AMERICAN PREDATORY LENDING AND THE
GLOBAL FINANCIAL CRISIS
ORAL HISTORY PROJECT
Interview with
A.W. Pickel
Bass Connections
Duke University
2020
PREFACE
The following Oral History is
the result of a recorded interview with A.W. Pickel, conducted by Darielle
Engilman on November 20, 2020. This interview
is part of the Bass Connections American Predatory Lending and the Global
Financial Crisis Project.
Readers are asked to bear in mind that they are reading a
transcript of spoken word, rather than written prose. The transcript has been
reviewed and approved by the interviewee.
Transcriber: Carolyn Chen Session: 1
Interviewee:
A. W. Pickel Location: By Zoom
Interviewer: Darielle
Engilman Date: November 20, 2020
Darielle
Engilman: I'm Darielle Engilman,
an undergraduate student and member of the Bass Connections, American Predatory
Lending and the Global Financial Crisis team. It's November 20, 2020. I'm
currently in Los Angeles for an oral history interview with A. W. Pickel, the founder of LeaderOne
Financial, one of the prominent mortgage lenders in the Midwest, who has joined
me via Zoom. Thank you for joining me today.
A.W.
Pickel: You're
welcome. Glad to be here.
Darielle
Engilman: So I'd like to start by
establishing a bit about your background. In the context of your work life,
when and how did you first become involved with residential mortgages?
A.W. Pickel: In 1988, I joined a friend of mine, Doug Brownlee, who had
a small company called Patrons Mortgage and worked with Doug for about three
years. And then in 1991, I joined a savings and loan [company] as their manager
of their mortgage department. I left that in 1992 to start my own company, LeaderOne, [on] January 16, 1992. I grew that company from
one person, me, to 550 employees doing about $2 billion in mortgages a year.
Along the way, we became Fannie [Federal National Mortgage Association,
i.e. Fannie Mae], Freddie [Federal Home Loan Mortgage Corporation, i.e. Freddie
Mac], and Ginnie [Government National Mortgage
Association, i.e. Ginnie Mae] approved. I sold it in
2016 and went to work for a small mortgage company out of Houston, then became
the President [and] CEO of Waterstone Financials' mortgage division, [which
had] about 850 employees. LeaderOne, when I sold it,
was 550 [employees], 75 locations, 40 states-- similar type of company,
residential mortgage banking. Then I retired, and all good retirees become
consultants. Hence, I am now A.W. Pickel Consulting.
Darielle
Engilman: During that time what
elements of the origination process were you responsible for, and did you see
that change over time?
A.W. Pickel: I started in '88, and interest rates were around 10%.
There was no such thing as credit scores at the time, very new to the market.
There was no such thing as automated underwriting. So, if you wanted to get a
loan, you pretty much had to have perfect credit—especially if it was going to
be sold on the secondary market. During the ‘90s was when Fannie Mae, Freddie
Mac, and several others actually, came up with what I would call proprietary
systems to automatically underwrite a file. They were touted as being able to
determine whether someone would make their payments based on their credit
history. When they first came out, they approved almost everything. It really
didn't matter what kind of credit [it was]. They wanted to get them accepted
into the system. That is not a popular opinion, but it is a true opinion.
From there, the systems got better. Fannie and Freddie
continued to grow in might and weight and were really like two 800-pound
gorillas in the system. Eventually, the other automated underwriting systems
fell away, and you were left with Loan Prospector by Freddie Mac and then
Desktop Underwriter by Fannie Mae. That really controlled the market. Our
history in the mortgage world, and this is my opinion, every time Wall Street
tends to get involved in buying more mortgages and pushing those down to the
street level, such as Deutsche Bank did prior to the 2007-2008 meltdown-- if
this is the credit box, in the name of home ownership and everything else, we
expand it. The problem with that is, as you expand it, you take on more credit
risk. And each time that was done—and it was often done with the provenance or
approval of the United States government in the name of homeownership, more
people should own a home—unfortunately, some people should not own a home. I
know that doesn't sound right, but some people have not developed the
wherewithal to make consistent payments or are in such a job position that it
really is doing them a disservice. That's really what happened in 2005. I did
not let my company do subprime loans, LeaderOne.
Consequently, I lost a lot of loans to other competitors during that same
period of time who were doing an 80%
loan-to-value first [lien mortgage],
and a 20% loan-to-value second [lien].
So, I saw the credit parameters, which had been fairly
high and probably needed to be expanded somewhat, then I saw those really get
expanded. And I'll give you an example. At the height of that boom in 2006,
I received a flyer. I won't tell you the name of the wholesaler, but they said,
“No income, no assets, investor property, down to a credit score of 580.” And I
called the account rep and I said, "You missed something." And he
said, "Tell me, A.W., and I'll add it." I said, "Bring your house keys to closing because we
are going to foreclose on your property." It made no sense. You're telling
people they can go out and buy an investment property with no money down, 100%
loan, with a 580 [FICO] credit score, which has a one in eight chance of
defaulting, according to the mortgage insurance companies, and tell them that
they can essentially lie about their income and lie about their assets and get
a loan. It's no wonder we had a meltdown.
Darielle
Engilman: To follow up on that, I
see on your CV that it says that LeaderOne avoided
these non-conforming credit programs. Can you talk a little bit about what
these are and why you avoided them?
