Wednesday, July 20, 2005

Con game.

Only 11 out of 56 economists surveyed worry about the housing bubble as their biggest worry about the economy. Wonder if that number has gone down from last year. Have economists replaced media as the great contrarian indicator--the fewer worried about an issue, the greater the real concern?

"I try to be fair, honest and act with integrity." -- any time one has to try to "act with integrity", one is engaged in a dishonest activity.

Disavowal of responsibility -- another classic sign of fraud perpetration.


Easy Money: A Mortgage Salesman's Pitch --- Mr. Ray Touts Low Payments For the First Five Years; Interest Keeps Piling Up --- A Chance to Buy That Escalade
By George Anders
2573 words
20 July 2005
The Wall Street Journal
(Copyright (c) 2005, Dow Jones & Company, Inc.)
SANTA ROSA, Calif. -- Hardly anyone makes home loans as quickly and as often as Ben Ray III of Benchmark Lending Group Inc. He is a former school counselor who struggled for years to find the right job. He sold vintage wine for a while and wrote grants for his native tribe of Pomo Indians.

Now the 39-year-old Mr. Ray is on pace to earn $200,000 this year in mortgage commissions. His friendly, efficient style helps win borrowers' trust. But his biggest edge comes from offering alluring and controversial mortgages that require unusually slim payments for a few years, before bigger sums fall due. Some customers use these loans to borrow as much as seven times their annual income -- a staggering jump from the two-times-annual-income level that was the rule of thumb when the 30-year fixed-rate mortgage was the norm.

As real-estate mania intensifies, the mortgage industry keeps making it easier to borrow. "Low documentation" loans are catching on, including ones where lenders simply take borrowers' word about their income and don't ask for pay stubs. Repayment terms sometimes are stretched as long as 40 years, to help shrink monthly payments. In the most common twist, lenders aren't requiring even token efforts to repay principal in the early years of a mortgage. Interest-only payments suffice. In some cases, borrowers can even pay less than that, allowing interest to pile up and be repaid later.

Skeptics worry that this easy-credit euphoria could end with a real-estate crash and waves of problem loans. Federal Reserve Board Chairman Alan Greenspan warned in June that housing prices in some areas appeared "unsustainable," adding that he was concerned about "the dramatic increase in the prevalence of interest-only loans." In a recent Wall Street Journal survey of 56 leading economists, 11 named a possible housing bust as their biggest worry for the economy.

For now, default rates are low and property prices remain strong. Many aspiring homebuyers are willing to try anything that stretches the amount they can borrow, since house prices continue surging while wages fail to keep pace. Aggressive lenders are enjoying the boom while it lasts.

Fifty miles north of San Francisco, Benchmark is a small, fast-growing mortgage company that typifies the industry's current stampede into interest-only lending. Benchmark gets about 60% of its business from loans with such features. In part, that reflects the iconoclastic tastes of company founder N. Bernard "Barney" Aldridge, a former rock-band drummer who comes to work in shorts and sandals.

In an interview, Mr. Aldridge scoffs at people who pay down their mortgages, month by month. "That's just a way of transferring money to your heirs," he says. "As a borrower, I'd rather make smaller payments and have the money myself."

Like many mortgage originators, Benchmark doesn't keep its mortgages long. Of its 2,176 loans last year, all but seven were sold to Wall Street firms and bigger mortgage companies, to be repackaged as bond-like instruments for insurers, pension funds and other investors. Benchmark nets about 1.5% of the value of the loan for its trouble, while freeing up capital to start the lending cycle again. It also means Benchmark doesn't have a major stake in the long-term fate of its mortgages.

Founded in 1995, closely held Benchmark is one of 2,994 consumer-finance lenders licensed to do business in California. That tally keeps growing, aided by a regulatory belief that lots of home-lending capacity is good for economic growth. California's Department of Corporations checks applicants for financial solvency and makes sure that top company executives have passed background checks and hire qualified people.

Benchmark expects to book $900 million of mortgages this year, nearly double last year's pace. The company does most business by phone, advertising briskly on AM radio. It urges people to call a toll-free number, assuring them: "There's no selling here. Either we can save you money or we can't." Some 150 people work at Benchmark's sleek two-story headquarters, fielding calls within earshot of a vast bubbling fountain.

