Salesman without Scruples: My Observations as a Loan Officer -- Part IV

**The following is the forth and last installment of a story that has been updated every Sunday in January. Scroll down for the previous pieces in the series.
Part IV: The Closing

Of the eight people I started with at the second brokerage, First American Financial, none lasted more than two months, me included. I soon found a stable job that while it didn’t promise $20,000 a month, lasted longer than most of the mortgages closed during my tenure.

Both brokerages I worked for were sued by its employees in class-action suits alleging that loan officers should have been classified as “non-exempt employees” and paid overtime. I opted out of both lawsuits. I dropped out of the case against Global Home Loans when a 10-page questionnaire, an obvious stalling tactic, was issued. It worked. The time expenditure became too great for a suit with little promise of payout. The companies suffered the same fate as most of the loans it closed. They went bust.

I didn’t keep in contact with anyone from the business. I quickly lost touch with Tara, Ed left First American soon after I did; he called a few months later to let me know he had found a job as a bank assistant. I found a few people on the internet, Tara’s friend with benefits is now married with children, she has a new man now. The others, like jobs in the mortgage industry, disappeared.

*All of the pieces on this blog are non-fiction, and this story is no exception. However, some names have been changed to protect the innocent (Me).

Salesman without Scruples: My Observations as a Loan Officer -- Part III

PART III -- Science vs. Shoeleather: The Case Against Quants.

Based on the prevailing financial models in 2006, sub-prime loans defaulted at a six standard deviation shock beyond expected calculations. A natural occurrence of once in 216 million years. I wouldn’t buy a one dollar lottery ticket with those odds. The banks bet billions.

The math couldn’t account for every variable. Why didn’t the big investment banks have detectives on the case? Everything was reduced to an excel spreadsheet; billions were bet on blind calculations. A little gumshoe work would have put a question mark next to the math, especially when they discovered that smooth-talking ex-cons were providing the numbers and earning the commissions.

Sometimes it was only a simple stroke of white-out that stood in the way of a loan’s approval and the commission that came with it.

At Global Home Loans, a $10,000 commission of Danny’s appeared in jeopardy. The loan required the borrower to have a bank balance showing sufficient cash reserves. But, their bank statements revealed that they had no cash flow. They spent everything they earned.

Danny knew what to do. He applied a little swab of white-out, a stroke of his pen, and bank statements showing a satisfactory balance were faxed to the lender. Loan approved.

The products themselves were as questionable as the people selling them.

The most popular product was a 2 & 28 Adjustable Rate Mortgage known as an ARM. Most traditional mortgages offered a 30-year payment plan where the interest rate and payments remained fixed for the life of the loan.

With an ARM, the interest was fixed for only the first two years, at a low teaser rate unavailable to sub-prime borrowers in a standard loan. After the first two years the interest rate jumped for the remainder of the loan. But, the 28-year piece was never intended to come into play. After two years the borrower’s credit was supposed to improve to prime territory allowing them to refinance at a better rate.

The rub? The same spending habits that created their credit issues remained. If they received cash back as part of the refinancing it compounded their problems.

Do you remember Mr. Perez? The landscaper from Sarasota? His home was worth $400,000. He owed $300,000 on the house; we gave him a loan for $340,000. The $40,000 difference was his to spend. If he was like most people he did, and stupidly.

Cash back became our calling card. It was one of the first questions we asked on cold-calls to hook in customers. A better interest rate bored them, but $40,000?

Let’s make a deal.

Instead of paying off bills with the cash back, they bought flat screens TV’s big enough to skate on, bunker-sized barbeque grills, and 8-cylinder SUV’s. Their credit never improved.

They used their homes like ATMs, refinancing three and four times as their property value increased. They collected cash back every time; so did the loan officer through his commissions. But, every cash back opportunity increased the loan amount. This posed no problem as long as the property held its value.

It didn’t. Mr. Perez’s $340,000 loan was issued when the property was worth $400,000. Housing values in Florida have since fallen 25%, valuing the house at less than $300,000. He owed more than the house was worth—this is called negative equity.