A.W. Pickel: There were really what I would call
two types. There's non-conforming, which means it did not conform to the
standard underwriting guidelines of Fannie Mae or Freddie Mac. And by
non-conforming there, it might be – we're going to base most everything on your
credit. We're not going to really look at your income. Or if you have $2
million in the bank and you're buying a $500,000 house, we're going to say, if
your credit score is high enough, we're going to give you that loan because
you've got the money to pay it off. That is a non-conforming loan. Another
non-conforming loan is anything in the jumbo loan market. So, the jumbo loan is
anything that's above the Fannie Mae, Freddie Mac limit. Now today, that's
pretty high. It's like $540,000, I think come January 1. But you do have homes
in that price range, and that's also non-conforming.
And then the other thing you had at the time was subprime.
I really avoided subprime. And basically, I felt like it was doing the borrower
a disservice and here's why. Most likely all 100% loan-to-value, but they come
in the form of a piggyback. And so, you qualified at the teaser rate, which
meant the initial rate, but they were adjustable rates, and so come the first
adjustment period in, when it could adjust, most of these were on a one-year or
two-year timeframe, both the first and the second would adjust to such an
extent that these people barely qualified at the teaser rate, let alone what
could happen in one year. It doesn't make common sense for someone to get a
loan and then at the end of one year, have a payment that's going to double.
And we know their income, unless a miracle happens, isn't going to double in
that one-year timeframe.
So, there were two types. We did not do the subprime. I
didn't want to get into it. I didn't want to do those. I was really grateful
when everybody started getting buybacks and we didn't. FHA [Federal Housing
Administration] is meant for the borrower, in my opinion, with less down
payment and perhaps some marginal credit, but that doesn't mean that they
should get that loan either. We just need to use underwriting guidelines and
common sense. So those are the ones we avoided.
Darielle
Engilman: What made you want to start LeaderOne in 1992?
A.W. Pickel: There are two answers. One, I didn't like working for
someone else who was both capricious and arbitrary. Prior to being in the
mortgage business, I was a campus minister, so I like to think that I came with
my own set of ethics. I'm somewhat appalled – I do expert witness consulting
now, and I've done it on behalf of mortgage companies and individuals. I'm
somewhat appalled by the character traits and the behavior of some in the
mortgage industry. The second reason, quite frankly, is I wanted to control the
closing. And I couldn't control the closing when I worked for someone else.
Your reputation is everything you have when you are trying to originate a loan.
When you set up a closing date and you have the moving truck showing up at the
house and the mortgage loan officer calls you and says, "Hey, the
underwriter's backed up. I can't get your approval. You can't move in,"
you might go ballistic because you have made plans. You've hired people to
move. You've hired people to perhaps remodel. You've got your
husband/boyfriend/partner ready to paint the entire house before you put
furniture in it. You're not going to be very happy. So those were the two
reasons.
Darielle Engilman: While at LeaderOne, which
institutions were funding their mortgages when it was operating as a mortgage
brokerage?
A.W. Pickel: Well we only operated as a mortgage
brokerage for perhaps one year. And then I moved it because I'd set myself on a
limited salary, and I took all the profits and put it back into the net worth
of the company. But during that first year, it would have been Meridian
Mortgage, Countrywide Mortgage, Directors Mortgage, and maybe a few others. Not
very many. The broker heyday had already started in some states like Florida,
but it really swept the nation in 1992. The reason it did, and I may have this
wrong, is either FASB 135, Financial Accounting Standards Board—I am an
accountant—or FASB 65, but basically it said to a mortgage lender, a wholesale
lender like Countrywide, "If you buy a loan from LeaderOne
as a broker, you are allowed to amortize the cost of that purchase over what
you consider to be the life of the loan.”
So, let's say they were paying me $2,000 to buy that loan,
and Countrywide did do this, probably not wise, and they said, “Well, this loan
is going to last 10 years.” So, they would then take the cost of that $2,000
divided by 10. And so, it's $200 as an expense, but the income they would get
off [the loan], they would recognize immediately. So, if you don't have
to recognize the expense of $2,000, and let's say they made $2,000. So then if
there's $2,000 income and $2,000 expense, they'd be at zero, but because it was
$2,000 income, $200 expense, they got $1,800 in income. That was direct income
falling to the bottom line, which would increase Countrywide's earnings per
share. And if you go back in time and look at their earnings per share, it
skyrocketed through this period of time. And so, if your earnings per share
goes up, Wall Street says, "Buy more." And that's how they got their
stock price up.
Darielle Engilman: Could you briefly describe this process that you're
talking about behind converting LeaderOne from a
mortgage brokerage to mortgage banking and the reasons why?[1]
A.W. Pickel: There are five things that a mortgage
banker can do. You can originate, which is [to] take the loan application. A
lot of places, when they talk about it, will actually talk about originations
closing. Let's define it here as meeting with the consumer via internet, phone,
face-to-face, and that's taking the loan. Secondly, there is processing. Then
there is underwriting and funding, and we could separate those. Underwriting is
determining the validity or credit worthiness of that loan. Processing is
gathering the documentation. Funding is actually funding the loan, sending the
money to the closing table where someone then closes on the loan. Then there is
selling or servicing. Both are done by a number of companies.
A mortgage broker can originate and
process. They cannot underwrite because they do not have the wherewithal or,
better defined as, they do not have the liquid assets in case they underwrite
poorly and have to buy the loan back. A mortgage banker, on the other hand, has
a higher net worth and can do all five things. Most mortgage bankers today that
are in the non-bank category—they have no depository funds—will sell those
loans immediately or after closing. They will use what is known as a warehouse
line with another bank.
