool. A half-acre. Lawn. Great schools. Wine cellar. Her dad would love the wine cellar....

They realize that this home is "beyond their means" but they want to stretch; they believe in The American Dream; they believe in UPS and Teachers: Union, Yes! (even though neither of them particularly loved the union to whom they paid dues and had to follow, and they knew they weren’t alone—but it gave them the feeling of stability in their employment).

So the realtor pushed—they made an offer—it was accepted contingent to them being able to get a loan. That is, if they were able to get a loan (and the contract didn't really specify what kind of loan, what interest rate, what terms), then they were bound to buy the home. Why does this matter?

Because if they hit the terms, then the realtor gets paid her commission—whether they take possession of the home or not (more or less). But the realtor knows how emotions work and she is a financial Great White so she eats seals for breakfast…and these two are fat ones. She guesses that if push came to shove, they could lean on their parents for a "quiet loan" or a loan guarantee if they really had to stretch beyond their means.

And besides, interest rates were at all-time lows, making affordable mortgages cheap.

So there was the realtor pushing; she sent them to a mortgage broker (someone who…shockingly...brokers mortgages). The MB price compared 40 banks and came up with three that "really fit" the needs. She sent them to your bank, BOG, because she knows that you do take more risk than others. And you are huge. So when money flows in and it does ebb and flow, you are highly motivated to loan it to the masses. After all, that's how BOG makes money.

That is, BOG gets money from the U.S. Government (generally) at, say 2% interest rate, and it loans it out at, say, 5% interest. It also tacks on fees and processing charges and fees and charges. And fees. That 3% spread might not seem like much but on a loan of $800k, 3% per year is $24k. And these loans typically run for 30 years. So the dough to the bank can be a lot when the mortgage biz is running right. Almost all of that $24k is profit (if and only if the entire loan is paid back).

The broker sent the clients to you—you HATE turning people down. Ticks everyone off from the realtor to the mortgage broker to the clients. And then maybe next time, the realtor and broker shoo clients away from BOG. That would be bad news for you and your career and for BOG's prospects in the local industry. So there is a balance that you "must" take in granting loans, getting to "Yes.”

You do the math: They have $116k in income from work and pretty much no savings; that is, all of their savings would go into a down payment which would be just 5% of the total ($850, 000 x 5% = $42,500). They have a bit more than this amount in cash but there are "closing costs"—like prepaying insurance, paying mortgage interest in advance, moving bills, and other things that suck cash so they need a bit of a cushion here.

They also have a 5-month-old baby which...is a cost concern.

Normally 5% is SO low a down payment, banks would shy away, but it's a bull market for housing and the bank wants this business; they also love UPS and school teachers and feel like those really are stable jobs in stable industries. So if they can goose up to putting $50k down and need $800k in loans, the current mortgage rates for an adjustable loan are 5%.

That means that on $116,000, the couple would have $40,000 a year just in interest payments. And about another $10,000 in real estate taxes. Now, with NO mortgage tax deduction, the couple nets about $85,000. But ALL of the interest in the $40,000 is tax deductible. So as far as the IRS is concerned, the $116,000 becomes $116,000 - $40,000 or $76,000...meaning that instead of paying $31,000 in taxes, the couple pays more like $15,000 in taxes. It's kinda sorta like the government splits the cost of the interest on the mortgage.

Why?

Because we live in America. It's the land of Freedom. Milk and Honey. Oh, wait, that's somewhere else. But it's the land of Freedom. And the American Dream. And well, owning a home is pretty much "it" when it comes to American Dreaming. That, apple pie, football, and winning practically every Olympic medal.

Could this couple in theory afford to pay the mortgage for a while? Definitely.

Is there extreme risk in granting this loan? Definitely. (If one gets fired or sick, or the baby needs special medical care for which they aren’t covered by insurance, or...if really ANYTHING goes wrong financially, the bank will have to repossess the home, kick them out, and call that blond Great White realtor to go sell it to someone else.) And in this process, BOG gets a nice cover story in the local newspaper (headline: Evil Bank Crushes Dreams of Naive Family—What Did They Know?).

And it's that "what did they know?" part that is a direct pot shot at...YOU. You as the pro Loan Officer are the backstop. The last line in the sand. The financial Marine. It was YOU who was supposed to know better and not lend them the money. You are Big Daddy. And yet you loaned them the money and they were booted and now you're a breeding mix of Darth and Osama.

So as all of this flashes before your eyes, knowing that normally the absolute max that BOG will loan is 4 times annual income (i.e. 4x $116,000 or a ceiling of $450,000 ish for a couple like this)...you say..."No."

There are tears. (Not just from the couple but from the realtor, the mortgage broker, the would-be decorator, the family and friends who were dying to crash in the guest room, etc...) But you are Big Daddy. The backstop. The not-on-my-watch guy. So you do the responsible thing and tell them "No"—find a home for $500,000 and then we can talk kind of guy.

Ah, if only the rest of your brethren were as responsible as you. From 2004 to 2007, they more or less all said "Yes" to this loan. Then prices went down. Teachers and drivers got fired. And then lots of pockets turned inside out.

Tough job. You manage risk and stress. And emotions will play with your brain all day and night long.

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