Like most of our customers, Mr. Perez was sold a 2 & 28 mortgage. After two years, he couldn’t refinance; banks don’t offer loans for more than a house is worth. The teaser rate ended, the monthly payments jumped, and he couldn’t cover the added burden. This happened all over the country, creating waves of foreclosures that crested into what mariners have mythologized as a rogue wave. A six standard deviation shock to scientists.

This was sub-prime as I saw it, not as an abstraction on a spreadsheet. I spoke with hundreds of these customers; I heard their stories; I saw their credit report. I doubt the rating agencies spoke to even a single loan customer.

PhD’s in physics, math, and computer science became hot commodities on Wall Street. Why accept a professor’s pay when you could quadruple your salary on Wall Street? Their models became gospel. Quantitative analysts and the spreadsheets they spawn will always have a place in business, but numbers are never so surefire to make intuition obsolete.

Clearly something went wrong with the models. The models measured what they could, but some of the most important factors were immeasurable. They couldn’t account for shadiness and stupidity on an Excel spreadsheet.

A bad business joke gets the gist:

The president of a car dealership stands in his showroom looking concerned. There’s a new dealership across the street and their American flag flies higher against the horizon. He won’t be upstaged, so he asks the janitor to measure the competitor’s flagpole.

The janitor returns the next morning and says 20 inches in circumference.

The rating agencies used statistical models to assess patterns of default. Statisticians want to know out of 1,000 mortgages, based on historical performance what percent of people will pay their loans? They assumed the past would remain relevant in a world where new products were unveiled every month.

A common product during the boom called a N.I.N.J.A. loan sums up the whole story. The acronym stands for No Income, No Job, or Assets. Though it was implied the borrowers had all these things, they weren’t documented. These loans appealed to cash businesses like landscaping where most income isn’t claimed on tax returns. People willingly paid a higher interest rate to avoid alerting the I.R.S. of their true earnings. And naturally loan officers loved them; there were few documents to deal with.

These new loans lacked both historical data and individual loan facts. Everything was based on credit scores and loan to value ratios. How can an equation be solved without knowing any of the variables?

You can’t make projections without historical precedent. The outcome itself, known as the sub-prime crisis was without precedent.

NEXT WEEK: The Closing

Salesman without Scruples: My Observations as a Loan Officer -- Part II

PART II: Sales 101

Whatever the product, a salesman has two objectives.

1. Build trust.

2. Qualify.

The mortgage business perfectly illustrated this truth. A credit check required the borrower’s social security number to determine if they qualified for a loan.

Though it’s hard to find faith in someone over the phone, this part of the process was scripted to sound hyper-professional and short circuit common sense. Basically it boils down to this: if you want something, ask for it.

A good, honest salesman deserves respect. It’s an art that can be mastered, but like pure athleticism or artistic ability it requires innate talent.

Example: Loan officer standing with a phone clutched in his fist like he is about to punch himself with it. The buckle on his Gucci belt matches the clasps on his Gucci loafers. He is talking to an apprehensive customer of mine from Sarasota, Florida named Mike Perez.

—This is Christian, I’m a senior loan officer. Yes, that’s right. Like your religion. Mr. Perez, let me ask you a question. What do you do for a living?

— I own a landscaping business.

— Do I tell you how to clip hedges, Mr. Perez? No? Good, because I don’t know anything about it and I bet you know even less about mortgages. So let’s stick with what we know. Ok?

— Ok.

— Mr. Perez, what’s you social security number?

With the social security number secured, the loan officer always told the customer not to let anyone else check their credit because it would decrease their score and drive up their interest rate. In truth it would take a bombardment of inquiries to make a difference. Shopping around is still standard practice.

Preliminary interest rates from the bank were based on the credit score and the loan to value ratio (LTV): the amount of the loan as a percentage of the total value of the property.

With an $80,000 loan on a home worth $100,000, the LTV is 80%. The lower the better. It means the borrower owns more of the house; this is known as equity. In this case, $20,000.

Once the figures were finessed and the customer hard-sold on the loan officer’s services, final approval by the bank required a ream of documentation: three years of tax returns, two years’ record of mortgage payments, one year of bank statements, pay stubs, and explanation of any delinquencies. Then, an appointment to appraise the property was scheduled.

