Are you obligated to negotiate with me?

Okay now, bank, let’s negotiate

That appears to be the premise behind litigation recently filed by Lori and Mark Pestana of Westford, MA.  As reported in the Boston Globe:

A Boston-area couple who are in foreclosure, despite their herculean attempts to prevent it, have filed a lawsuit against Washington Mutual, one of the nation’s largest mortgage servicing firms.

I shall make several telephone calls on your behalf!

The cynical newspaper reader observes that these herculean efforts, as we shall see, occurred after the initial defaults – and that the defaults were apparently voluntary.

In the suit, filed in Suffolk Superior Court, Lori and Mark Pestana of Westford allege the loan servicer was unresponsive to their repeated phone calls and to their applications to negotiate an arrangement that would have allowed them keep their house out of foreclosure.

So there’s the question: must the lender negotiate?

The suit is seeking class-action status on behalf of thousands of Washington Mutual borrowers in Massachusetts.

Their allegations echo those of other borrowers who dealt with customer service departments at major loan servicing firms. Loan servicing firms accept payments and handle mortgage duties on behalf of lenders or the Wall Street investors who hold the loans.

The firms, inundated with loan delinquencies and foreclosures, often don’t respond to phone calls or letters and fail to accept late payments, renegotiate loans, or approve house sales that would avert foreclosures, some borrowers and agents have said.

I’d be surprised if lenders fail to accept payments, unless the payments come, as they sometimes do, with a self-serving note saying, “This check tendered in full payment of …”  I have always understood that the lender can cash such a check, writing its own commentary editorial gloss, but perhaps that’s inaccurate.

“I feel like we were just sucked in and caught in a vortex that we couldn’t get out of,” Lori Pestana said about trying to prevent Washington Mutual, or WaMu, from foreclosing on a $275,000, fixed-rate mortgage.

Loan payments going down the drain?

A fixed-rate mortgage?  Somewhere in here, my cynical mind then asked this question, How did the Globe get hold of this story?  Not from WaMu, whose external communications department crafted this gem:

WaMu yesterday said it is “fully committed to helping our customers stay in their homes” and that “foreclosure is a last resort.”

How’s that for public communications?

In other words, WaMu said nothing. 

The suit, filed one week ago, indicates the Pestanas would not have gone into foreclosure if they had reached someone at WaMu with authority to resolve their problem.

The Pestanas always had the option of paying their loan in full.  ‘Resolve their problem’ has to be a code phrase for get relief short of making full payments on time.

From the scraps available in the story, I tried to determine if the Pestanas had followed AHI’s advice to delinquent borrowers:

When the servicer calls – or writes, or emails – all of her inquiries boil down to her search for the answer to two questions:

1. Why are you in trouble?

2. What’s the best way out?

The answer is, Sort of.

After the couple missed their August 2007 payment, Mark Pestana, a human resources specialist, and Lori Pestana, a business consultant whose work had slowed, still felt they could get current on their loan.  One option might have been dipping into retirement savings, they said.

Why did the Pestanas not do this?  They apparently claim they thought something more favorable was on offer:

After reading on WaMu’s website that it would assist distressed borrowers with loan modifications, Lori Pestana [1] called and [2] was told they could not qualify until their payments were 50 days late. To become eligible, they [3] stopped paying and applied for help on Oct. 9, 2007.

Every picture tells a story?

Every workout request comes with a story attached.  Stories are beguiling; something in human nature makes us dive critically into them, even if they are or may be entirely irrelevant.  Whether by circumstance or by selective design (more on this below), as stories go, this is a good one – we were current until we defaulted because you told us to! – guaranteed to elicit instinctive sympathy. 

Not everybody is sympathetic

Suspending for now the critical fourth question [Unmentioned, and being left as a temporary exercise for the reader – Ed.], I’ve put brackets around three key factual questions:

1.  Whom did they call?  Anyone who’s ever had a consumer complaint knows that telephoning is frustrating and unreliable.  I’ve gotten into the habit of always asking each person I reach to give me their name and their phone number, because if you’re disconnected, you’re nowhere. 

That Ms. Pestana says she called implies the Pestanas have no written record of their communication – a significant minus to their putative case. 

Although the Pestanas said they were told they would get an answer in four to five weeks, a Nov. 13 letter from the Boston law firm Harmon Law informed them they were in foreclosure. Harmon Law represented WaMu in the foreclosure, the suit said.

The foreclosure notice, obviously, was in writing.

