Prime spirit in a sub-prime world

published 15 December 2007

Monique Dueñas is home for the holidays, having spent most of the last seven years in California. In 2000, she went there with nothing but $600 dollars in her pocket and “a desire to find myself.”

She started her life in the United States as cashier at a local 7-11 store. She made $3.50 an hour and rented a room where all she had to do get from the living room to the kitchen was to turn her head. Then she stumbled into the lending industry—and on her first day as receptionist at Citinet Mortgage, she knew her life would never be the same.

Her employer acted as broker between lending institutions and borrowers at a time when, reeling from the effects of 9/11, the US government was encouraging its citizens to spend their way out of an economic downturn. The housing market became lucrative because of the easing of interest rates that afforded ordinary people the opportunity to turn the dream of owning a home into reality.

Monique worked hard. She was thrilled at the idea that she was out there alone and she was earning her keep. Why, she figured, if she persevered enough, she might in a few years’ time be able to own a home as well. After nine months, she was promoted to human resources supervisor. Another year passed and she became junior loan processor. By May 2004, she had moved into yet another mortgage company, Pacific First, in Van Nuys. She was now senior processor and earning enough to move into an apartment “where the smell of my cooking didn’t reach my bedroom.”

It was in this company where she became more exposed to the rudiments of consumer lending. She attended trainings. She built her network with lending institutions: Big banks, thrift banks, even retirees who wanted to make productive use of their retirement money and pooled their funds together.

Here she discovered that once one was issued a social security number, one was already subject to a credit rating. In Monique’s part of town, three ratings agencies assessed a person’s creditworthiness—based on age, job, credit history and payment habits. All these formed an overall picture of the individual that would, in turn, determine the likelihood of his ability to secure loans or gain access to other financial instruments in the future. A rating of 850 points made one a prime borrower. Some, however, were rated as low as 300. Normally, loans—especially those from conservative institutions—were granted to those with ratings of 720 and up.

Monique’s job was to evaluate the credentials of individuals applying for housing loans and match them with the requirements of the various institutions offering to fund them. The requirements varied, depending on the risk appetite of the lending company. Some of the criteria she looked at were the credit rating of the individual, default history, if any, sustainability of paying capacity, reserves (we know this as savings) and the debt-to-income ratio, which meant simply the level of debt (principal and interest) as a percentage of a person’s disposable income.

Big banks usually approved the applications of those with 35-38 percent ratio. Some small lenders, however, accepted clients even if their existing liabilities made up 50-55 percent of disposable income.

These not-so-creditworthy applicants were also known as the sub-primes.

The adjustability of interest rates made this arrangement, notwithstanding the risk, more palatable to the lenders. Of course, borrowers held on to their dream so they were inclined to agree to payment arrangements that were quite a stretch given their present income capacities.

Interest rates for the first two years were normally fixed—for instance, 8 percent. However, on the third year, the loans would be subjected to ARMs, or adjustable rate mortgages, where borrowers were charged prevailing interest rates PLUS a margin directly proportional to their sub-primeness, if there is such a word. In other words, the more sub-prime you were, the more lenders were emboldened to charge. And, as in anywhere else in the world, there were too many takers: Those willing to pay steep prices for their dreams. The mark-ups could bring the adjusted rates to as much as 15 percent.

In addition, loan processors were given incentives—anywhere between $300 and $500 for every approved application. Clearly, this was a conflict of interest as some processors may have been inclined to misrepresent facts just so the loan would be granted and the incentives released.

But Monique says it’s difficult to see this matter as black and white. So long as applicants’ documentation supported their claims, she said, the papers would then be offered to numerous lenders. If a borrower was not acceptable to one, he or she could be to the next.

These irregularities wouldn’t matter— yet. In early 2005, the industry was still in full swing—too much, in fact, that Monique, now confident in her skills and in the contacts she had developed (and inspired by her boyfriend, Enrique, whom she is set to marry in August 2008) decided to establish her own business, Loans MD (MD are her initials) offering loan processing services.

Monique earned $80,000 on her first year and $160,000 on the second year. She and Enrique able to take a mortgage for a modest home. They took a vacation in Hawaii—twice. She celebrated her 30th birthday at a hotel. In fact, she had to take in three assistants to help her service her clients’ requirements.

Now we know, of course, that these happy days were too good to last.

Over time, the adjustable rate mortgages became a problem for the sub-prime borrowers who were mostly (a.) cultural minorities and/ or (b.)members of the working class. In California where Monique operated, it was Mexicans and some Asians. The increased interest rates rendered them unable to service their monthly dues. According to the Wall Street Journal, between 2004 and 2006, “more than 2,500 banks, thrift banks, credit unions and mortgage companies made a combined $1.5 trillion in high-interest loans.” And the troubles aren’t about to end soon. According to the same newspaper, “as much as $600 billion of adjustable-rate sub-prime loans are due to adjust to higher rates by the end of 2008, which means that more and more borrowers are likely to fall behind.”

The sub-prime crisis has been known to have far-reaching consequences. Share prices of lending companies listed in the New York Stock Exchange took a plunge over concerns of defaults and foreclosures. There are also efforts to discourage lending in the meantime, supposedly to weed out the sub-prime borrowers from the market. Houses remain in the market, no takers, for extended periods of time. The dollar has been languishing against other currencies and capital markets all over the world are adopting a wait-and-see attitude, taking the cue from Wall Street.

Monique says that since July, she has counted herself lucky if she can process one or two loans. She has had to let go of her assistant. Good thing Enrique’s job in a computer chip-making company is stable; their wedding plans are still under way and they have been able to keep up with their own mortgage payments. For her part, she has decided to spend whatever is left of her money to see her widowed mother and her brothers for Christmas.

She’s flying back to the US on the 27th, eager to start her classes in culinary arts. Monique says real estate is governed by cycles, and the tides will sure turn for the better at some point in the future. But she can’t wait around for that. At least she has acquired skills that can never be taken away from her, not by any crisis. Now she looks forward to learning something new and turning this into yet another venture altogether.

In the meantime, she is really just so “happy to be home.”