For a lot of customers these steps presented a major obstacle. If their life was in order, so would their credit score.

With documentation complete the loan was submitted for approval, and the commission calculated. In most shops the commission was the only source of a loan officer’s income. But there was a lot of money to be made.

On one loan Danny made $24,000. A good-size haul, and a textbook example.

Loan officers made commission on the front and back of a loan. The front side is generally 1% - 2% of the loan’s value and disclosed to the borrower (if they bothered to read the Good Faith Estimate). The more complicated the mortgage, the higher the percentage. Danny’s client, a gas station owner, took out a $600,000 loan to buy a second home in Boca Raton. He charged them 2%, not because the loan was particularly difficult, but because he could get away with it. Two points on the front made him $12,000.

He also charged 2 % on the back end. Here it got sneaky. Danny locked down a 6.5% interest rate on the loan. The real market rate, the truly best rate available was 6.0%. The spread between the rates was called the yield spread premium. Interest rate sheets provided by the banks listed the spreads for every loan. An extra quarter percentage point might earn a 1% commission, or one pointy

An increase from 6 to 6.5%, earned Danny two points on the back of the loan for an additional $12,000. This was never disclosed to the customer; shopping around provided their only protection.

Danny’s made $24,000 with two points on the front and two points on the back loan. He never met the customer; the entire transaction took place by phone.

But, how was this legal?

The yield spread premium was created to provide cash back for the borrower to cover all fees and closing costs. Someone could own a home with no money down, financing the entire cost of the house, plus closing costs and attorney fees. Renting an apartment with first, last month’s rent, and security deposit would require a greater cash outlay.

The folks we sold loans to weren’t that crafty. The yield spread premium lined the loan officer pockets instead of theirs. It didn’t matter to the banks since they benefited either way. An extra half a percent over the life of a loan can bring in tens of thousands of dollars in additional interest.

I learned these ins and outs at Global Home Loans, but after one month I transferred to the mortgage company where Tara’s friend with benefits worked. She was happy to get me the job so she could keep track of him.

I wasn’t the first to make the move. The month before, a female loan officer had blazed the same path to escape the sexual advances of the boss.

The mortgage industry experienced job turnover like a meat packing plant, a revolving door of recruits. It was not uncommon for people to quit after one day.

I started my second gig with a class of eight loan officers at First American Financial downtown near Battery Park. Though the place was a little more professional, their big screen TV in the conference room was stolen the weekend before I started and presumed to be an inside job.

Management told us to see the movie Boiler Room. After watching it I realized I had one up on Hollywood. I would make hundreds of calls a day working with two telephones, clenching a receiver in each fist.

The new crew consisted of Rocco, an actor short-listed for a part on the Sopranos; Ed, a Russian kid fresh out of City College; the black guy with the Jewish surname—something like Sidney Greenstein—that I thought would be better suited for a line of men’s haberdashery. He called himself a lion of Judah. Stan, the 40-something guy from Queens who lived with his mom. “No, my mom lives with me.” Norman, the former art gallery owner, who at 70 supplemented his social security in a fly-by-night free-for-all.

First American held classes for the new recruits. A know-nothing know-it-all who tended bar for ten years answered all the questions while I kept my mouth shut, smirking at the cheap black suit he wore everyday with white socks.

Our instructor was an English guy with a posh accent. Two weeks later, with classes over, they sacked him but kept his voice on the phone recording for the British air of legitimacy it offered.

During our many breaks, I smoked cigarettes with Ed in front of the building. Most everyone smoked in the mortgage business. Ed’s favorite subject was Russian mobsters and Meyer Lansky, who he regarded as a folk-hero, a Jewish representation of America’s tough-guy tradition.

Standing there smoking, I fixed on the Statue of Liberty across New York Harbor, my family’s first sight of America when they arrived at Ellis Island almost 100 years prior. Ed’s family immigrated on an Airbus via JFK—three generations for me; the first for him. Neither of us considered our jobs to be the better life our families envisioned for us, nor did we believe the mortgages we were peddling paved the way toward the dream of home ownership. We were commodities selling commodities.