We would send our note docs—note,
mortgage, all other docs—to that warehouse bank. They would attach what is
known as a bailee letter to it. Then they would send it on to whatever investor
we had chosen to sell it to. The investor then would pay off the warehouse
bank, so they would get their money they loaned us. We would get the profit on
the loan, and that would be deposited in our account.
Today some non-banks have developed
such a strong net worth, let's take Caliber [Caliber Home Loans] for instance.
They are holding on to the servicing and servicing the loan themselves, but it
takes net worth to do that. You ask how I became a mortgage banker—I grew the
net worth of the company to $250,000. Now, net worth doesn't have to be all liquid,
so you can put other things into that, but that's essentially what happens. And
then you go get a warehouse lender because obviously with a net worth of
$250,000, I can maybe fund one loan. So, I would get a warehouse lender who
would have access to a lot more money. They would charge me a fee for borrowing
that money, hopefully less than I'm charging the borrower when I give them the
mortgage. And then I would collect the difference in the positive arbitrage
[between] the note rate I charged them and the note rate the bank is charging
me, plus the profit when I sell that loan on Wall Street. Typically, I was not
selling directly to Wall Street, I was selling to a correspondent lender. In
the broker world, you sell your loans to a wholesaler. In the correspondent
world, you sell them to another correspondent.
Darielle Engilman: How would you train and retain your sales force, and what
sort of tools and incentives were they provided with?
A.W. Pickel: The sales force in a mortgage company is difficult. They
all seem to be prima donnas, sales staff-wise. Oftentimes, a mortgage
company will get started by poaching or recruiting loan officers from other
companies. I didn't like that way of doing business because they often came
with bad habits. My way of doing it is, I believe in showing by example, so I
would continue to originate. I would take loan officers out with me. I prefer
having people with no experience who had a strong sense of ethics, who cared for
the consumer. My favorite pool of people to recruit from were high school
teachers because they seemed to be able to put up with almost anything in the
class. They have a knack for mathematics, generally speaking, and they are able
to build trust and rapport fairly quickly. So, I believed in training. I would
still hire people from other companies. They would come and my thought was,
make your company good enough and ethical enough that people will line up at
the door to work for you.
Darielle
Engilman: And how were LeaderOne brokers compensated?
A.W.
Pickel: Well,
they weren't brokers. Unless, are you referring to when we were a broker the
first year?
Darielle
Engilman: …We can talk about
both.
A.W. Pickel: Okay. I think you're referring to
loan officers. They're essentially both paid the same way, but to clarify, when
you sell a loan to a wholesale lender if you're a mortgage broker, they will
give you a rate sheet on any given day. And if you're ethical, you're going to
pick a rate where, right now, because of the Dodd-Frank Act [Dodd-Frank Wall
Street Reform and Consumer Protection Act], a broker cannot make more than
2.75%. I remember speaking with a mortgage broker who said that wasn't enough.
He wanted that raised. And my comment to him was, "How many loans are you
closing?" And he goes, "Well, I'm closing 10 loans a month." So
I said, "Let's just imagine then that you're making 2.5% on each
loan." And he said, "Well that would make me $25,000 a month."
And I said, "How many staff do you have as a broker?" He said,
"I have one part-time staff." "So you're telling me you can't
live on $25,000 a month?" I said, "It's $300,000 a year and you don't
have that much in expense."
I was flabbergasted, quite frankly,
but that's how you make loans. I challenged another mortgage broker one time.
He was in the Philadelphia area, and his average loan size was $400,000. And he
says, "A.W. I charge two points every time. And then I make two points on
the backside." And I looked him straight in the eye and I said,
"That's $16,000 a loan. You tell me what you have done as a broker, which
you only originate, you only process, and you're not taking any of the default
risks, to earn that kind of money." "Well, I should earn it."
That's what got us in trouble—greed.
The movie The Big Short wasn't that far off when it showed those
brokers. A loan officer is paid in basis points – think of percentage. If
someone says a hundred basis points, that's 1%. Today, loan officers'
[averages] depends on if they go out and get the leads or if they are given the
lead referrals, the clients. A loan officer who typically [get the leads]—and
this is true today, I consult, I see it—25 to 50 basis points. If they do a
$200,000 loan, they make 50 basis points. That is $1,000. Now loan officers who
originate what we call self-generated leads—they go out and they talk to
realtors, builders, insurance, agents, attorneys, what have you—they'll be
anywhere between 85 basis points to as much as 200 basis points. Now, they have
more expenses. They're expected to pay for those expenses to a certain extent
on their own. Some are required to be paid by the company due to the CFPB
[Consumer Financial Protection Bureau] and the Dodd-Frank Act. Using the same
scenario, the typical range is about 125 [basis points], so let's say it's 100.
If it's 100 and the same $200,000 loan, real simple math, that's $2,000 they
make per loan. So, a pretty good living.
Darielle
Engilman: In your experience, how
did these loan officers that worked for you view their relationship with the
borrower?
A.W. Pickel: I would say the majority really wanted to help the
borrower and at the same time make a lot of money. I probably had a few, that I
fired, that simply wanted to take advantage of the borrower. But I'd say the
majority truly felt like they were trying to help the borrower get a home. We
focused on purchase business, not so much refinance, although you can't help
but do refinances for the past eight years, since 2012.
