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March 06, 2007
Why Not Grade Borrowers Like Meat?
I have a modest proposal for our friends in the subprime mortgage industry, who got immensely rich over the past five years making bad loans to people who were in no shape to repay them.
You already use "prime" to describe credit-worthy borrowers. That's a term that comes straight from the U.S. Department of Agriculture grading system for beef. So why not use the rest of the USDA's grading system, too? After all, the borrowers have basically been led to the slaughter.
Here's my modest proposal for ranking borrowing households like meat. The meat descriptions in italics come from this USDA web page.
Prime: Unblemished credit, rock-bottom LTV, doesn't need your money, so go away.USDA Prime: Prime grade beef is the ultimate in tenderness, juiciness, and flavor. It has abundant marbling -- flecks of fat within the lean -- which enhances both flavor and juiciness. Prime roasts and steaks are unexcelled for dry-heat cooking (roasting and broiling).
Choice: Pays all bills on-time. Putting 25% down. Dad defaulted on a college loan in 1982.USDA Choice: Choice grade beef has less marbling than Prime, but is of very high quality. Choice roasts and steaks from the loin and rib will be very tender, juicy, and flavorful and are, like Prime, suited to dry-heat cooking. Many of the less tender cuts, such as those from the rump, round, and blade chuck, can also be cooked with dry heat.
Select: Late with the occasional car payment, but who isn't? Steady income and the pay stubs to prove it.USDA Select: Select grade beef is very uniform in quality and somewhat leaner than the higher grades. It is fairly tender, but, because it has less marbling, it may lack some of the juiciness and flavor of the higher grades. Only the tender cuts should be cooked with dry heat. Other cuts should be marinated before cooking or cooked with moisture to obtain maximum tenderness and flavor.
Now we're getting iffy.
Standard and Commercial grade beef frequently is sold as ungraded or as "brand name" meat.
Standard: Got the LTV down to "only" 95% by shopping around for an optimistic appraisal.
Commercial: Plenty of money for a downpayment as long as the house doesn't cost more than $359.14.
And down we go ...
The three lower grades -- USDA Utility, Cutter, and Canner -- are seldom, if ever, sold at retail but are used instead to make ground beef and manufactured meat items such as frankfurters.
Utility: Needs to borrow the entire downpayment and asks the loan officer to slip him a 10 to buy lunch.
Cutter: FICO score same as bowling score.
Canner: Absolutely no chance of staying current past the Fourth of July. Give that man $300,000!!!
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A very humorous 'piece'. More importantly, tongue in cheek, a bulls eye...
Posted by: Thomas Kenny at March 7, 2007 07:34 AM
dude that was lame
Posted by: syncmaster at March 7, 2007 08:01 AM
Funny and gross at all once. Good read.
Posted by: Dan Green at March 7, 2007 10:32 AM
This is actually a very serious issue in the USA. But as usual it has become comedy. Many families are ruined, some commit suicide, and a lot of capital is crushed - all because the government changed regulations. Why? Because there were a bunch of sharp lobbyists giving out dough in Washington.
20 years ago the sub-prime market wouldn't have existed (this was the realm of loan sharks and the mob). 20 years ago you couldn't penalize someone for paying off a loan early. 20 years ago you couldn't charge the same customer vastly different rates (all dependent on their ability to negotiate and read long contracts).
First we gave the practice a name - sub-prime. Then we expanded the practice to many who aren't even sub-prime. Then we lobbied to get little laws changed to enhance the profitability. We come up with ways to make money besides from interest on the loan (late fees, hidden points, hidden fees, etc.)
Now it is a huge "legal" business. But in reality it is really just a legal, formalized form of loan sharking.
Now the issue is the butt of jokes. So I guess we have just accepted the practice as legal, moral, and good for the USA.
Let me tell you - none of the 10 countries I have lived in have anything as appalling as this. If you have a job and a down payment you get exactly the same deal as the millionaire who doesn't really need a loan.
Funny article anyway.
Posted by: William at March 7, 2007 07:13 PM
Can't agree more. Excellent piece.
Posted by: umcane at March 7, 2007 07:35 PM
I think I'm going to become a vegitarian!
Posted by: Rhonda Porter at March 8, 2007 09:52 AM
vegetarian = cash only :)
vegan = Larry Finkelstein (Big Brother avoidin', no SSN, rent only) :D
And the majority of US loan owners = heart attach and high cholesterol :D
Posted by: Got TheRunaround at March 8, 2007 05:48 PM
As a real estate broker with over 20 years of experience, I wanted to weigh in on the current sub-prime debacle.
In this last housing boom, lenders created loan products to meet consumer's hearty desires, they created a huge amount of equity but missed a vital point; they allowed consumers to buy a payment, not a house. Items like "Stated Income" and "Hybrid ARMs" made an egregious amount of money for banks and brokers but put people in places they should never have been allowed to go. The sad part is that the public will end up paying for the lender?? mistakes.
One of the biggest problems is how the market defines "sub-prime", they label it as 640 FICO or less. One 30 day late can unjustly bring you to that level, to use that against borrowers is criminal. Banks have been manipulating borrowers with excellent credit so that they can put them into lousy loans that make the bank a ton of money but place the borrower into a larger payment that is built to fail sooner or later. If the credit scoring mechanisms (FICO) were realistic and banks rated a borrower's credit correctly, allowing for mistakes and some unavoidable items, it would result in borrowers being put into the proper loans. Banks would have made a bit less money but not bankrupted their customers eventually. It is a system in which the borrower has very little leverage; you play on the bank's field or you go home????..if you have one.
Of vital need for change is the way loan brokers are compensated. The YSP or "Yield Spread Premium" is nothing more than the Bank's kickback to the broker for doing the loan. The worse the loan, in terms of interest rate, that the broker gets the borrower to agree to, the higher the YSP dollars go to the broker. What exactly, other than honesty, is the broker's motivation for helping a borrower get the best available deal? Combine greed, low barrier to entry and minimal mandated disclosures and you have a recipe for a lending disaster at the borrower level. Until there are mandated disclosures that spell out, in 14-point type and plain language, what exactly a borrower is encumbering themselves to in total and how the broker or bank is compensated this system will continue to fail the public.
I have personally seen lenders and brokers lie to consumers about their credit-worthiness and play bait-and-switch games to get them into appalling loans. The residential industry is rife with such tactics and their bill is coming due for it. They killed their own Golden Goose; we're going to get stuck with the feathers.
Huntington Beach, Ca
Posted by: Michael Hoskinson at May 10, 2007 11:01 AM