Subprime Mortgage Crisis Who’s Responsible for the Mortgage Mess

Having been in the mortgage business a little over fifteen years I have made it a habit to read most of the press and articles written on the looming mortgage crisis. It would appear that most, if not all, columnist and writers feel that it is politically correct to point the finger at smaller brokers and lenders branding them “greedy lenders” and “predatory lenders.

Maureen Downey a columnist at the Atlanta Journal Constitution writes; “Lenders and brokers didn’t fret about a borrower’s long-term prospects of maintaining payments because they collected their profits at the closing table; the loans were then resold to investors.” This attitude is common place in the media and follows political talking points as opposed to actually trying to understand the subject.

Even reporters whose primary focus is finance seem to cover the sound-bites over the substance of the mortgage crisis. Writers from every category of the media bemoan and opine about the unscrupulous lenders whose sole intention was to rip-off the poor and make millions in the process. The sad thing is that most of the reporters covering this story were probably incapable of spelling the word “mortgage” over a year ago. These same “Johnny come lately” reporters are the very same writers that are now passing their selves off as experts on the subject.

Here is how the system works for and mom and pop brokers and small lenders. Brokers primarily work with banks for “B paper” borrowers and sub-prime borrowers. These are the borrowers that fall between the cracks at most large banks and lenders. Almost all of the major banks Wells Fargo, Chase, Washington Mutual, Indy Mac and Countrywide have correspondent divisions set up for this very purpose. These institutions set the guidelines for the type of Alt-A and sub-prime mortgages they would buy. Once the loan is closed these banks buy the “paper” from the brokers to bundle up and sell on Wall Street.

As competition between these banking giants grew their tolerance for sub-prime underwriting standards dropped for specific niche borrowers. Soon we had a dozen banks each having their own sub-prime division and competing for different niches in the sub-prime market. In an attempt to gain more market share these banks would employ account executives to visit the small brokers and lenders to “teach” the loan officers how to get certain borrowers through underwriting in their specific niche’s.

As a result of competition, the capacity to qualify for mortgages was lowered and mortgages flourished. Builders began building housing on the “wrong” side of town in an attempt to capture an otherwise untapped market. These builders hired advertising and marketing companies to strategically plan their progress. Home improvement chains added stores and reported record profits. Painting companies hired more painters and carpenters hammered more nails. The building industry almost doubled in the last ten years as a result of the housing boom.

Then in an effort to market the neighborhoods the builders hired real estate agents to sell their products, who in turn worked with lenders and appraisers that could get their clients loans. Lenders that could not or would not accommodate the demand of sub-prime request were in danger of closing down. No one knew that property values would pop and defaults would rise, nor did they care.

America became a nation addicted to refinancing as property values escalated across the nation. Credit cards were charged to the hilt and refinancing saved the day. Borrowers with good and bad credit flocked to mortgage companies in record numbers to convert their revolving debt to lower rates and began the cycle again. When the real estate “bubble” burst and property values plummeted, these people were then unable to refinance their homes to reduce their debt. With huge credit card payments looming and mortgages that were beginning to adjust home owners could no longer cope. Thus the mortgage crisis.

Now default rates are up on the portfolios (groups of loans) that the banks are holding and investors do not want to buy them. This forces the banks to hold their “paper” which has created a cash-crunch. This in turn has caused banks to tighten the reins on their lending practices.It’s simple supply and demand and the supply is short and the demand is enormous. We have literally became a credit addicted society that has been cut off and were blaming the dealer who got us addicted.

Through this whole chain of events almost every reporter that has written on the subject has only written stories to write about the evil “greedy lender.” Think about it; have you seen any stories about builders, real estate agents, truck drivers, lumber companies, building supply stores, painting companies, architectural firms, engineers or marketing companies that profited from the housing boom during the last ten years? Nope, the only stories you have seen reported are about the “greedy lenders”.

Try this, open your news paper or watch the news tomorrow and listen to what the politicians are saying about the mortgage crisis. Then turn to your local columnist and listen to what he or she is saying about the crisis. It’s the same story, only their story is directed at the local small town lender. The same lender they ran to when they jacked up their own credit cards and needed a bail out. They are the same person as you and me that are caught up in a credit addicted society. I wonder if any these pundits will report about the 93% of the current sub-prime mortgage holders who are making payments on time right now and wouldn’t have a home without the housing boom?

Large banks as well as small lenders have definitely facilitated a large portion of this mess America finds herself in. However countless areas of businesses from all vertical markets profited right along with them. The root of this problem did not start with the small lenders nor will it be fixed by killing them with regulations. Each and every American needs to look in the mirror and assume their part of the blame.