Darielle
Engilman: How would you
characterize some of the key changes in the overall residential mortgage market
between 1988, when you started, and 2008?
A.W. Pickel: Much looser credit would be the
biggest one. The number of products also exploded. Every day it seemed like,
back in 2005, that there was another lender coming into the market with another
loan type. You've probably heard of the NINA loan, which has no income, no
asset or the NINANE, no income, no asset, no employment. That's crazy. They
were called Ninja loans or "liar, liar, pants on fire" loans. There
was a loan that was a SISA, stated income, stated asset, which means you tell
people, "Just tell me what your income is!" And so, you had taxi
drivers, this is literally true, who would say their income was a quarter of a
million a year driving a taxi. We know that not to be true, we can get their
tax returns, but you weren't allowed to ask for it. I didn't want those loans,
I wanted no part of that.
Darielle
Engilman: And you talked a little
bit about this earlier, but how do you think automated underwriting practices
impacted this change?
A.W. Pickel: Well I think they encouraged it. It
got to the point where if Desktop Underwriter, DU as it's commonly known, or
Loan Prospector, Freddie's system, or LP as it was known, if they issued an approval,
people didn't care. And so, you were depending on a machine algorithm. As good
as it is, it's still an algorithm. It doesn't take into account people. In one
sense, it was very good because I think it promoted colorblindness. It didn't
matter if you were red, yellow, black, green, white, or multicolor. If it went
into the system, it went into the system, and it looked at it. And it didn't
take into account any of those facts. It didn't matter if you were male,
female, or if you didn't claim a sex. It just didn't matter. Now, from that
perspective, it was very good.
But from the perspective of analyzing income, credit
assets, and being able to take a common-sense approach and being able to have
ability to repay? Now, I think that is one of the good things to come out of
Dodd-Frank. I'm somewhat alone in that opinion. There are plenty of mortgage
bankers that don't like that. There are some that do, but we don't just want to
throw people into loans and say, “Hey, sink or swim, the way I learned to swim
as a farm kid—throw you in the pool, hope you don't drown.” I think automated
underwriting contributed to the meltdown in the sense that people got so used
to relying on that and not using other common-sense guidelines.
Darielle
Engilman: … I wanted to talk a
little bit about your time at the National Association of Mortgage Brokers and
talk a little bit about some of the roles you had there and some of the goals
of the association.
A.W. Pickel: I was on the board from 1999 through
2005 as the Immediate Past President. Prior to that, I was the Technology
Committee Chair. I love technology, although today I don't. I don't know,
something happened there in the sixties, my sixties, but I ran the convention a
couple of times. I was Secretary, [and] I was Treasurer. That was a brief time
– I didn't want to be Treasurer. I was the President, obviously. I helped grow
the association from roughly 16,000 members to 25,000 members in 2003, 2004.
And then continued that in 2004, 2005. I also did a lot in 2002 and 2003
because the current president ahead of me, Armand Cosenza, had developed
cancer. So, I took over a lot of his speaking roles.
As far as the objectives of the trade association, it is a
501(c)(6), which means its purpose is education, not truly a non-for-profit. It
is non-for-profit, but you can make a profit in a 501(c)(6), or a (c)(3), but
you need to be donating money. Since ours was education, we provided most of
the continuing education that was required, at that time by some states. And we
encouraged our members to go ahead and get the education, even if it wasn't
required.
There
were other things I wanted to do that I did not accomplish. We were very active
in doing some things with Congress and making sure that good rules were
promulgated. I got in a lot of heat with a lot of mortgage brokers for that. I
was a banker at the time and most people then said, "We don't want the
government involved in our business at all," which is the standard line. What
I'll have to tell you is what a guy from General Electric told me. He was in GE
Mortgage Services at the time. He said, "A.W., what you really need in
your association is a couple of public hangings." And what he meant by
that was not literal, in any sense of the word, but that the association needed
to take a stronger stance on people who did the wrong thing. And I agreed with
him, but it was really hard to get someone else to go along with that. We were
not a judging agency. We were truly a trade association. I thought there was
other ways we could do it. The other thing is, I felt like some mortgage
brokers wanted to keep the bar high on entrance as a mortgage broker so that
they could be what I would call anti-competitive or perhaps even antitrust.
I
wanted to develop like [what] you see for the dentist. When someone becomes a
dentist and then sets up their own practice, the ADA [American Dental
Association] will come in with balance sheets, profit and loss, this is what
your rent should be compared to your sales. That was really my heartbeat. I
wanted to help mortgage brokers be more successful by being wise businesspeople,
and then they could continue to help more customers. But those were the two
primary goals. We wanted to provide education and to provide support in the
sense that they could talk to other fellow mortgage brokers and learn from one
another.
Darielle
Engilman: Did any figures within
the National Association of Mortgage Brokers express concerns about the
changing nature of credit extension during the 2000s? Did any of these concerns
lead to debates or changes in business practices?
A.W. Pickel: Yes. For instance, Ginny Ferguson was
on the board at that time. She's from California. And Ginny was a big proponent
of getting a sort of seal of approval. And we did develop that during her time
while she was there, and I think it continues to this day. It's much like the
seal that you see for an independent insurance agent, which is called a trusted
advisor. The mortgage brokers strongly balked at seeing a fiduciary component,
which I didn't think was a bad thing, but the entire association would not go
for it. So, we did get a seal of approval or, for instance, I helped write the
test, but then I took the test as well, the Certified Mortgage Consultant,
which meant you had to take so many courses, have so many education credits
outside mortgage—so like [a] university degree, etc. And then you could sit for
this 125-question exam. The Mortgage Bank Association has something similar.