The Pestanas said they tried at least twice to determine the amount they could pay to reinstate their loan, but Harmon Law either did not call back or could not give them an amount. Another time, Harmon Law refused a $12,000 payment, because it was $3,000 short of the total payoff amount, the suit said.

We all have personal experience with friends or business acquaintances who were supposed to do something they did not want to do, who tell us “I called half a dozen times,” yet when we check, the source says, “Nobody ever called me.”

In January, Lori Pestana called WaMu again but was “caught up in an endless telephone loop,” the suit said; she left a message but no one called her back.

Perhaps the Pestanas have contemporaneous written notes.  Probably not.

Something like this, of the right date, would help, wouldn’t it?

Do those actions sound herculean to you?

2.  What were they told?  A year ago, a study I recall reading found that something like 20% of all telephone answers the IRS gave inquiring taxpayers were wrong.  Yet as the service repeats in all its administrative guidance and in every tax court filing, ignorance of the law is no excuse.  It’s up to the taxpayer to file correctly, even if incorrectly advised.

Here even more questions arise.  Who told the Pestanas?  Was the statement [must be fifty days in arrears] accurate?  Even if it was, were other conditions (e.g. default interest and penalties) attached to the loan modification offer?

Doubtless the Pestanas’ counsel will come armed for bear on these questions – still, there they are.

3.  When they stopped paying, did they explain why?  Evidently the Pestanas, who were current on their mortgage, voluntarily stopped making the payments.  Unless more evidence is adduced, this is rock-brain dumb; the one thing you don’t do is cease paying your mortgage unless your lender has had plenty of notice that you intend to do so and has acquiesced – preferably in writing.  As I put it back then:

Conclusion: keep your eyes on the prize.  Although a lender is not your friend, neither is the lender your enemy.  Loan servicers want to do something that’s good for the company, safe for themselves personally, and likely to work.  They make these judgments based largely on statements you make and evidence you provide to support those statements. 

They care about the answers to two questions:

Why are you in trouble?  Whatever explanation you give, it had better be the truth.

What’s the best way forward?  Your goal is to demonstrate that foreclosure, although administratively reliable, is a very risky financial path, whereas modifying with you, however it may sting, is reliable.

My problem with the Pestanas’ story as presented is lack of verifiability.  The events presented are the actions they say they took a year ago – evidently, without any contemporaneous written communication from WaMu or the loan servicer.

In court, you also have to verify

Finally, there’s a fourth question, not explicitly mentioned but actually the most important of all:

[Continued tomorrow in Part 2.]

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All others pay cash?

Sherlock Holmes believed that debt says, I don’t trust you.  As he put it:

 “Consider debt.   I lend you money, which you promise to repay, in regular installments.  Everything about the transaction breathes distrust.  In fact, while I personally am no romantic” — Watson broke out in a fit of coughing — “I rather imagine that the faces on bank notes, as they are being passed over by a loan officer, speak words like these.”

“You have violated your loan agreement.”

“I quite take your point,” said Watson.  “Even the word ‘indenture’ reminds us of our fiscal servitude.  But do not all capital relationships imply a similar dependency and superiority? “

In the developed and formalized world they do, but in the global south, lending is much less administrative and much more personal, as revealed by this interesting exchange between Wall Street Journal interviewer Emily Parker and Muhammad Yunus of Bangladesh’s Grameen Bank:

I mention that Mr. Yunus’s way of doing business seems like an “old-fashioned” notion of credit, which a few centuries back was apparently closer to the Latin credere (to believe or trust). To have “credit” in a community, for example, meant that you could be trusted to pay back your debts.

Credulity, according to Hogarth right alongside superstition and fanaticism

“I use to say this in my speeches, in the early days,” he responds. “I said: look at the world, how funny it is.  They took the word credit which means trust, and built a whole edifice of credit institutions, refined, very sophisticated, entirely based on distrust.”  At Grameen, he says, “we went back to the original meaning of credit.”

It’s incredible what you can do if you believe in yourself

In doing so, Mr. Yunus and Grameen have returned to one of the two great strands from which banking arose, the credit union, where everybody pools their capital, and everybody knows everybody else:

Grameen works a little differently from your average American financial institution. The Grameen banker comes to the borrowers, either in their homes or businesses. Women borrowers take priority. There is no need for collateral, credit-history checks, legalities or complicated paperwork. Just credit, plain and simple.

