What was worse, these same borrowers would be back eight months later to refinance the same property—often without proof of income and again, the mortgage originator left with a $20,000 check. But we have learned from all that, right? We will never allow the U.S. to go back to that time in the mortgage lending history where it was more like selling snake oil and investing with Bernie Madoff, right? Unfortunately, while “The Big Short” may be a Hollywood movie, [SPOILER ALERT] it doesn’t have a fairytale ending. The downtrodden, heretofore unpopular young man doesn’t get what he believes to be the love of his life and walk away into the sunset. Too many people lost their homes, their jobs,
their families, their futures and their lives. While that often happens in movies, more often the perpetrators are hunted down and punished. Not the case in “The Big Short” nor in the United States. Despite all that was lost, mostly based upon greed, with only one or two exceptions, no one went to jail! The government bailed out Wall Street and the banks and, in many cases, those who were bailed out, did not use the bailout money for the benefit of homeowners. It was used to benefit those who created the mess. And again, no one went to jail! In fact, some like the CEO of JPMorgan Chase got a multimillion dollar bonus. This after Chase had to pay a multibillion dollar fine, and, in early January,
2016, agreed to pay an additional $48 million to settle claims against it for its handling of post-2008 mortgage servicing issues. But we did learn our lesson, right? We have put into place all the new rules to prevent this from happening again. No more prepayment penalties. More accurate disclosures (we all love the new TRID rules). We can never go back … right? The answer may lie at the very, very end of “The Big Short!” Richard H. Lovell is an attorney in Queens County, N.Y. His law practice is concentrated in the areas of real estate law, real estate lending and criminal law. For more information, visit LovellLawNewYork.com.
n National Mortgage Professional Magazine n JANUARY 2016
our lives more than Michael Jordan, the iPod and YouTube combined with a concept and three simple words: Mortgage-backed securities (MBS). The entire world was about to change— for the better, at least for a while. The cast of this movie was clearly chosen from Hollywood’s A-List: Christian Bale, Ryan Gosling and Steve Carrell (who played a terrific, serious role in the also true story, “Foxcatcher”). It includes lesser roles and cameos from other A-Listers like Marisa Tomei and Selena Gomez. What follows is the story of how Michael Burry (his real name, although many other names in the movie have been fictionalized), a physician turned eccentric fund manager, and expertly played by Bale). The good doctor began placing all of the fund money invested by his clients in the “short” market by betting on the impending financial catastrophe. What impending catastrophe? Burry’s theory, which turned out to be correct, was that the ever growing number of the residential mortgages upon which MBS were based, were virtually worthless. The banks were lending money to homeowners secured by properties where neither the homeowners nor the properties were deserving of those mortgage loans. To make matters worse, the investment bankers on Wall Street were collateralizing the investments of their clients with these doomed mortgage-based instruments. Investors believed that nothing was more secure than securities backed by mortgages on peoples’ homes. When most others saw what Burry was doing, they thought he was crazy. You will decide if he was. If you belong to that group of Americans described in the very beginning of this review, that is, those involved in the mortgage world), take a moment to revisit that Cyclone ride. Until 2008, most of us made a lot of money. Many of us followed the rules, both legal and ethical. Some took advantage of the loopholes in the law and with the blessing of an Administration that really wanted a “hands off” policy to avoid bursting the real estate bubble. For those with either short memories or who are too young to have experienced it, so many entities were making so much money that the profits became much more important than how those profits were being made. “The Big Short” aptly reminds us of this. As a closing attorney for more than 40 lenders in the early- to middle-2000s, I witnessed mortgage loan originators walking out of my office after a residential mortgage closing in the amount of, say, $400,000, with a payday of $20,000. Many of these mortgage loans were in excess of the purchase price, some with adjustable interest rate features and negative amortization! Very often, the borrower had absolutely no idea what they were obligating themselves to and their own attorneys at the closing did little to explain it to them.