NEXT WEEK: Science vs. Shoe Leather

Salesman without Scruples: My Observations as a Loan Officer -- Part I

Salesman without scruples selling loans to people without marbles set off the sub-prime housing collapse. I was one of them.

I sold mortgages all over America from a building on 32^nd street a block from the Empire State Building during the heady days of deal making when a mortgage company sponsored that year’s Super Bowl.

50 blocks downtown and a world away, Wall Street was betting billions on the sanctity of these salesmen without scruples and the sanity of our customers. To be sure, they made their measurements, calculated their risk, but it was all math with no meaning. They failed because they never set foot in a mortgage brokerage. Unfortunately for me, I did every morning. This is my view from the inside.

The sub-prime market operated in a realm far removed from the picture of a young couple walking into a local bank to meet with a manager. Most sub-prime mortgages originated from brokerages where guys with bad accents cold called from cubicle farms to customers all over America.

I found the first mortgage company I worked for, Global Home Loans and Finance, through The New York Times classifieds. The headline: EARN $20,000 A MONTH.

I called the number; spoke with a guy named Danny, and scheduled an interview. He did not ask to see my resume. My first of many red flags.

The next day, I interviewed with Danny, a 20-something Jewish guy from Great Neck who looked like a young Barry Manilow if he were a shyster instead of a songster.

He introduced me to the owner in passing. I noticed one thing. The face of his watch was the size of a hockey puck. Probably filled with air, just like the promises of earning $20,000 a month.

But, greed got to me. I wanted to make money, set my own hours, and have time to work on the novel I was writing. Thankfully I was 25 and young enough to recover from my stupidity.

The mortgage industry operates on commission. I received no salary or benefits and I never made much. I was renting an apartment on Avenue C next door to a squat and above a bar called the C-Note. The night before my first day, the band played until 2 a.m. on a Sunday night. I stumbled downstairs in my sweatpants and told them to get off the stage. When more people stand on stage than in the audience, there’s an unwritten rule: pack it up.

I arrived exhausted for my first day of work the next morning. Within my first hour on the job I was offering financial advice over the telephone. I had no experience in mortgages or sales.

The industry was lightly regulated, both the products sold and the people selling them. In most states, mortgage brokers needed to be licensed. However, the broker served merely as a figurehead to satisfy state regulations. The companies I worked for were licensed in over a dozen states. Most brokerages though operated as absentee landlords, they just collected the money. The footwork was done by loan officers, people like me who hit the phones an hour off the street.

I soon learned many of my co-workers had convictions, and they weren’t the religious sort.

Danny’s crew consisted of seven people. The standouts: Dave, a holdover from the old Hell’s Kitchen; a small mousy Italian guy with thin dark hair that draped over his little head. He was once involved in drugs and restaurants, running both. Angel, an ex-con that draped his cheap pea coat over his shoulders like he was an associate in some Inwood mafia. Tyron, a black guy with a coke spoon pinky nail who perused hard core porn during his down time.

I sat with my back to him, facing Tara, a party girl with a perma-rasp that sounded like she spent the previous night belting out Bon Jovi tunes at a Karaoke bar.

For her college graduation gift her father funded her DD implants, consolation for divorcing her mother and remarrying a Playmate. For her graduate school graduation, they were removed. She was back to an A-flat when I met her.

Tara was seeing a human resources director at a rival mortgage brokerage downtown that I transferred to a few weeks later. She interviewed with him and didn’t get the job; they started dating and she ended up giving him jobs instead.

I became Tara’s friend, without those kinds of benefits. But I did appreciate her feminine levity and chance to commiserate.

I did well enough on an early lead to make Tara jealous. I’m good with people and talkative, but not a salesman for stuff I don’t believe in.

I got lucky. New recruits worked with leads that were as cold as the reception we got. It’s easy to harass people when you know they’re not going to bite. I just practiced on the poor suckers.

My office found leads through a third-party that blanketed the internet with banner ads promising rates like a limbo line—look how low we can go. Those who signed-up saw their information sold to brokerages all over the country. A seasoned loan officer would call with every intention to close a loan; thereafter these numbers were cold-called in perpetuity to train new classes of recruits.