Instead of hardware and software, Mr. Yunus’s lending relies on wetware — people’s knowledge of each other.

Daily savings/ lending cooperative ledger book, Mumbai

“Because not only are we poorest, [borrowers] don’t have collateral, they don’t have guarantees, they don’t have lawyers, nothing.  How risky can you get?  Still, our money comes back.”  Grameen has claimed that over 98% of their debts are repaid.

Compared with the massive financial edifices that lend to millions of individuals, Grameen’s lenders have several assets:

1.         Tight credit.  Grameen won’t allow its borrowers to become over-levered:

“When borrowers inflate their demands, you don’t know how to screen it,” he says of the U.S. system. “In our bank, a borrower can say, I want $10,000 — I don’t think any Grameen bank anywhere will give her $10,000.  We know what is the limit within in which we operate.”

2.         Small loans, very short duration.  The core principle of microfinance is baby steps, bite-sized pieces.  The resulting interest rates are high — if measured in abstract percentage terms, but small measured in dollars and cents. 

The more cycles, the stronger the network

3.         Tiny geography.  They lend only to a very small community, and their loan officers know where everybody lives.

4.         Group peer pressure.  Loans are made to people who are well established within an ethnic or tribal community, so there is a constellation of people.

Each borrower joins a group of people from similar social and economic conditions, and the group approves the loan request of each member. In this way, the group assumes “moral responsibility” for the loan.

The Board of Directors, Mlolongo savings cooperative, Nairobi, Kenya

In other words, Mr. Yunus turns the community into his own wetware credit bureau.

5.         Strong collection procedures.  They pay close attention to their borrowers, and use the most basic of penalties — denial of future credit.

Why is Grameen’s debt-repayment rate so high? “Self-interest,” is one reason. “For the first time, she has been given this opportunity to make money, make an income. Now she has a choice: she can pay back the loan so that she can continue with this door open and she can move on step by step. Or she says, enough is enough, I’m not going to pay back, I’m going to enjoy the money I got. What happens? The door gets closed.”

No microcredit for you, young lady

Over the last year, I’ve quizzed people around the world who make small loans; universally, they have a principle of denying credit to a delinquent borrower for a period roughly equal to the (short) term of the defaulted loan.

Mr. Yunus freely acknowledges that the free market has done a great deal for the poor. “I didn’t say that what is there is wrong. I said the structure was not complete. One piece was missing. We couldn’t express within the business world all the things we want to do for others.”

Mr. Yunus is right; the talent updraft tends to sweep up the best and brightest, who migrate up the income pyramid away from banking the very poorest.

If not us, who?

At the same time, Mr. Yunus’s lending almost certainly violates all the anti-discrimination and anti-redlining laws applicable to banks.  That’s the wetware credit bureau’s downside — if the community doesn’t like you, you’ll be frozen out.

Still, as I’ve posted before, financial velocity is an intrinsically good thing, because it liberates people’s minds to be entrepreneurial:

As we saw in my five-part series on Turkey, capital liquidity triggers an economic boom, and as a result affordable housing becomes a rising political imperative. Innovation begets wealth which begets capital, which begets more innovation:

The Journal echoes these sentiments:

Increasing options, after all, is what Mr. Yunus is about. He looks at a poor person and sees a potential entrepreneur. By increasing individuals’ economic power, he gives them greater freedom to make their own decisions.

Who’s most often the victim of credit bigotry?  Women:

Savings collaborative, Mahila Milan, Mumbai

Mr. Yunus’s use of the female pronoun is not accidental. He says Grameen Bank’s borrowers are 97% women, the result of a very deliberate policy.  

Something like 75% of Patrimonio Hoy’s borrowers are women.  So are most members of Slum Dwellers International. 

Liberating credit empowers women. 

It all started when Mr. Yunus complained that Bangladesh’s banks weren’t lending to women at all. “I was trying to show in how many different ways conventional banking went wrong. So when I began I wanted to make sure that I do not face the same complaint against me. So I wanted to have 50% of my borrowers as women.”

A few weeks ago in Colombo, Sri Lanka, I facilitated a mock loan meeting with members of the SDI finance committee, where each in turn presented his or her proposed capital advance, and the others quizzed the mock borrower. 

My traveling office: a laptop in a backpack

I was struck by their mutual blunt pragmatism — they beat each other up pretty well.  All I had to do was write down what they said.

