Subprime lending, the dramatis personae
When the mud starts to fly in the subprime story,
you’ll want to know who’s who. So, since you can’t tell the players without a program, here is who’s who in the lender universe, in rough order of appearance in our little play.
Borrower. The person who wants to buy a home, and who is willing to pledge many months’ and years’ worth of his or her future earnings to achieve that result. The hero or heroine of our little tale.
Me and my money will ne’er be parted
Guarantor. A financially more robust person than the borrower — more assets, more income, a better credit history — who is willing to lend his or her credit and credibility, usually by co-signing the loan. Often a parent or family member.
“My friend Bassanio needs a loan, but I’m telling you he’s good for it.”
Originator. An individual who works for a mortgage broker or direct lender, and who interviews the applicant in hopes of turning him into a borrower.
Now then, Mr. Apricot, do you qualify for this loan?
Originators are explorers and hunters; they are always seeking out new homes and new applications, boldly going where no bank has gone before.
Correspondent or mortgage broker. A company that, although it employs individual originators to seek out borrowers, in fact has no money of its own and does not actually make loans directly. Instead it develops completed loan application packages that it submits to the investing lender’s underwriter.
Some tasty loan applications coming right up, sir!
It’s a normal principle of lending that in any correspondent lending relationship, the originator/ mortgage broker takes first loss.
Underwriter. A green-eyeshade analyst who works not for the mortgage broker but for the investing lender, and whose job it is to scrutinize every application (as W. C. Fields once said of the Bible) looking for loopholes. The underwriter approves only those loans he cannot deny, and he has many legitimate grounds for denying credit.
Your reasons for recommending this loan are illogical
Typically portrayed as emotionless and uninterested in borrowers.
“I would prefer not to make this loan, sir.”
Conversely, the obliging lender is portrayed as helpful, when in the subprime story it was the too-obliging lenders who created the problem.
Credit committee. A BOGSAT — (bunch of guys sitting around a table) who represent the lending institution. They collectively review the underwriter’s work and say thumbs up or thumbs down.
World’s most famous BOGSAT
Funding desk. A capital source, most likely a department within the lending institution, that can actually fund the loan when it comes time to close. You know, when you get the money.
Yes, we can open the new house when we get home
Investing lender. A well-capitalized entity (think pension fund or insurance company) that wants to put capital to work long term.
“If he be like to die, then he should do it, and decrease the surplus population.”
Many investing lenders also created origination/ underwriting arms, but this is not essential. Investing lenders buy either whole loans or tranches of securitized loans (see below).
Securitizer. The alternative to selling whole loans, securitization is the process of issuing a new security, largely backed by a pledge of the existing loan portfolio, but with new characteristics: lower loan-to-value, priority of repayment, lower interest rate.
Repackaged for greater efficiency and lower cost!
That new securities instrument has to be created by a very clever person with a hyperactive financial mind, who can structure it at the optimal price and terms, and whose judgment about risk is precise.
[Dear readers, have no fear! In a forthcoming post, The Adventure of the Investment Banker’s Clerk, Watson will be visiting Sherlock Holmes’ brother, the City of London investment banker Mycroft Holmes, for a private tutorial in securitization.]
Securities holder (A piece). The investor who buys a securitized instrument normally has a first claim on the whole loan pool’s collections. That first slice of the pie is normally called the “A piece”, and what remains — are we ready, class? — is the B piece.
In more complex securitizations, there can be a C piece, a D piece, and so on.
Holders of the A debt feel themselves entirely safe … until the B piece holder implodes. Then they are prone to panic.
You bought the A securities and I didn’t!
Loan servicer. The person or division within a lending institution that actually receives and processes monthly loan repayments, and sends them on to the investing lender.
“We keep your loans shiny and well buffed.”
Because they are recurring, routine, and numerical, servicing has become spectacularly automated. Servicers have grown to enormous financial scale, even as they maintain ever smaller numbers of staff per loan.
It’s all in my head
Asset manager. Normally one level higher up within the same entity that provides loan servicing, the asset manager is always a person (or collection of people) who address any loans that aren’t running perfectly smoothly.
Looks good so far
Asset managers are problem solvers, and because problems vary, solutions are always customized. Like many other skills, asset management looks easy when done well. As a result, it’s a term that everybody uses and very, very few people actually understand, much less know how to do it.
Workout specialist. When the problems overwhelm the asset manager, loans need restructuring. Workouts are their own entire discipline, calling for precise judgment, cool nerves, and skilled action.
“Get in, get out, move fast, solve problems.”
If all these players confuse you, you could just opt for safety:
“Neither a borrower nor a lender be”
