Confidential to our bankster friends: The trick is, the people who can pay loans back you're supposed to make loans to

Inna Komarovskaya has "a six-figure income and an ample down payment." Let's say you're the banker. Would you give her a mortgage?

by Ken

I know the above-noted principle sounds ridiculously rudimentary. Making loans to people who can pay them back is supposed to be the most important way banks make money. But in the Modern World of Financial Services, this pathetically old-fashioned bit of knowledge seems to have been lost. With mortgages and most other kinds of loans, it's no longer considered even appropriate, let alone obligatory, for a banker to be able to form an up-or-down evaluation of creditworthiness by developing personal knowledge of a prospective borrower and applying his/her professional judgment.

I wonder whether anyone was really surprised to read in today's NYT:

Tight Mortage Rules Exclude Even Good Risks

By DAVID STREITFELD

BOSTON -- Inna Komarovskaya was ready to do her part to revive the economy: She found a "really cute" condo to buy.

Despite a good credit score, a six-figure income and an ample down payment, Dr. Komarovskaya, a recent dental school graduate, could not get a loan. Her mortgage broker told her she ran afoul of new rules requiring two years of sufficient tax returns from some home buyers, instead of only one.

"Everyone says this is a buyer's market, but they wouldn't let me buy," said Dr. Komarovskaya, 30. "It's not fair."

Not fair, perhaps, but far from unique, brokers and agents say. The readiness of banks to sell foreclosed properties has led to rising home sales in some areas. But the traditional housing market, the one that involves willing buyers and sellers, is still dead, with transactions lower than they have been for decades.

The recession is the major reason sales are dragging, of course, but it is not the only one. As Dr. Komarovskaya found, buyers once viewed as perfectly qualified are being denied mortgages.

Brokers and bankers say that in past decades, the credit markets would almost certainly have accommodated many of these people.

"The credit pendulum is stuck at ‘stupid,'" said Lou S. Barnes, an owner of Boulder West Financial Services, a Colorado mortgage bank. "I am turning down loans every day that my grandfather in his Ponca City, Okla., savings and loan in 1935 would have been happy to make. And he was tough."

[And so on and so on.]

In the modern world of financial pseudoscience, algorithms are applied automatically to numbers fed into the computer, algorithms that may or may not tell you whether the prospective borrower is a trustworthy credit risk. What's more, as I've just been reminded by catching up with Connie Bruck's predictably illuminating chronicle of the rise and spectacular crash of the giant mortgage lender Countrywide in the June 25 New Yorker (unfortunately, nonsubscribers have to pay to read more than this abstract; however, there's a brief background Q-and-A with the author that's apparently available to all at the magazine's online News Desk), in the more frenzied heights of the late, lamented housing bubble, even these tiresome strictures were easily worked around.

The theory was that, since housing prices could only go up, just about any kind of loan could be justified. All you had to do was jack up the interest rate to match the perceived level of risk -- as, for example, when you chose to require no down payment, and/or to allow the prospective borrower to simply declare his/her income without verification. It doesn't take much Modern Financial Services Savvy to appreciate that these higher-risk loans, far from being thought of as undesirable, could be viewed as more desirable than the stodgy, safe ones that mortgage banker Lou Barnes tells NYT reporter David Streitfeld his grandfather would have made in his Oklahoma savings and loan in 1935. Heck, at those stratospheric interest rates, the high-risk loans were way more profitable than the tedious low-risk ones.

Until they weren't.

I know there are people who still don't understand what the housing bubble was about, and assume the blame falls on uncreditworthy people who had the chutzpah to accept loans they couldn't pay back. The nerve of them! Never mind that most of those people were simply lied to and victimized by having loans written on terms (terms that probably none of us would understand, and that probably nobody could understand if they couldn't afford a good lawyer to study the paperwork) that guaranteed they would default. Often people who could have afforded more reasonably priced loans were steered into more bogus ones because they were more profitable.

And even this doesn't describe what was going on. It wasn't about poor people, and it certainly wasn't about the Delusional Right's pathetic lie about Barney Frank mollycoddling Fannie Mae and Freddy Mac. It was about the seemingly insatiable demand of Wall Street for more and more of the crap paper that the mortgage brokers were creating by making every loan they could con anyone into taking and bundling that into supposedly "collateralized" securities. Bruck describes the most gung-ho members of the Countrywide leadership maximizing the pressure on their salespeople to generate enough of this crap paper to try to keep up with the demand from in-the-know securities investors.

Until there was no demand.

Along the way there were, naturally, people within the company who were horrified by the risk Countrywide had exposed itself to. Naturally, they were sneered at and where possible forced out of the company. It's not the only reason the whole house of cards. We mustn't forget that this delusional state of mind had become a widespread model for doing business throughout the modern Financial Services House of Cards.

And now here we are, pumping money into the banksters' coffers, expecting that to break free the credit logjam that has been a defining factor of the worldwide economic meltdown. The problem isn't so much that the banksters are crooks, although of course many of them are, and should be prosecuted for their crimes. No, the problem is that so many of those bankster execs pulling down those six- and seven-figure salaries with the six-figure bonuses are screamingly incompetent, and literally don't know the first thing about their business: how to make a loan.

#