Mr. Yunus likes to tell a story of going into a village and meeting one of his borrowers, whose daughter has risen to become a doctor. “You look at the mother, that illiterate woman who borrowed money to raise chickens, to buy a cow to send the daughter to school, and now she’s a doctor.  And I get the question in my mind: the mother could have been a doctor too,” he says.

The wetware credit bureau works because people are smart.  Tell them the rules, demonstrate that the rules apply to everybody, and they can move mountains.

A savings cooperative passbook, Mumbai

“The whole thing is about making those opportunities available, so that they can change their lives.”

Aim high

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Somebody’s suing me?

When a state attorney general does it, the tactic has more effect. 

Litigators!  Litigators!

Of such threat vaporware is New York state attorney general Andrew Cuomo a past master, as he recently demonstrated by parlaying his face-down cards into an important settlement action.  As reported in The New York Times:

Responding to criticism that home appraisers had inflated prices in recent years, Fannie Mae and Freddie Mac said Monday [March 3, 2008 -- Ed.] that they would buy mortgages only from lenders that use independent appraisers.

Their size makes the GSEs natural market leaders, and when they set a standard, it tends to stick.  Since GSE agency loans are the only securitization window currently open for most originators, when they establish a rule, it very likely will move the marketplace’s standards. 

Because Fannie Mae and Freddie Mac are buying most home loans being made today, the terms they dictate to banks and mortgage companies become de facto industry standards.

Just like the GSEs, if E. F. Hutton were still around, and it talked, people would listen

Further, it’s an excellent change, because the value of demonstrable independence outweighs the profit efficiencies of vertical integration:

Appraisers on one side, lenders on another

The shift, part of an agreement with the attorney general of New York, is expected to force large lenders like Countrywide Financial to sell or spin off their appraisal businesses.

Some years back, Sarbanes-Oxley forced accountants to divest themselves of their consulting branches.  Thus Andersen begat Accenture, and KPMG begat BearingPoint, and the world kept turning on its axis.

Just keep spinning, just keep spinning

The deal is significant victory for the attorney general, Andrew M. Cuomo, who has been investigating the mortgage industry for a year, and last year sued an appraisal company owned by the First American Corporation.  The changes announced on Monday will go into effect in 2009.

Better late than never.

Regulation is on its way!

As defaults and foreclosures have surged in the last year, regulators and industry analysts have raised pointed questions about the independence of appraisers.  

As we’ve already seen, if you want to defraud the lender, a fraudulent appraiser is one of your best friends. 

Mr. Cuomo, who was secretary of housing and urban development in the Clinton administration, said the new rules were important to restoring the confidence in the mortgage market.

“The appraisal is the linchpin of the system,” he said. “But the appraisal was the most susceptible to pressure.”

Yet an appraiser affiliated with a lender is unlikely to be an active participant in the fraud, if only because he’ll be bilking the bank that signs his paychecks.

Don’t I look trustworthy?

Because they rely on banks and brokers to give them additional business, appraisers often feel pressured to value a home at prices that match or exceed loan amounts.

That’s true whether the appraiser is affiliated or not.

Let me think about that for a moment

Mr. Cuomo’s deal on appraisals is unusual in that it has the blessing of the regulator that supervises Fannie Mae and Freddie Mac.  Mr. Cuomo and other state officials have often squabbled with federal officials over who should police the mortgage business, and how.

Quite understandably.  The GSEs are federal entities, and if action is to be taken, it should be taken federally, lest the United States find itself a hodgepodge of conflicting state standards.  Further, OFHEO — the Office of Federal Housing Enterprise Oversight — clearly has the best jurisdictional claim.

Negotiations over the agreement have been taking place for several months and intensified in recent weeks.

Once the attorney general had chomped his teeth into the GSEs’ ankle, the Feds graciously and sensibly realized the better course of valor was to work with Mr. Cuomo and hammer out a national standard.

I guess he’s got your attention now

But significant federal-state tensions remain. In a statement on Monday, the Office of Thrift Supervision, which regulates savings banks like Countrywide and Washington Mutual, said that “the agreement has some positive elements” but added that it was concerned that “the closed-door fashion in which it was reached could result in negative unintended consequences.”

Such as rendering entities vulnerable to back-door shakedowns, perhaps?

Don’t appraise any houses there

Under the new rules, lenders who want to sell loans to Fannie Mae or Freddie Mac will not be allowed to use in-house appraisers to do the first evaluation on a home. They will also be forbidden from using appraisals by a subsidiary or an affiliated company.

