Sunday, September 2, 2007

A simple solution to the subprime crisis: loan officers’ pay

Put them on salary rather than commission:

As he drives through the Slavic Village neighborhood (of suburban Cleveland), passing homes stripped of aluminum siding, copper pipes and other remnants, Marc A. Stefanski says, “There are still S.& L.’s and banks that lend with a conscience, but, man, you got to find them.”

Mr. Stefanski should know: as the chief executive of Third Federal Savings and Loan, a Cleveland thrift that his parents founded in 1938, he has an unusual perspective on the mortgage mess. Unlike most of his competitors, Mr. Stefanski resisted the urge to cash in on the subprime lending boom.

His bank never offered no-money-down loans, piggyback mortgages, exploding adjustable-rate mortgages or the other financial exotica that ultimately tripped up the Sweets and millions like them. Third Federal pays its loan officers salaries, rather than commissions, so there is no incentive to go for volume. Even more remarkable is that Third Federal holds onto a sizable portion of its mortgages and keeps them on the books, rather than selling them to Wall Street to be sliced and diced into asset-backed securities owned by investors on the other side of the globe.

The result is that unlike many other mortgage lenders, Third Federal has a vested interest in making sure its loans do not go bad, so foreclosure is a last resort.

And, Third Federal practices what it preaches in selling more risky loans, when it does:
Third Federal has created a program for more risky borrowers like the Sweets, with required classes so that mortgage holders understand exactly how their loans work and what they will owe.

If the majority of American lenders were like Third Federal, we would never have had the problems we do.