Among Benchmark's loan officers is Mr. Ray, a stocky man who favors billowy Ralph Lauren tunics. At mealtimes he struggles to stay on the South Beach diet, but on the phone he is in total command. He listens well. He crunches monthly payment estimates quickly and slips them into conversation effortlessly.

Most days, Mr. Ray is as busy as a bartender at happy hour. Each call begins with a chipper greeting: "Hi, this is Ben. What kind of loan can I help you with today?" In moments, he creates an atmosphere of optimism and certainty, sweeping away callers' jitters.

"I'm so glad you called today," Mr. Ray told one caller in early June, about five minutes into the conversation. "If we start on your loan tomorrow, we can get you the money by the end of the month."

For all this bonhomie, Mr. Ray repeatedly confronts deep tensions between people's spending dreams and the dangers of too much debt. Some callers have a bankruptcy filing in their past. Others are working second jobs in the evening as Target store clerks to pay the bills.

"People are killing themselves," Mr. Ray says after work one evening. "They don't save any money, and they put themselves at great financial risk in the name of instant gratification. You don't ever want to be in a situation where you have to sell your house or lose it."

When people's credit ratings are a mess, Mr. Ray urges them to tidy their finances before seeking more debt. But if they meet Benchmark's loan standards, he reasons that it isn't his job to police the public's appetite for debt. "I can't organize people's lives for them," Mr. Ray explains. "All I can do is make sure the loan is made properly."

Besides, if callers are creditworthy, Mr. Ray figures somebody will finance them, regardless of any qualms he might have. In that case, he declares, "I want to be the guy that does the loan." Mr. Ray gets a commission of 0.2% to 0.4% of each loan he originates.

Mr. Ray joined Benchmark in mid-2003, after rattling around in a series of jobs at schools, hospitals and the tribal reservation that never paid more than $37,500 a year. Because of injuries from a car accident, he had been out of work for a year before joining Benchmark. His finances were in tatters, and he was driving a battered Pontiac. His brother-in-law, a Benchmark employee, suggested trying the mortgage business. Mr. Ray was dubious at first, but then decided it might work.

As a raw trainee two years ago, Mr. Ray stood out with his eagerness to book business. During a three-week orientation, he pestered his bosses for a chance to field live calls ahead of schedule. Grudgingly, they let him sit by a phone after 8 p.m., after veteran loan officers had gone home. The next day, he excitedly told his bosses that he had screened seven calls -- and expected to close on at least one loan.

"It was a couple from Sacramento," Mr. Ray recalls. "Lovely people. They wanted to borrow $423,000. They became my first mortgage, and I hadn't even finished training. My bosses couldn't believe it."

Now Mr. Ray's cubicle has become a teaching stop for new trainees, who listen to his patter like acolytes, absorbing every detail. When loan applicants repeat a fact that Mr. Ray has just told them, he responds with a crisp "correct!" -- like a schoolteacher praising a bright child. It's a potent way to take command of the call and keep things moving fast. In the cubicles near Mr. Ray, other loan officers now chirp "correct!" in the midst of their calls, too.

Benchmark does much of its business in California, catering to welders, flight attendants and others who want to buy or refinance $500,000 homes. Callers hope to borrow most of the home's value, drawing on household incomes that average just $70,000 a year. At Benchmark, such middle-class strivers are greeted with open arms. True, they may be hard-pressed to cope with traditional mortgages that require principal repayment each month. But they can handle interest-only mortgages with smaller monthly payments.

If even that amount seems too steep, Benchmark offers something called the Freedom Loan. For the first few years, it lets borrowers choose between standard repayment terms -- and a "minimum payment" option calculated on a 1% teaser interest rate. For the first month, that option fully services the mortgage; after that, the interest rate climbs above 5% and the minimum payment covers only about two-thirds of monthly interest due.

Anyone picking that lenient final option must pay the price later, because unpaid interest is tacked onto the balance due. But for the short term, such loans let borrowers adjust payments to match their income fluctuations, feeling as if they are handling vast amounts of debt effortlessly. In areas where buyers are frustrated by lofty home prices, the Freedom Loan and similar variants offered by dozens of other mortgage lenders have become very popular.

Sitting in his cubicle, Mr. Ray introduces callers to the delights of the Freedom Loan. He recommends it to young buyers, older buyers and to established homeowners who simply want to refinance their existing mortgages. When a Colorado shopkeeper says he wants to refinance his current $170,000 mortgage with a loan twice that size -- so he can extract some extra cash to be used for buying investment properties -- Mr. Ray knows just what to recommend.

