Banking Law

Dallas Morning News business columnist Cheryl Hall recently interviewed Richard Bitner, a former subprime lender based in the Dallas suburb of Plano, Texas, and the author of an ex-insider's look at how the subprime debacle occurred and how to prevent it from happening again, entitled Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse. Cheryl calls the book "part confessional and part sermon."

Rating agencies, paid by the investment banks, handed out Triple-A ratings on mortgage-backed securities that were clearly not that safe. Appraisers said homes were worth much more than they were to keep the mortgage brokers coming in. Mortgage brokers were free to play fast and loose without being held accountable.    

Well-intentioned companies like his realized the situation was nuts but thought the industry would regain its sanity.

It didn't.   

Proving either that he was prescient or the truth of the old adage that it's better to be lucky than smart, Bitner sold old his interest in his firm (Kellner Mortgage Investment) to his partners in 2005, well ahead of the deluge. As in many walks of life, timing is everything. He made a boat-load of money and, according to Ms. Hall, appears a bit defensive about that fact. He shouldn't be. As he notes, early on, no one was concerned about "creative" loans that helped the poorer members of society realize "the American dream" of home ownership. It was when, as Mr. Bitner notes, "loan terms became more and more screwy" that mortgage brokers like Bitner saw the handwriting on the wall.

Home appraisals were fantasy-based. Mortgage brokers were cattle herders roping in customers regardless of their creditworthiness. "These loans [usually a two-year adjustable-rate loan] were always designed to be a Band-Aid or an in-between for somebody," he says. "You lost your job. You had a problem. But you can still afford this payment. You keep it for two years, fix your credit and you move on. "Unfortunately, it went from being a niche product to being a standard staple given out to 25 percent of the mortgage business in the United States."

Many were too addicted to the money "jones" to stop being enablers. While no one should get dew-eyed over Mr. Bitner's timing, they should give him his "props" for his foresight and, perhaps, having a conscience. I don't know if I agree with his contention that Kellner Mortgage Company "did far more good than harm in the long run," but I don't know what it's track record was. He may very well be right.

Mr. Bitner occasionally posts opinion pieces on this topic and related topics at Housing Wire, an excellent information source, by the way. It's publisher, Paul Jackson, thinks that Bitner posts intelligent thoughts about how to fix the mess. I agree.

Much of what Mr. Jackson hears from consumer groups is "a gross oversimplification of things ? 'lenders bad, consumers good' caveman logic."

He wants policymakers and regulators ? among the 2,500 subscribers of his site ? to have more informed information when they put together the next bill or regulatory standard. He says Mr. Bitner offers that.

"It's not popular to say now, but the concept of subprime lending was rooted in a good idea," Mr. Jackson says.

"It was just executed beyond horribly, thanks to a complex and unregulated financial web that spun out of control."

Mr. Bitner boils it down to a simple truth: "If the industry had correctly charged interest rates commensurate with the risk, there's a strong chance none of this ever happens."

There's also a strong chance that the same policymakers who now are calling for the heads of the "crooks" in the subprime mortgage business would have excoriated that same group for its failure to address the mortgage needs of the poor and downtrodden. "Informed information" has little to do with any legislator's thought process when proposing, supporting or opposing legislation. "Caveman logic" rules.