Mortgage brokers and real estate agents involved will also be prevented from picking appraisers.

All this is to the good — really, long overdue.

And how America is so good!

The Appraisal Institute, a trade group that represents 30,000 appraisers, endorsed the agreement, saying it would “reinforce the independence of real estate appraisers and the integrity of appraisals.”

It’ll force industry dis-aggregation:

For a company like Countrywide, that would mean it would no longer be able to use its LandSafe subsidiary to do appraisals for its home loan business if it wanted to sell loans to Fannie Mae or Freddie Mac. Title companies like First American would also have to divest their appraisal divisions if they wanted to continue working for lenders that sold loans to the mortgage agencies.

Independence and integration are natural opponents.  This will tend to mean that the appraisal business will remain, if not microscopic, at least highly fragmented.

Fannie Mae and Freddie Mac will put up $24 million to create the Independent Valuation Protection Institute, a group that will accept complaints from consumers and appraisers.

What a nice name.

“Honey, the Independent Valuation Protection Institute has done it again.”

The institute will put the new rules into place and monitor their enforcement, reporting to Mr. Cuomo’s office and the Office of Federal Housing Enterprise Oversight, or OFHEO, the regulator that monitors Fannie Mae and Freddie Mac.

I’ll bet OFHEO is thrilled, just thrilled, to have dual reporting. 

Cuomo’s involved!

The deal almost collapsed because of differences between federal and state regulators. Mr. Cuomo and the companies were hoping to announce the agreement a week ago but stalled after the director of OFHEO, James B. Lockhart, said he wanted the Office of Thrift Supervision and the Office of the Comptroller of the Currency to sign off.

Good for Mr. Lockhart — consistency of application is critical.

Mr. Cuomo agreed because the support of federal officials would speed up its implementation.

Or make it impossible: without the Federal government’s endorsement, the proposal would be, if not stillborn, at least guaranteed of a rocky start.

The banking regulators worried that the deal would not give banks and other mortgage lenders enough time to comment on changes that could limit their ability to make loans. To address their concerns, the negotiators added a comment period during which Fannie and Freddie would solicit feedback from lenders.

Allowing a public comment period makes total sense. 

At several junctures, Senator Charles E. Schumer, Democrat of New York, interceded on Mr. Cuomo’s behalf by making phone calls to Mr. Lockhart and banking regulators. “I said, ‘Look this is the right thing to do,’” Mr. Schumer said.

Nice to have prominent friends.

I’m from the government and I’m here to help you

“It was a cooperative relationship,” Mr. Lockhart said. “It worked out once we all understood that we were in this together.”

The banking regulators suggested several provisions that ended up in the final agreement and agreed not to publicly criticize the deal, according to several people involved in the discussion.

Does it seem odd to you that, if everyone was working together, the Feds were asked to agree not to criticize their government allies? 

Nothing odd about friends, is there?

Maybe there was friction at the apparent usurpation of Federal authority?

Surely not me?

Officials at the banking regulators’ offices declined to discuss their involvement.

Kollyvornia had nutting to do vid dis

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And after the Pajama Game, the Debtor Game

So many of the stories we read about subprime home buyers sinking under the weight of their high-interest-rate loans have one nagging flaw: the borrowers whom they cite were in debt trouble before they got the subprime loan.  As a consumer advocate puts it:

“A typical subprime borrower is not someone buying a house, but someone refinancing,” says Mary Moore, a spokeswoman from the Center for Responsible Lending, a nonprofit that advocates curbs on predatory lending.  “A typical subprime borrower is someone who has a lot of credit-card debt, and is refinancing to pay some of it off.”

That’s a consumer advocate, folks!   Admitting that people used the equity in their homes as a cheap piggy bank, literally betting the farm on their ability to pay off their debts — debts they incurred on credit card expenditures.  Why are they in trouble?  Because they could not control their expenditures.

You must learn to control your impulses

Saving is a habit, and so is loan paying.  As I’ve pointed out, they are economically equivalent actions:

When it comes to homeownership, housing and housing affordability are intertwined with savings, not just to accumulate the down payment, but also because savings are practice to develop the habit of making monthly financial payments. 

Saving means making regular equal payments to build up a cash balance.

Borrowing means making regular equal payments to pay down a debt.

Since the cost of borrowing is always higher than the rate of savings, any given fixed monthly payment will accumulate to a higher savings balance than the loan it will support.   So if we want to move the poor economically upwards, both financially and in their housing, they have to learn to save.  This isn’t easy, because lots of people claim they will change their behavior if only you give them their cookie first. 