"In your situation, I'd recommend the Freedom Loan," Mr. Ray says. Whizzing his fingers over an HP-10B2 calculator, Mr. Ray declares that the Colorado man can borrow $340,000 and make minimum payments of just $1,125 a month. Payments on a traditional 30-year, fixed-rate mortgage would be nearly twice as high. "This lets you control your cash flow," Mr. Ray declares. "It's going to be a much better loan for you."

Benchmark's top executives encourage such serenades. "We paint pictures," says Lance Diener, the company's executive vice president for sales. "This is all about people improving the quality of their lives. If you can save $800 a month on your mortgage payments, maybe you can buy that brand-new Cadillac Escalade." Larger loans also mean more revenue for Benchmark.

Today's frolics carry a price, though. As Mr. Ray tells callers, the Freedom Loan is set up so that all its terms are drastically recast after five years. The skimpy minimum-payment option disappears. Unpaid interest is tacked onto the balance due. Borrowers may owe more -- and they need to repay it faster. A new payment schedule emerges, most likely with sharply higher amounts due each month.

Benchmark's Freedom Loan has been offered for less than a year, so there isn't any first-hand data about how customers will fare after its easy-credit terms expire. But there is plenty of muttering in the industry. Mr. Diener says he has heard competitors dub it the Prison Loan, on the belief that borrowers might be so deeply in debt after five years that they could lose their homes. He calls that an unfair slur by rivals who "don't understand the benefits of the loan."

Inside Benchmark, employees are encouraged to focus on what could go right. Training classes are packed with hypothetical examples of people who borrowed heavily to buy homes a few years ago -- and now can refinance them to take advantage of 30% or greater appreciation. Although there's no guarantee that the refinancing window will stay open, Benchmark employees and executives present that as the normal course of events.

When one trainee asked about grimmer scenarios in the event of a drawn-out property slump, people at Benchmark stared at him with bewilderment and pity, as if he didn't understand the first thing about real estate. The firm's overarching philosophy is explained in a separate meeting by Jodi Ehrlicher, Benchmark's processing manager. "Buying a home is a leap into the unknown, but you have to do it if you want to get anywhere," she says.

Mr. Ray echoes that. "My parents always told me: 'You can never go wrong if you buy real estate,'" he says. As a boy, he watched his father scrape up enough money to buy a condemned home near the edge of tribal lands, about 70 miles northwest of Sacramento. The Rays had to pour a new foundation to salvage the house. Once they did, it turned out to be a nice home -- and a good investment.

Mr. Ray freely concedes that Benchmark's rates aren't always the cheapest. Rates on the Freedom Loan generally are set at 2.9 percentage points above the yields on short-term Treasury securities. Other lenders offer similar loans at spreads of 2.5 points to 4 points. But Mr. Ray urges callers to do business with him anyway because he is quick, affable and dependable.

"I'm making a huge commitment to get this done for you," Mr. Ray tells one caller. "Part of what you're paying for is service." When he books loans, he arranges for appraisers to show up within a day or two. He schedules notaries to make house calls for the closing, so customers don't need to cool their heels in a title-company office. His goal is to make borrowing as easy and painless as ordering a pizza.

For Mr. Ray, selling mortgages has been a ticket to prosperity. He is leasing an elegant condominium in Santa Rosa with an option to buy. He takes vacations in Paris and Hawaii. He has upgraded to a top-of-the-line sport-utility vehicle, the GMC Yukon Denali, and is helping out family members who need cash. In a few years, he thinks he will have saved up enough money to start buying rental properties on the edge of California's wine country.

It's a big leap from the world he knew as a school counselor in the late 1990s, when he fought endless battles against truancy and drug use. He arranged picnics on the weekend for the most troubled teens and their parents, trying to show them a calmer way of life. When one boy dropped out of school and drifted away to Los Angeles, Mr. Ray recalls, "It broke my heart."

At Benchmark, Mr. Ray holds back. "I don't take stewardship for people's lives," he says. "I try to be fair, honest and act with integrity. But I'm not a marriage counselor. I'm not a parent. I don't put people's emotional issues in my bag when I walk out of here. The loans don't go home with me."


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