The mortgage market mess is first and foremost the responsibility of greedy lenders and secondly the borrowers who received their loans.
Two years ago and more if a borrower applied for a loan and he had a mid 500 credit score, no money in the bank, and less than $25000.00 in outstanding collections, he was a good candidate for a home loan. If their debt ratio was too high, the banks gave them an adjustable rate loan or an interest only loan so that they would qualify for that loan. Or how about charging them a higher rate so that they can state their income so that everyone involved can close their eyes and pretend their borrowers can actually afford the loan they are getting. Then the lenders tacked on a 3 year prepayment penalty so that if they were able to raise their credit and get a 30 year fixed loan, they would have to pay the lender again to get out of their mortgage. In what planet did these lenders reside on? An average man would not loan someone money that had a history of not paying their bills.
The borrower, he knows he cannot afford the home but wants it so he agrees to whatever the lender tells him. The closing table is likely the last time the borrower ever sees or speaks to this type of lender again. 2 years go by and we check in on the borrower,he is trying to find a lender to refinance his loan so that he can afford the adjustable rate mortgage that just went up. Well there seems to be numerous problems, the prepayment penalty is still in effect for another year even though the rates are not. The house hasn’t appreciated enough to include the prepayment penalty in the loan. Oh and by the way, he was laid off 6 months ago and the unemployment has run out and he is 2 months behind on his mortgage already because the kids had to eat and he needed his alcohol. No lender can help him, so he gets a job and he goes another month late before he breaks down and asks a family member for money so his family won’t be out on the street. 4 months later you check in on the borrower and he has been laid off. His mortgage payment is 4 months behind because he got laid off a week after the family loaned him the money so he kept a little of it to survive off of. Think this is extreme? Well it’s not, I know this man. Not typical, but not the extreme.
The effect people with good credit, a down payment, and know their limits are jumping through hoops to get their loans approved by the lenders that are left in the business. Less loans equals less people working on loans, which equals more people laid off which means more people not paying their loans….the circle continues.
Until lenders stop running scared and start loaning to people credit and asset worthy the mortgage mess is going to continue to get worse and it all started with a lender that wanted to make money at any cost and a borrower that believed him.