Economically, saving and loan repaying are equivalent: a fixed amount, every period.  The only difference is who imposes the discipline.  When I save, I impose discipline on myself, and I become economically visible.  When I repay a loan, someone else imposes the discipline on me. 

List of savers, Kibera co-operative

That’s part of why Slum Dwellers International insists on daily savings as a core behavioral and organizing principle.

So stories that ask us to weep for poor insolvent borrowers, who turn upon careful review to have dug themselves into this hole by spending well beyond their means on credit cards, have had me alternately peeved and depressed, because they suggest that in some strange way people become addicted to debt — such as that most exploitive form, payday loans.  

Evidently popular, judging by all the places it’s legal

And then I found myself re-reading Eric Berne’s Games People Play (1964), and hit the following passages describing The Debtor Game.

Congratulations, you’ve just mortgaged your future!

“Debtor” is more than a game.  In America it tends to become a script, a plan for a whole lifetime, just as it does in some of the jungles of Africa and New Guinea.  There the relatives of a young man buy him a bride at an enormous price, putting him in their debt for years to come.  Here the same custom prevails, at least in the more civilized sections of the country, except that the bride price becomes a house price, and if there is no stake from the relatives, this role is taken on by the bank.

SO, when did you start having these feelings toward your mortgage?

Berne is suggesting that the tangible symbols of wealth are more important than the reality of wealth, and that indenturing oneself to the bank, in exchange for a physical object, is psychologically liberating even as it is economically enslaving.

Thus the young man in New Guinea with an old wrist watch dangling from his ear to ensure success, and the young man in America with a new wrist watch wrapped around his arm to ensure success, both feel that they have a ‘purpose’ in life. 

Berne, like many a psychoanalyst, feels himself qualified to pronounce on other people’s motivations over and above their own stated desires.  He does this in the name of ‘transactional analysis,’ a behaviorist approach to psychology that could be loosely defined as ‘watch what they do, not what they say.’

The big celebration, the wedding or housewarming, takes place not when the debt is discharged, but when it is undertaken.  What is emphasized on TV, for example, is not the middle-aged man who has finally paid off his mortgage, but the young man who moves into his new home with his family, proudly waving the papers he has just signed and which will bind him for most of his productive years.  After he has paid his debt — the mortgage, the college expenses for his children and his insurance — he is regarded as a problem, a ’senior citizen’ for whom society must provide not only material comforts but a new ‘purpose.’  

This is wrong, to be sure.   Those people who are seen as elderly for whom society must provide are not those who are economically solvent and intellectually lucid, but those who are indigent and infirm.

If destitute, you get sent to the poorhouse

As in New Guinea, if he is very shrewd, he may become a big creditor instead of a big debtor, but this happens relatively rarely. 

Most young Americans, however, take their mortgages very seriously only in times of stress. 

He’s writing about 1964. 

Consistency in pursuit of mortgage payments is no vice

And tolerance in pursuit of delinquency is no virtue

Plus change ….

If they are depressed, or the economic situation is bad, their obligations keep them going and may prevent some of them from committing suicide.  Most of the time they play a mild game of “If It Weren’t for the Debts”, but otherwise enjoy themselves.  Only a few make a career out of playing a hard game of “Debtor.”

Berne’s analysis does not stop with the psychological comfort of being self-indebted.  He turns around the moral superiority by focusing on how the debtor can make the creditor feel guilty:

“Try and Collect” (TAC) is commonly played by young married couples, and illustrates how a game is set up so that the player ‘wins’ whichever way it goes.  The Whites obtain all sorts of goods and services on credit, petty or luxurious, depending on their backgrounds and how they were taught to play the game by their parents or grandparents.  

I should clarify that Berne uses White and Black in their sense as chess pieces, with White having the first move.  No other inferences should be drawn …

White moves first, that’s all

If the creditor gives up after a few soft efforts to collect, then the Whites can enjoy their gains without penalty, and in this sense they win. 

Berne sees many human interactions in terms of games, psychological encounters that follow well-prescribed and mutually understood rules, like “Get The Guest” and “Hump the Hostess.”

Are you winning “Humiliate the Host”?