They call it the CMB, Certified Mortgage Banker, I've also worked on it. So
yes, there were concerns inside. I myself testified before the Senate on
predatory lending – against predatory lending, I might add. There were those of us who were concerned
about what we saw, but it's hard for people to get on board with that when
they're making so much money.
Darielle
Engilman: And so during that
period of subprime lending growth in the early 2000s, what perspective did
brokers have regarding lenders?
A.W.
Pickel: So
maybe, can you explain—what do you mean by "what perspective did brokers
have of lenders"?
Darielle
Engilman: Sort of like were they
trying to get the best deal, get them into a product that paid the highest
commission, or was it genuinely, we want to give them what's best; we want to
do what's right for them, sort of like what you were saying about how your loan
officers operated at LeaderOne?
A.W. Pickel: I would say that would be 50/50. This
is how I would illustrate it. If a lady likes high heel shoes, and she goes
into Steve Madden, and she walks in, and she tells the salesperson, "Hey,
I'd like a pair of high heel shoes." And he goes "Okay, how high the
heel?" She goes "Six-inch stilettos." And he says, "Well, I
have this, this, and this." And he might make more on this one or he might
make less on this one. And she looks at the one that pays less and he says,
"Okay, that's great." She buys those. And she says, "I like them
so much. I'm going to put them on right now." So, she puts them on right
now, and she starts walking through the mall, and she trips because after all,
those are pretty difficult to walk in. And she breaks her ankle. She wants to
sue—who? The salesperson? The shoe company? The shoe store? Perhaps all three.
If someone comes to a loan officer
and says, "Hey, I want this”—Countrywide did a lot of these—pick-a-pay
[pick-a-payment] loan. And the pick-a-pay loan, you could pay less interest and
a much smaller payment, and whatever interest you didn't pay was tacked onto
your loan. So, it had negative amortization. The interest actually caused the
loan amount to go up, not go down. Or you could pay a regular payment with less
interest, or a fully amortized payment, or more. Well, obviously, people would
use those to qualify for, especially in California, as much house as they could
get. Well, then when that pick-a-pay came due, and they had to pay the regular
payment, they couldn't make it. Now, who's at fault? The customer for picking
it? The loan officer for selling it? The company, who said, "This is a
product we have"? Or Wall Street, who developed that product?
It's not as clear cut, I think, as a
lot of people would like to make it. The broker obviously would defend
themselves as the shoe salesman would say, "The customer wanted the
product." Does he have a responsibility to inform the shoe-buying customer
of six-inch stilettos, "Hey, you could break your ankle wearing these
things"? Perhaps, perhaps not. I doubt if they ever do. Would the loan
officer have a responsibility to say, "Hey," and by the way, they
generally did, "this is what this payment can do." Or what about Wall
Street? Did the shoe salesman who invented the six-inch stilettos say,
"Hey, I'm going to call up Steve Madden and say, you need to build a
six-inch stiletto. I'm getting requests for them all the time." He never
did that. The mortgage loan officer didn't call up Countrywide and say,
"Hey, I need this product. It really sucks, but I can make a lot of money
and people want it." Does Wall Street have any liability for creating that
product and causing so many people to fall?
To me, the blame, if there is any, and there is in my
opinion, relies on all four. The customer who wanted the product, and who may
or may not have been informed, the loan officer who should have said,
"Hey, you're on a fixed income. This is going to change. I don't think
it's going to be helpful." Then if the customer says, "I still want
it", okay. What about the company for selling it? They knew the profit
margin in it. And what about Wall Street, who designed it so they could put it
into a mortgage-backed security, or those infamous CMOs, collateralized
mortgage obligations, that went under as fast as they got developed.
Darielle
Engilman: And during that same
time, how did brokers view regulators and overall regulation?
A.W.
Pickel: Well,
I think that's pretty safe to say that they didn't like it.
Darielle Engilman: On your CV it says that you established the Kansas
Association of Mortgage Brokers. So, if you could talk a little about your
motivation to establish that.
A.W. Pickel: Well again, I've never been afraid of
having the government involved in regulation. I'm probably moderate in most
things. So, I'm not a libertarian who wants to throw out every regulation nor
do I fully believe in Adam Smith's hidden hand theory. I think that theory
works if there is a code of ethics at the core of every person, but if you
strip out that code of ethics, that doesn't help. So, I think there needs to be
some regulation. Some regulations can be punitive when they dictate only one
way. I think you do want the creative ability. I mean there is no other country
that has created a home loan system like we have in the United States. And I've
heard the stories. People say, "Oh, well, if you go to Spain, they have higher
homeownership." That's true. But that's because more of the Spaniards
actually have inherited their homes through family or over time. They only have
about 6,000 years on us or something – we're a fairly young nation. The closest
one is Australia in terms of the secondary market, and then Japan. I remember
meeting with people from Japan and discussing our secondary marketing system
when I was president in AMB [Associated Mortgage Bankers].