Nearly all the loans we closed were refinanced mortgages, homeowners who wanted to lower their interest rate and monthly mortgage payment on their existing mortgage. Refi’s were more abundant and less demanding than new home mortgages and thus perfect fodder for the armies of salesmen that sprung up overnight.

As an experiment I clicked on one of these ads and signed up posing as a prospective borrower. I received my first phone call within 15 minutes. The calls continued a year later. They finally stopped when the brokers went of out business.

NEXT WEEK: Sales 101

The Bluetooth: Life Line or Out of Line?

*The story below was submitted to the City Section of the New York Times. The pitch was accepted by my editor on a contingency basis, however she rejected the finished article because she didn't think it offered anything new. You be the judge.


A customer walked into a Brooklyn corner store to purchase a pack of gum. As he approached the register, he was twice called sweetheart by the clerk standing behind the counter. The customer froze for a moment until he realized the clerk was talking on his cell phone through a Bluetooth mobile phone headset—a five-minute phone conversation of 4,000 minutes he used that month.

The Bluetooth headset clips over the ear and functions as both an earpiece and receiver. The teardrop shaped device emits a flashing blue signal like a Christmas light. It is an ornament known to many for the awkward exchanges it inspires rather than its utility as a hands free mode of cell phone conversation.

But, for the men who work long hours in the City’s convenience stores and taxi cabs, it can be a life-line. The Bluetooth headset and other attachments like it allow them to catch up with their spouses, engage in remote parenting, and to be sure, talk about sports too.

But what then are they talking about, and to whom?

At the 5th Avenue Market in Park Slope, Brooklyn, Mohomed Ali, known to his regulars as Mojo, works seven nights a week at the 24-hour outpost and three days in receiving at a department store. Mr. Ali, half Yemeni; half Venezuelan, speaks English, Spanish, and Arabic. He carries on with his customers and callers in all three languages.

People call me when they want to talk, he said. “At three in the morning, if they can’t sleep they know I’m awake.” But, he cautioned against using two things at once. “It gets you into trouble.” You have to pay attention to customers, especially when counting out change, he said.

Taxi drivers surveyed in an informal poll estimated that at least three-quarters of their colleagues used a hands free device. Though The New York City Taxi & Limousine Commission outlawed their use, it could be considered the cabbies’ equivalent of jaywalking.

Even so, drivers remain cautious. On a recent Sunday at the Central Taxi Hold at Kennedy International Airport, among the hundreds of drivers who awaited dispatch, the right ear was the pronounced favorite for the attachment. This ear points inside the car, unseen from the driver’s side window.

Luis Almonte has driven a taxi since 1971, and been married to his wife for all of those years. For the last two have they communicated using the Bluetooth headset. Of the couples’ four children, his daughter calls him the most, his sons less so. ”I call my wife whenever I’m feeling lonely, or she is too,” he said.

Azzam Hesham said he prefers talking by speakerphone while driving his taxi. “The Bluetooth makes you look stupid,” he said. He suggested the product designers create a clip-on device that attaches to clothing like guests wear on television talk shows.

Sonu Singh, a driver for two years, said he uses the Bluetooth headset to stay alert on late night shifts, get directions, traffic reports, and avoid police activity. “It’s just another tool of the trade.”

Khasru Ahmed has driven a taxi for 21 years, and as an early adopter of the Bluetooth headset, began using it seven years ago. Mr. Ahmed said he likes the voice command feature for hands free dialing. He talks to everybody, he said. “I’m a very popular guy.”

Mr. Ali, at the 5th Avenue Market, would consider himself in good company. When asked if he had any significant others, he responded, “you can’t have just one.”

Though some of his relationships are more understanding than others, he said. “You have to take care of business. That comes first.” Others, he said, are less accepting of the arrangement.

Whatever the topic of conversation, the constant chatter may have more to do with its low cost than the need to stay connected. Most cell phone plans offer evening and weekend minutes free, and no one knows this better than night-shift workers.

Lost and Found on 42nd Street

The subway stops at 42nd Street and the train clears before its final stop at 57th.

I see a flash drive sitting on a nearby seat and call out to the exiting riders. Nobody claims it.

I’ve returned a lost wallet and had someone do the same for me when mine went missing.
And the Friday before, I had a similar flash drive melt so I was particularly keen to get this one back.