If the creditor makes more strenuous attempts, then they enjoy the pleasures of the chase as well as the use of their purchases.  The hard form of the game occurs if the creditor is determined to collect.  In order to get his money he will have to resort to extreme measures.  These usually have a coercive element — going to White’s employers or driving up to his house in a noisy, garish truck labeled in big letters COLLECTION AGENCY. 

If only it were this easy!

We have all had friends like this, those who seem to thrive on managing one step ahead of the financial posse.

At this point there is a switch.  White now knows he will probably have to pay.  But because of the coercive element, made clear in most cases by the ‘third letter’ from the collector (”If you do not appear at our offices within 48 hours …”), White feels peremptorily justified in getting angry; he now switches over to a variant of “Now I’ve Got You, You Son of a Bitch.”  In this case he wins by demonstrating that the creditor is greedy, ruthless, and untrustworthy. 

Are you making me look heartless?

It was about at this time I found Berne’s forty-year-old words deeply distressing, for this is precisely the tone taken by many of the delinquent borrowers sympathetically profiled in recent subprime articles.

The two most obvious advantages of this are (1) it strengthens White’s existential position, which is a disguised form of ‘All creditors are grasping,’ and (2) it offers a large external social gain, since he is now in a position to abuse the creditor openly to his friends without losing his own status as a “Good Joe.”  He may also exploit further internal social gain by confronting the creditor himself.  In addition, it vindicates his taking advantage of the credit system: if that is the way creditors are, as he has now shown, why pay anybody?

Why pay anybody, indeed?  Why not whinge about the relief you have been offered?

‘Creditor’, in the form ‘Try and Get Away With It’ (TAG-AWI), is sometimes played by small landlords. TAC and TAG-AWI players readily recognize each other, and because of the prospective transactional advantages and the promised sport, they are secretly pleased and readily become involved with each other.

Though I wish Berne’s analysis could be discounted, it rings true.

Regardless of who wins the money, each has improved the other’s position for playing ‘Why Does This Always Happen To Me?’ after it is all over.

I’m cursed

Money games can have very serious consequences. If these descriptions sound facetious, as they do to some people, it is not because they relate to trivia but because of the exposure of trivial motivations behind matters people are taught to take seriously.

It’s discouraging to think that some people experience financial bankruptcy because the turmoil it creates provides a psychological refuge. 

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Yesterday’s exploration of the house-buying scheme designed to defraud a too-eager lender, in the form of Bear Stearns Residential Mortgage, chronicled how a small ring of sharp characters posed as all of the stakeholders in the home-buying value chain – borrower, originator, appraiser – to secure inflated mortgages on properties for which they were paying considerably less.  How could such sophisticated investment bankers wind up losing so much money?

“The author of the best-selling Driven, a guide to compulsive behavior, gave her fortune away – to some con man?”

In the wake of their downfall, debate has been intense about how such an unaccomplished group could defraud top-tier financial institutions out of millions.

Prosecutors call the scheme sophisticated, noting its reliance upon forged and falsified documentation.

Lenders agree. Bear Stearns says the scheme evaded its antifraud efforts by supplying false information at every step of the application process. “We as an industry cannot eliminate fraud entirely,” Tom Marano, head of mortgages and asset-backed securities for Bear Stearns, said in a statement about the Atlanta ring. “We can and do continue to develop systems and detection techniques that evolve with the complexity of criminal schemes.’”

“We all gotta live in an imperfect world.”

Mike: Oh, you’re a bad pony. And I’m not gonna bet on you.

These indictments were handed up in April, 2006, a year and a half ago.  Yet apparently they made no impression on the securitizers’ lending practices or financial controls.

During its first full year of business in 2006, Bear Stearns Residential Mortgage originated 19,715 mortgages for a combined $4.37 billion, according to data compiled by the Federal Reserve and analyzed by The Wall Street Journal.

Bear Stearns Residential Mortgage rejected about 13% of applications, compared with an average denial rate of 29% nationally, according to the Fed data. Bear Stearns says that it had a lower denial rate because all of its applicants had already been screened through its “on line pre-qualifying” site before they submitted a formal application.

When you’re late to the party, you gobble the appetizers.  And when you think you’re smarter than everybody else, you can rationalize almost anything. 

Since the scheme, Bear Stearns says it has enhanced its monitoring of payouts listed on closing statements. BankFirst stopped issuing residential mortgages altogether, citing the declining market.

“We’ve had fun.  You must say that.”

But others contend that the Atlanta case illustrates the recklessness with which lenders were issuing mortgages in recent years. “This case should have been an indictment of the mortgage industry,” says Patrick Deering, an Atlanta defense attorney involved in the case.