But back to Kansas and why I established that, or wanted
to. I felt like there needed to be an association for mortgage brokers to come
to. I was laughed at by some mortgage brokers. They said, "I'll never join
that. Why would I give you $300 a year?" I said, "Well, primarily
because I think it's a good deal." I helped write the first mortgage
broker-banker law. I was amazed at what was put in it. Real estate agents tried
to exempt themselves saying they could write mortgages without having to get a
license. We got that taken out. I just felt like we can work together. In fact,
the state of Kansas and I still work together on projects. This is Kansas
Statutes, Chapter 9, Banks and Banking Trust Companies, Article 22, Mortgage
Business. In fact, I need to get back in touch with them, but I do that as a
free consult for them. I just want them to be on the cutting edge. I've always
had a very good working relationship with the state of Kansas, be they
Democrat, be they Republican, because I think most of these issues transcend
party.
Darielle
Engilman: So talking more about
this mortgage banker-broker bill, if you can talk a little bit about some of
your motivations to author it and some of the main priorities of the bill
itself.
A.W. Pickel: Well, the main priority was to register. So initially it
was really simply a registration system, but then to identify who can originate
a loan. And that would be to prevent your “Wild Wild
West” characters, who would simply take advantage. I'll give you an example.
I'm going to leave out the names, but in 1995 or 1996, I hired two people who
had been mortgage brokers with another company. And they said, "Oh, we
needed a company that is more stable, so we'd like to work for you." So,
the first time, it was two females, they came in. They brought some loans with
them, and I said, "Well, we need to get permission from your previous
company. And then we can take those." And I said, "Can you show me,
at the time, good faith estimates." So, they had both quoted their
customers, and this is what they were told to quote, 13.95% with eight [basis] points.
I said, "You know, that rate isn't available today." Rates are at the
time in the sevens. I said, "Where are you getting this rate?" And
they said, "Well, our owner told us to quote that, so that then when we
told them 9% with three points, they would think they were getting a great
deal." I said, "Well, that's bait and switch." I said, "We
don't do that here. So, here's a rate sheet. These are the rates you can quote."
Some of my motivation for the Kansas mortgage banker-broker law was to take
that type of thing out of the system. I'd say that was the primary motivation.
It was [for] registration.
Later on, I worked a lot with Kevin Glendening over in
Topeka, and I think he was in charge of the mortgage brokers part of it. I also
worked with another individual on the banks themselves. It might come as a
shock to you, but some of the banks were engaging in what I would call
predatory lending. They don't like to ever say that, but...anyway. And then we
added education into it, so you had to have so much education. Education in and
of itself is not a deterrent, in my opinion, to predatory lending. But if you
have a registration system requiring education, at least hopefully you can get
people to begin to understand what it means to be a fair player in the mortgage
world.
Darielle
Engilman: How would you define
predatory lending?
A.W. Pickel: You know the phrase by the Supreme Court, right? "I
know pornography when I see it, but I can't define it"? I did not say
that, I'm quoting, don't shoot the messenger. I could give that a lot of
thought, and I could probably come up with a better one, but out of the depths
of the top of my head, predatory lending is when the borrower is given a loan
that will not help them. Very simple. And you know, of course, then you get
into what will help them and what will not? And are we in a free country? If
someone wants to go do something stupid, do they have that right? Or does the
government step in and say, "If someone wants to drink themselves silly,
as long as they don't get into a car and attempt to drive, no one's going to be
upset because they have that right." Do we think it's smart? No. If
someone wants to use illegal drugs, the government steps in and says, "No,
you can't do that because that's illegal." So, the question becomes, I
think, there has to be a duty of care, and so I am not one of those opposed to
fiduciary duty, as to the finances of the individual who is looking to get the
loan.
Darielle
Engilman: What were some of the
predatory lending practices you observed leading up to the financial crisis?
A.W. Pickel: I think the biggest one was not being concerned about the
borrower's ability to repay, nor to look down the road. I remember there was an
account rep from World Savings, which was sold, and he came in and he said,
"I want to talk about the pick-a pay loan," because Countrywide
didn't have the end-all-be-all on all pick-a-pay loans. So, he came and talked
to my staff. And during that process, as I was wont to do, I said, "Well,
let's say we have a retired couple. Is this a good loan for them?" And he goes,
"Absolutely!" I said, "Well, they're on a
fixed income. Is this payment going to change?" "Well, of course! But it's a great loan for
them..." and he went on and expounded. And I said, "Okay, thanks for that
explanation." I said, "We're going to take a 10-minute break, and
everybody else can go outside and do what you need to do." Some people
smoked, and you don't see that today, by the way, this was back in 1995, and so
I pulled him aside, and I said, "You're leaving." He goes, "What do you mean?
I'm not done?" I said,
"No, you're leaving because I'm going to walk back in there, and I'm going
to tell them that there are a lot of people that should never get this loan.
And a retired couple is one of them. And if you think you can come in here and
convince the people that work for me to do those loans, you are sadly mistaken.
So, you have a nice day. I won't embarrass you, but don't come back."
So
that was one. That was primarily to give someone a loan without regard to their
ability to repay. The second thing that was pretty common would be a loan
officer calling up an appraiser saying, "Hey, I need $200,000 to make this
deal work. And if you don't give me that value? By the way, I won't send you
any more appraisals." That was pretty common. If I found out, I fired the
loan officer, and I've done that. I'm not saying I'm a saint. Don't think that.
But you can't do that. But it was allowed, so to speak. Back then, you could
say, "Hey, the customer thinks it's worth $200,000." But I was always
amazed at how many times the appraisal came in at exactly whatever the loan
officer said he thought it was worth, which tells me that the appraiser didn't
do their job. They just went out and found comps [comparables]
that supported it and then sent it in.
