Mortgage Crisis – the Crooked Predatory Lenders

Everyone by now is aware of the looming mortgage crisis and has probably added their two cents as to its cause and effect on the financial world. Having been in the mortgage business a little over ten years I have read most of the press that is covering this historic event in America and I thought I would chime in as well. As a result of the controversial headline I assume that most of the people that will read this column will do so predisposed to hate it or love it. Either way, I hope you continue reading as I feel it will shine a light on this subject that is often neglected.

"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." Maureen Downey Atlanta Journal Constitution

This quote is not untypical of most articles written on the mortgage crisis. It would appear that columnist feel that it is politically correct to point the finger at smaller brokers branding them "predatory lenders." Even reporters whose primary focus is finances seem to cover the sound-bites over the substance of the mortgage crisis. They opine about unscrupulous lenders and brokers whose sole intention was to rip-off the poor while making millions in the process. The truth is that most of the reporters and politicians covering this story know about as much about mortgages as the first two articles tell them from a Google search. For those who fall into this category allow me to explain.

Here is how the system works for brokers and mom and pop lenders. Brokers primarily work with banks for “A paper” borrowers and some sub-prime borrowers. Almost all of the major banks have or had correspondent sub-prime division as well as their normal operations. This list of banks names such as, Wells Fargo, Chase, Washington Mutual, Indy Mac, Countrywide and countless other large and mid-sized regional banks. These are the institutions that set the guidelines for the type of 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 among 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 advertise their products. Then, they 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 now 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 that default rates are up on the portfolios (groups of loans) that the banks are holding investors do not want to buy them. This forces the banks' to hold their “paper” which has created a cash-crunch and caused banks to tighten the reins on their lending practices. Through this whole chain of events almost all “reporters” can only find stories to write about the evil “greedy lender” with a prejudicial inference toward the smaller brokers and lenders. Think about it; have you seen any stories about builders, real estate agents or marketing companies that contributed to the mortgage crisis?

If we open a paper now days all we can see and hear about the sub-prime mortgage crisis is politicians and columnist lamenting for government involvement as if they had a clue to the outcome of their actions. Have you seen the bill congress is proposing? The answer is a resounding “no” for 99% of America, reporters and politicians as well. The bill proposed not only wipes out sub-prime lending for good; it raises the bar for ordinary mortgage borrowers to the point that a large segment of them will not qualify either. All of this is done in the spirit of helping the “poor” avoid predatory loans.

I wonder if any the pundits will report about the 95% of current sub-prime mortgage holders who are making payments on time right now? Do you think they have considered the home owners that have had to file bankruptcy or had a foreclosure as a result of the current circumstances? With the current legislation proposed by congress and championed by reporters these people will NEVER be able to buy a home again. Are we to assume that the "poor" should never buy a home as the bill does? Just today Fannie Mae raised the threshold for borrowers who have had a foreclosure to 5 years!

Large banks have facilitated a large portion of this mess America finds herself in. The problem did not start with the small lenders nor will it be fixed by killing them with regulations. After billions of dollars in write-offs, fired CEO’s and hostile takeovers’ the banking industry is not eager to make the same mistakes twice. Throwing the” baby out with the bath water” legislation will only fuel this crisis, not end it.