In an eye-opening setback for prosecutors, Mr. Deering and other defense attorneys successfully defended three home builders against charges that they had participated in the scheme.

But some defense attorneys went on the offensive and attacked lenders for failing to guard against fraud. Particularly illuminating was the testimony of Lucy Lynch, a former vice president of mortgage operations at BankFirst.

“Fraud was not really a consideration in our world,” Ms. Lynch testified, according to a trial transcript.

“Now you’ve got to take some money from me.  I want you to take it.”
“Save your money, Joe.  Semper fi.”

Mike: You’re not miffed at us, are ya?

Ms. Lynch said the bank relied on an outside “loan officer” at a reputable mortgage broker to serve as its “eyes and ears” in the real-estate transactions. As it turned out, that person was indicted as part of the fraud ring.

In any long con, everyone but the mark is part of the con.

How do you know he’s really dead?

Ms. Lynch stressed that the bank took measures such as running all loan applications through a software program designed to detect fraud. “And things that didn’t seem quite right, an underwriter could quickly pick those things out,” Ms. Lynch said, according to a trial transcript. “So as far as having an actual policy or procedure around fraud, we didn’t think it was necessary, quite frankly.”

What about now?  Is it necessary now?

Dr. Margaret Ford: You took my money.
Mike: How naughty of me.

“You took me under false pretenses.”

“Well, that’s just what happened, isn’t it?”

When there ’s a huge imbalance between the amount of money crossing someone’s desk and the salary of the person reviewing the money flows, there is always potential for exploitation. 

Asked in court why the pattern of payouts didn’t raise any red flags, Ms. Lynch responded: “Do you have any idea how many loans came into BankFirst during that time period?” She said BankFirst typically allowed a “15-minute window” from the time it received closing documents by fax to the time it released the loan proceeds to the borrower.

If the sums were smaller, the reviewers might be suspicious, but numerical size dulls the sensitivities:

A total of $4.9 million in loans from BankFirst were used by the Atlanta fraud ring. In some cases, the bank gave its blessing to closing documents that showed unexplained payments of hundreds of thousands of dollars to obscure companies that turned out to be owned by the fraudsters. On three different Atlanta-area homes over a three-month period starting in late 2005, closing documents approved by BankFirst showed large payouts to the same companies.

Ms. Lynch said the bank assumed that the cash was going to subcontractors for construction work. But the bank never asked for invoices. In an interview, Ms. Lynch says the bank was primarily checking to make sure the borrower wasn’t being charged any additional fees or debt.

Consumer protection run amok.  What about protection from the consumer?

“We didn’t do anything different from the rest of the industry,’ she said -

I feel all better now.

 - adding that she believes her testimony helped convict three perpetrators of the fraud - two borrowers and a real-estate agent who helped lead the ring. 

Mike: You say I acted atrociously. Yes. I did. I do it for a living. 
 
“You were gonna con me out of my money.”
“It was only business.”
“Only business.”
“It was only business, huh?”
“It’s the American way.”

Bear Stearns says falsified income and asset documents are difficult to detect “if they are part of a sophisticated fraud ring.” In the case of the $1.8 million loan that Bear Stearns issued to Mr. Wright, the New York telephone worker, the company says it verified Mr. Wright’s employment and assets.

But Mr. Wright’s attorney, Mr. Secret, says, “Bear Stearns certainly couldn’t have verified any of the assets or any of the money. It simply wasn’t there.”

“I gave you my trust.”
“Of course you gave me your trust.  That’s what I do for a living.” 

Some banks victimized by the Atlanta ring say they depended in part on a party called the closing attorney to protect their interests. But often, lenders neither choose nor pay for the closing attorney: The buyer does. In this case, the closing attorney was part of the fraud ring. The 58-year-old lawyer, Raymond Costanzo Jr., known in the ring as “Uncle Joe,” signed off on several fraudulent sales, and collected $250,000 from the scheme, the indictment alleges. In 2006, Mr. Costanzo pleaded guilty to bank fraud and is awaiting sentencing.

Just remember, in a good con, there is no straight man — everyone’s in on it.  So if you want to participate in a securitization, make sure there is at least one irreproachably honest entity or person on whom you are relying.  Otherwise it could all be a very, very long con.
In documents we trust?
  

Mike: What I’m talking about comes down to a more basic philosophical principle: Don’t trust nobody.

 

 

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