Subprime Mortgage Crisis Who’s Responsible for the Mortgage Mess

Who is to blame for the mortgage crisis? America, go look in the mirror! You don’t pay your bills and if you do, you let interest and late fees accumulate until you can’t pay them. This means that your credit score gets lower and lower with each missed payment or increase in debt. Then you whine because no one wants to lend you money anymore and the bank is taking back the house you bought with no money down and the seller paid your closing costs.

As a mortgage professional, I have seen it all! There are so many stories; I had a lady tell me she had good credit and then yell at me because I told her that she had been late every month for the last year. She said she didn’t think that being slow on payments should make a difference on her credit and that it wasn’t fair, at least she paid her bills.

I caused many an argument between husband and wife because they kept bad credit secrets from each other. I once had a man claim that he had excellent credit, only to learn that his credit was in the low 500’s because his wife hadn’t paid the bills on time and they were carrying a balance of $16,000 to Nordstrom’s, not to mention the other $25,000 of debt they were carrying. I believe that was the beginning of divorce proceedings because she was only reachable at the vacation home after that.

During the 1990’s, the sub-prime markets were born. This was creative financing to help those that had fallen on hard times, to re-establish credit and still be able to buy the things that those with “good credit” could buy, just at higher interest rates. Wall Street was selling these loans, in bulk, like hot cakes on the secondary market and investors were singing all the way to the bank.

It got to the point that you could file Chapter 7 bankruptcy on Monday and on Tuesday, with 15% down, could go and buy a new house. The bankruptcy laws being as forgiving as they were, you probably still had your home and could sell it and use the equity as your 15% down payment. If you still managed to keep your credit score at 580 (creditors only report to the credit bureaus every 3 months), this same deal could be done with just “stating” your income instead of actually verifying that you could make the payment.

After 9/11 the economy took a major hit and lenders once again came up with more creative financing to help struggling buyers. These programs combined with low interest rates that the Federal Reserve kept dropping, got to the point that I was able to put families into a new home with zero money down, the seller paying up to 6% of the closing costs and get the buyer 100% financing. I had one buyer walk out of escrow pocketing $800 for buying a condo because the seller had paid all the closing costs and she was credited by her real estate agent.

The most lucrative thing lenders came up with was the Adjustable Rate Mortgage or ARM. These were a good deal for the lender, the loan officer and the buyer, if they were disciplined and listened to an ethical mortgage professional. There were two types; those that had the possibility of negative amortization and those that didn’t. This was an ethical issue for most loan officers because lenders were paying up to 4 points yield spread premium on the loans that had the negative amortization clause. This is money that most buyers aren’t even aware of because it doesn’t always have to be disclosed, depending on the licensing of the broker and the money doesn’t come out of the buyers pocket at escrow. Mortgage companies were selling these to anyone and everyone, regardless of whether it made sense. This means on a $400,000 loan, $16,000 could be paid to the broker in addition to the other fees charged. Everybody got fat and happy and the borrowers had no idea what they had done, until the payment adjusted and they couldn’t make the new payment.

Regardless of whether this was explained to you or not, America, you didn’t want to listen! You saw a $1500 per month payment for a $400,000 house and went for it because you wanted to impress your wife, family, neighbors and co-workers. Buying a home is the American dream and you wanted your piece of it, now! Not when you could save enough money because America doesn’t save money anymore. You spend it all and live paycheck to paycheck.

Just in my own experience, I explained and explained and disclosed and you didn’t listen. However, my borrowers got the loans that didn’t have the negative amortization clause. It still meant they had to pay their mortgage and bills on time. At the point right before the loan adjusts in rate they were to call to see what rates are doing and either stick with it because rates are down or refinance because they qualify for a lower rate.

However, as much as I hold the American home buyer responsible, I have to say that the mortgage industry is also guilty. It is rampant with criminals and liars. The Department of Real Estate can’t keep up with the complaints and the fraud that just keeps escalating. There is too much pressure to charge the borrower excessive fees so the brokers can make money. There is too much temptation on the part of lenders and what they will pay a broker if they can sell a higher interest rate or particular program to a borrower.

Right after 9/11, there was a huge increase in hiring of loan officers. If you could dial a phone, fill out an application and charge fees, you had a job. Everybody wanted to get in and made money, many at the unfortunate expense of unaware borrowers. I have seen previous felons selling loans out of a cubicle, on the phone and working under the license of someone else, churning and burning refinances with leads bought from the three credit bureaus. The mortgage business in general was a chaotic mess of those just scrambling to make a buck and lenders turning a blind eye or even helping make sure the loan packages were “fixed” to qualify for programs that made the most money for the lender and the loan officer. Margins were huge and yield spread premiums big.

Now government wants to get in and regulate and throw “quick fix” economic stimulus programs out there that sound good but really only delay the serious issue of economic meltdown. Government sponsored loan programs are not good for most buyers, sellers and seniors.

For example, FHA programs require mortgage insurance or PMI if more than 80% of the price of the home is financed. This can be as much as $400 or more per month that the borrower is paying so the lender to assured that the borrower won’t default on the loan. This is often not quoted as part of the monthly payment and most borrowers don’t find out about it until escrow, if they are paying attention to the disclosures. Once you have this type of loan it is very difficult to get the insurance removed, even if you owe less than 80% of the market value of the home. One way of avoiding this is to break the financing into two loans, 80/20, but the rate on the second loan is usually much higher than the first and still adds up to a higher payment that is a stretch for most borrowers.

Reverse loans are a government sponsored rip off. In my opinion, no one should ever take one of these out unless they are having serious health issues and can’t pay for treatment. The loan amount versus the net loan is usually not worth the price you pay in mandatory fees. The broker doesn’t determine the fees, it is the government. The AARP website has a great calculator to see what I mean; They also have several good articles that help educate the borrower about the good and bad aspects when considering such a loan. Sometimes they make sense, but only in dire circumstances.

Having the government taking over lending will only increase the problems, not fix them. There should be tighter regulation in the form of licensing and more education of mortgage professionals to help keep the criminals out and the good guys in. Fees should be restricted and monitored by lenders. Let the industry regulate itself. With the housing market the way it is, most of the bad guys left a long time ago. Those left are mostly the ones that are dedicated professionals that wanted to make a difference in a good way.

America, get back to paying cash for what you buy. Pay attention when you are making the biggest economic decision of you life and take the time to find a licensed professional, not just someone that tells you what you want to hear, and get at least three opinions by those that know the industry and review the Good Faith Estimate before you commit to anything.

America start taking responsibility for your own finances and stop looking for a hand out. You are a country obsessed with plastic and owing more than what you can pay for. When buying on credit was invented, it wasn’t meant to be an excuse to keep buying and never pay off the debt. They used to have debtors prisons and maybe bringing them back isn’t such a bad idea. You are only a victim because you let yourself be one.