Third thing that happened somewhat, not as often, was the
willingness to commit fraud. Even lenders got in on that act, and there was a
lender that went to prison in Florida, the account executive. She would
literally go into an office and say, "Let's see that borrower you said
didn't qualify." She'd say, "Well, instead of $5,000, let's put in
$10,000." And then, "Oh look! They qualify." And you didn't have
to prove it.
So, I guess they would say, “Well, it
was fine”. But I don't think that's right. A friend of mine that I hired, David
Pearson, worked for a company in Michigan, and he was the Chief Operating
Officer, and I hired him away. And he was doing fraud checks on this one
branch. And the way he would do that is he would go into the branch say,
"Hey guys, go to lunch. Go anywhere you want. The company will buy, and
then come back in an hour and a half." And then they would all leave. He'd
lock the door, and he'd search the office.
Well, in this particular office, he
opened one filing cabinet, four-door filing cabinet. Top drawer, pulled it out.
Tax returns—no names, all income, everything else filled out. Push that in. Pulled
out the next one. Pay stubs—no name, no social, all the income filled out. And
we're not talking just a few. We're talking hundreds. Third drawer, pulled up.
Bank statements. You get the idea. Basically, they could pull out, type in the
borrower's name, social, et cetera, give them the income they needed. So that
was the third thing that I think went on. It wasn't as prevalent as the first
two because it's obvious it's wrong.
Darielle
Engilman: And did you see any
particular groups being more targeted by these predatory lending practices?
A.W. Pickel: No, I really didn't. I know that comes up. I'm about to
tell you a statement that you probably won't like in your studies. You might
hear it, you might not. Typically, the group that was taken advantage of was
taken advantage of by their own ethnic group. Whites would take advantage of
whites. African-Americans would take advantage of African-Americans because
they trusted them. Hispanics would take advantage of other Hispanics. In fact,
I asked a Hispanic-American loan officer one time, I said, "How come you
charge—" And if I say rate sheet, and I told you, I picked the rate at the
top, do you know what I mean by that?
Darielle
Engilman: Not really, if you
could explain it a little bit.
A.W. Pickel: So what I mean by that [is] you pick the highest rate. Let's
say the rate sheet shows—here's the rate at 6%, 5.5%, 5%, 4.5%, 4%. This loan
officer would take the rate at the very top of the rate sheet, 6%. Now the rate
at the very top of the rate sheet is going to pay more money to the loan
officer/mortgage broker than the rate at the bottom. And then he would charge,
the same loan officer, would pick that rate and then charge two discount
points. Even though they weren’t really bona fide. It was just a way for him to
make more money. So, I asked him, I said, "Why do you do that?" He
said, "Well, because when I take my car to him, he's going to inflate what
it costs to repair it by three times. It's a way of lies. And so, when he comes
to me for my mortgage loan, then I'm going to charge him triple."
Darielle
Engilman: Your CV states that you were a member
of the Fannie Mae Housing Impact Advisory Council and the Freddie Mac LP [Loan
Prospector] Advisory Council. Can you talk a little bit about what these
councils were and what you did while you were serving on them?
A.W.
Pickel: Well,
that's back when Fannie and Freddie could host parties. So, the Housing Impact
Advisory Council was made up of individuals across the United States. Franklin
Raines, essentially, would come in and speak to us. It would be a two-day meeting.
They would put us up in a very nice hotel, and they would give us nice meals,
and we would discuss the impact of housing across the nation and various and
sundry things. I think they looked at that as more of a sounding board, and I
think it had very good intentions. I don't know, to be honest, if we ever
accomplished that much. But it was fun to go to, and it was good to get to know
people like that. I've played golf with Dan Mudd [Daniel Mudd], who's no longer
there, but he was CEO at one time. And I'm a lousy golfer, I'm surprised they
invited me.
The Freddie Mac LP Advisory Council would meet two to
three times a year. Same deal—very nice hotel, nice meals. And I'll compare and
contrast that with another one here in a second, that's not listed. And they
really wanted to know more about LP or Loan Prospector and its rate of
acceptance among mortgage brokers. Keep in mind during this timeframe, LP and
DU were always competing over who could get more things run through their
systems. And so, they wanted to know if there were problems, or if you were
seeing borrowers that weren't getting approved, and if so, why. Again, it was a
meeting of colleagues. I thought it was, in my opinion, very good. Again, I
don't know, as it sounds, Advisory Board, I don't know that any of us set the
world on fire. Compare and contrast that to, I was on the CSBS [Conference of
State Bank Supervisors], a couple of committees for them, in writing test
questions or evaluating test questions for the NMLS [Nationwide Multistate Licensing
System & Registry] exam. And they would pay for an inexpensive flight and
your hotel. Meals were on your own, and I think if you went over a certain
amount, they only had so much budgeted. So, it was a far different scenario,
and one that I would probably expect from a governmental entity.
Darielle
Engilman: What were some of the
conversations or concerns that the Fannie and Freddie councils that you were on
were having in the early 2000s with the rise of subprime lending?