Though I am no spiritual woo woo, I believe in karma. I will always endeavor to return anything of value, even the lost and found prosthetic legs I’ve read about.

I take the flash drive to my desk and pop it in the computer. It’s filled with work files for Oxford University Press publications with 2009 release dates. I find one document that sheds some light: “Files for Myra.”

I call the receptionist and am transferred to Myra’s line. I leave a message.

She calls back minutes later. (One way to get your call returned promptly.)

I read her a list of the files on the flash drive. She says they’re important and that she will track down the owner. I give her my number.

I guy named Matt calls back 20 minutes later to claim it. “That’s odd,” he says, about as appreciative as someone who gets puddle-soaked by a passing car.

Would it have been less odd had I used it as a fishing lure?

He says he’ll send over a messenger.

I don’t want a reward, I’m not looking for recognition; I’m just doing a good deed (for once) and it would be nice to feel like I’m saving someone’s day.

A messenger calls my phone an hour later; English is not his first language. I take the elevator to the lobby to meet him. He’s not there. I head back upstairs five minutes poorer.

The messenger arrives an hour later and again I make the trip downstairs, this time for the handoff.

I never meet Matt and I never get a follow-up phone call saying thanks. The whole incident leaves me feeling like a nice guy. I want to fade back into anonymous New York and pretend I don’t hear Kitty Genovese.

To the people in my office though, I’m all right.

I’m done doing detective work for a while, but if you need help crossing the street, calling me a fine young man is reward enough.

A New York Life

My great aunt Helen ‘Chocha’ Kolassa was born in Manhattan in 1915. She grew up on the Lower East Side, on 2nd Street and Avenue A.

The family of six lived in a one-bedroom flat in a building filled with families new to the new world. I visited the Tenement Museum a few years ago and found the tour guide’s stories redundant. Chocha told them to me first.

She turned off the lights for the Orthodox Jewish families on the Sabbath; on sweaty summer nights they slept on the fire escape, for the breezes and the extra space it afforded.

In those days in downtown Manhattan, you made it if you made it out. When Chocha was 11 her family moved to Jamaica, Queens, where my mother was born and raised.

My grandmother and grandfather’s family lived in the upstairs half of a two family home, and my aunt and uncle lived downstairs. My Aunt Chocha and Uncle Eddie are siblings; I didn’t realize they weren’t married until my teens.

They lived in Jamaica for over 50 years. For 40 of those years, Chocha commuted to her job at Standard and Poors in lower Manhattan.

Jamaica was once a predominately Polish neighborhood. The only vestige of the old neighborhood as they knew it is the church, St. Joseph's, where Polish mass is still said every Sunday.

Crime in New York peaked in the 1980’s; Jamaica was no exception. When a bullet fired into the house lodged in the dining room wall, my grandfather played CSI with a yard stick, measuring the trajectory of the gun shot. Their trajectory was south Queens.

The family moved to a second two-family house in South Ozone Park near Kennedy Airport.

There was noise, but no crime. For all the glamour given to the mafia, there is one accepted truth: mob presence deters street crime, and brings fireworks. I remember watching John Gotti’s annual Fourth of July display through the upstairs window with my grandmother.

A few years after my family moved to South Ozone Park, a Puerto Rican family with Sandra Cepeda as the matriarch, moved next door.

As the first Latin family on the street they were met with trepidation by an overwhelmingly white neighborhood.

Chocha though, ushered them in. She was a neighborhood mentor who made them feel at home, at home. I never knew how much Chocha meant to Sandra and her family, but I knew how much she meant to my own.

I rarely saw Sandra, but I heard about her every time I saw my aunt. In later years, as a child of the Westchester suburbs, I moved to Brooklyn and would take the A train to visit Chocha, on a ride that took our family full circle back to the City.

Chocha died last week. She was 93. Four generations of my family paid our respects.

Sandra came with three generations of her family that had extended into the suburbs like my own. They did double duty at the wake, appearing for both the day and evening viewings; her family almost outnumbering ours at times.

Chocha, means aunt in Polish. Chocha didn’t have any children of her own, but she was an aunt to everyone.

She will be missed. God Bless.