Vince’s Lessons as a Broker, Part 2

by Tony Chavira

Vince got into real estate brokering late in the game. When he left his job in the auto industry in 2006, the housing market was already exploding. All of the scary, predatory stuff was in full effect and regulations were relatively nonexistent. The very fact that Vince was able to get his broker’s license in about a week (through the California Department of Corporations) instead of years (through the Department of Real Estate) shows how easy it was to get into the game and how convinced everyone seemed to be that brokering was a great, easy job.

Within the year, Vince had 34 loan officers working under him, dealing with both regular and (gasp!) subprime home loans. Granted, it was difficult on the ground level to understand that those subprime mortgages were going to be resold to investors as Collateralized Debt Obligations (CDOs) with triple-A ratings (even though a rational person would assume that it would be incredibly risky to invest money in someone who had bad credit). As a broker, you don’t care who’s buying a loan. Besides, when money was flowing like water, it’s easy to assume that the economy is strong enough to withstand a few defaults here and there. Since subprime loans appeared to be so high-yield, wouldn’t a broker prefer them in order to make a hefty cut right away?

This was the situation Vince stepped into. And he was able to see his children whenever he wanted, blow cash on his loving family, and rent out a bunch of properties, all while working out of his home. Most important, he was able to buy himself out of his old job in the auto industry (where he got over $100K for working 70+ hours a week).

By mid-2007, his business had reached its peak. He worked out of a bedroom in his Downey home and employed 34 loan officers in 45 states, who got 80% of the commission when a deal closed. There were no licensing requirements for loan officers (now there are plenty), so it was easy to find people interested in making cash fast. All they had to do was find someone ready to buy a home, propose to finance them, and send the deal to Vince. He would check the buyer out, set up the deal with one of the over 100 lenders in his Rolodex, and make the offer to the buyers. Deals went through a loan processor in Arizona, who charged $750 per loan. Once everything was ready to roll, Vince would send the buyers the paperwork to sign, the loan officers closed the deals, and Vince would allocate the commission.

With 34 loan officers, business became really good really quickly. Soon Vince was able to start buying properties. Between homes in Lansing, Michigan and Simi Valley and a million dollar one in South L.A., in mid-2007 Vince was making $150K+ overnight, on top of closing about six loans per month.

Then one morning he received an email from New Century Financial Corporation. Vince was in the process of closing three deals with them, and each had passed its Right of Rescission, the three day window a buyer has to pull out of a deal. The email said that if Vince had any current or recently processed New Century deals, he should consider them null and void. This came as a huge shock since, in January 2007, New Century was the second largest subprime mortgage lender in the United States.

But by March 2007, they couldn’t sell their bad mortgages to the U.S. government. Their market capitalization went from $1.75 billion to $417 million practically overnight. They announced that they had overstated their earnings in previous years. Their executives had their personal profits disgorged—taken away because they were obtained illegally. (In 2010 their executive board members and cofounders were indicted and barred from serving on the board of publicly-run companies for five years.)

Vince was now stuck, and the more phone calls he made to his contacts, the worse things seemed. Mortgage lenders began closing up shop; less than 15 days later, Vince had lost over 100. Soon there was almost no one left to borrow money from, and his current buyers simply could not close, regardless of the money they put down.

Fifteen days wasn’t enough time for the seriousness of the situation to sink in. Vince and many of his colleagues continued to trudge along, brokering deals where they could and moving forward regardless of new regulations their lenders put into place. They had all known that the bubble would burst. Everyone could see that prices were too high and would eventually return to a normal level. Some buyers had financed their home purchases 100%, and were locked into their low rate for only three years; then their payments would skyrocket. Simply stated, people with terrible credit had no personal investment in their homes: they used no money to get them and they'll lose no money to leave them. If things went wrong, they'd just walk away.

Vince and his colleagues knew they should have prepared for the inevitable crash. But they weren’t, in part because they didn’t anticipate that the entire system was so inherently irresponsible that it would freeze all credit. Or that freezing credit would crush so many lending companies. Or that the elimination of these companies would so painfully affect the entire financial industry. They had expected that the bubble would burst, but thought it would simply mean less people could buy homes for less money.

Instead, the world invested its life savings in those rotten CDOs and lost huge. There no credit left, and no money to support the credit that was already given out. People with no equity declared bankruptcy and walked away, leaving their banks on the hook for hundreds of thousands of dollars. People across America lost their jobs, including Vince’s tenants. Over ten months, all of Vince’s profits were liquidated to cover the payments on his homes while they sat on the market. When one did sell, any potential profit would go to pay for the others. At the end of those ten months, his homes in Michigan were gone, his homes in the Valley were gone, his million dollar home in South L.A. was gone, and he was going to lose his home in Downey. In 2008, he closed his business.

Everyone Vince knew in the industry was affected, and many lost their homes, cars, families ... their entire lives. Lending to people with credit scores below 600 (where 530 was the minimum possible) caught up to the industry. In 2005, you could get $300,000 mortgage with a score of 530. Today, 530 wouldn’t finance a box of tissues. In 2005, all you needed to show was that you had six months of mortgage payments in the bank. Today, you need a year of mortgage payments, your taxes for the next two years, and an income stable enough to make future payments.

And what was Vince’s attitude after coming that close to poverty? “Babies get what they want all the time. Grown-ups deal with shit.”

Next week we’ll talk about how to get what you want out of a home purchase, whether you’re an investor or buying the home you’ll live in forever.

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