A.W. Pickel: Well, I don't remember concerns being a part of it, on
subprime lending. I was on it, I guess, for part of that time. But in the
beginning, subprime was still a small section of the market. The bigger
concern, at least in Fannie's conversations, was increasing homeownership. And
so, they had affordable housing goals that they had set for them by FHA at the
time. And as we know now, Franklin Raines' pay was dependent upon, his bonus at
least was depending on, meeting those affordable housing goals. So that was a
big concern by them. And truthfully, I think there was a very healthy concern
to get more minority home loans out there, which is why DU and LP were pushed
quite often. As I said, it was a colorblind system. The LP, I don't think we
ever talked about subprime, although I will say that the LP, prior to the
meltdown, was trying to get to where they could also underwrite those loans.
Darielle
Engilman: Over the last decade,
we've seen a number of different narratives emerge to explain the financial
crisis. In your opinion, how do you understand what caused the crisis as a
whole?
A.W. Pickel: Well, the credit box was expanded, and Wall Street
demanded this product, and then because no one, really, I thought [like] in The
Big Short, that guy that said, "Hey, no one's looking at the
underlying pools." I've been in probably 50 to 75 court cases on credit
damages, mortgage fraud, and valuation, et cetera. One of the things that
occurred, for instance, there was a lady in Vegas who, along with two other
ladies, went out and bought 15 properties, and said they were going to live in
them. A little difficult—you're not going to live in 15. And so, they were
really buying investment properties. And so, I was actually for the defense.
And they had a public defender, and they said, "What do you need to
evaluate?" And I said, "Well, I need the mortgage loan files."
Would you believe it, on at least half of those loan files, there was a loan
application and that was it. Either they had been lost or never done.
There was a big fraud that occurred in Kansas City at one
of the Countrywide branches. At the end of the month, the manager would go in,
he'd pull all the files out that had been denied for whatever reason, and he'd
stamp them approved, put his signature on them, close them, and send them
through. And of course, that sort of thing gets noticed because the brokers
hear, "Hey, Countrywide's approving anything and everything. If you throw
it in there, they'll approve it." And then when those loans start to
default, Countrywide obviously still wanted good loans. They didn't approve of
that practice.
More
specifically, I think it was the products and the determined inability to not
evaluate ability to repay. Again, I think it comes down to greed. I think the
government was complicit in it in that they promoted homeownership above
responsible lending. But I don't think there's anyone without blame.
Darielle
Engilman: And to what extent do
you see your own personal experience as adding something important to our
understanding of what happened in the run-up to 2007 and 2008?
A.W. Pickel: I guess just the experiences that I had that I've shared
with you. I'm not the saint on a white horse. Heaven knows raising four
daughters, I've lost my temper on more than one occasion. I have 11 grandchildren;
number 12 is on the way.
Darielle
Engilman: So looking back on the
crisis over a decade later, what do you see as its most important lessons for
mortgage originators and state level policy makers?
A.W. Pickel: Regulation is necessary, but don't
create so much regulation that you throw the baby out with the bath water. I'm
not opposed to the CFPB. I would like for it to remain non-politicized. I think
it gets, as everything does today, very political, and that's not our goal
here. Our goal here is to help the consumer. Our goal here is not to make
somebody's business get shut down, unless they're deserving of it, I guess. But
it's sort of like bringing an industry of age. There ought to be restrictions
on the bar on getting into the industry. There ought to be minimum education
requirements. And we have all that. What we found is that that, in and of
itself, will not stop fraud or other things. So, there does have to be, I
think, penalties for that. But I also think we can make the assumption, and
maybe we shouldn't, that generally speaking, people want to do the right thing.
I mean, I'm guessing here that you don't have a political ax to grind in your
study. I mean, you're going to let the people speak for themselves and then
you're going to report on that…
Darielle
Engilman: … And so just in
closing, is there anything else you think we should have touched on, I should
have asked, or just anything in general we might've missed in the interview
that you'd like to add?
A.W. Pickel: Well, I think one of the things— so,
Barney Frank had an interest in a bank, One Savings bank, I think, or something
like that – One West Bank. Whenever I look at politicians, be they Ds
[Democrats] or Rs [Republicans] or Is [Independents], and they're involved in
the financial circuit, I always like to know—are they getting paid by somebody?
What is their true financial interest? With a businessman, I can pretty well
tell you—money is green, and that's the only color they primarily see. So, I
think it's like when you get ready to buy a house, whenever you buy something,
the seller is self-interested, as is the buyer. And so, the true value is what
the meeting of the minds are. If a seller says, "I want to sell you a 2020
Camaro." And you say, "I want that 2020 Camaro." You might be
willing to pay more or less than say a dealer, depending upon what your
interest is. Same thing with a house. I tell people it's not all about getting
a mortgage. Life is more than a mortgage, and life is actually much more than a
house. There's a lot of living that we need to do. And I don't get caught up in
the little things. So, I guess as I look at it, I don't know if there was more
that we could have done. I think, as we always say, the industry should have
been better at policing itself. The guy from General Electric Mortgage Services
was right. We should have had a couple of public hangings saying, "Look,
this guy did wrong. Here's what he did wrong and we're going to bar him or
blacklist him from being in the industry." And then people get upset,
"Well, you can't do that. It's a free country." Well, no, if you do
something wrong, you shouldn't get to play. And if you throw sand at somebody
else's face, you have to get kicked out of the sandbox. So, feel free to use
any of my pithy quotes or my phenomenal illustrations. And I hereby absolve you
of any financial renumeration for anything you quote that I say.
Darielle
Engilman: … Thank you so much
again for taking the time.
[END
OF SESSION]