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Jackpine Rob

The Mortgage Mess

4 posts in this topic

A number of us could write theses and dissertations on how we got to where we are now, but after about the third or fourth page most normal and sane people would go watch a ball game or play with the dog....

Its not a simple problem guys, and the roots of our current financial situation are deep and well-entrenched. What we have here is a "Perfect Storm" of lawmakers, financiers, and average people coming together, and a whole lot of innocent (and not so innocent) people are getting burned. I'll try to stick to the high points...

I've been in the mortgage industry since 1991. Started with new loan intake, went on to mortgage servicing (defaults, collections, and bankruptcy), and moved out into title. If you're buying a home or business, refinancing, or developing some property, you're going to come across someone like me. In my business, we handle the title and closing - the money comes through us, and we're the last line of defense for buyer, seller and lender.

This current situation has been brewing for years. Its no surprise to anyone in the industry. Heck, I paid off my credit cards, refi'd to a fixed rate, and consolidated my finances 25 months ago. Its been like watching a train wreck in slow motion, and being powerless to do anything.

FANNIE AND FREDDIE

These two creatures of Congress have had a HUGE influence on the mortgage/credit industry. They have led the charge, and set the bar for many lenders. With the implicit government guarantee, they were able to step out and go to irrational positions on underwriting - - and everyone else was faced with the Hobbesian decision of going with them or losing business. Quite a bit of the subprime mess can be traced directly back to these two entities.

To make matters even worse, I invite anyone to look and see who ran the show at these two places. These were political patronage jobs, often staffed by political flunkies with absolutely no business or mortgage experience, but promoted and protected by their political benefactors. They made millions, while providing little or no benefit.

CRA and Redlining

The Community Reinvestment Act was a noble effort, attempting to get banks involved with the lower income community, and lift up those less fortunate. I have personally worked with several programs designed to encourage home ownership, and while some are good, the open door to fraud and abuse was a travesty.

Banks and other businesses have traditionally been hesitant to loan money in certain "bad" neighborhoods. That's called "redlining". Congressional action made it not only required to lend in shady areas, but then offered financial incentives to lenders to did so.

Standards for income verification and simple credit history requirements went out the window - these same requirements then vanished in the suburbs, exurbs and rural America, and we had a whole bunch of loans all over the place without proper documentation, verification, or any sense whatsoever being written.

The standards for proper lending were lost. Plain and simple.

NEWTON'S LAW

What goes up, must come down. The housing and real estate markets benefited greatly from the low interest rates after 9/11. Of course, we darn near lost our shirts in the Fall and early Winter of 2001, but the drop in interest rates (meant to spur the broader economy after the terrorist attacks) had the effect of spurring the housing market, probably far beyond what anyone could have imagined.

In order to keep the broader market propped up, the Fed kept the interest rates low, and everyone went hog-wild in real estate - the one market that anyone with a room-temperature IQ can get in on.

Loans were made in the expectation that there would never be a downturn. Many bought into the fantasy. They were wrong.

WALL STREET

This is the tough part to explain - and I'll try to keep this as simple as possible. It is also the most vexing, and why you are seeing a whole bunch of Dems and Reps squirming like worms on the hook. Its a hornets nest, and has the potential of really screwing things up.

When Joe bought his house, he worked with Friendly Mortgage. Of course, Friendly didn't really have the money, they had already sold the loan to Countrywide. Joe sends his money into Countrywide every month, thinking he is paying the people who loaned him the money.

Wrong.

Countrywide has already sold this loan out on the market in two or three or four pieces. They took Joe's loan, bundled it with a few thousand other loans from other Joes, and sold pieces of the loans to investors. This is a simplified version of mortgage-backed securities.

Who invested in these pieces????

Everyone. Banks, investment firms, foreign governments, your own 401K, your own 403B, your own pension fund. Money was flowing like water in mortgages, and everyone and their brother wanted in on the action.

Wall Street - - meet Main Street.

WHERE ARE WE NOW??

Darned if I know. We have an unholy mess - and one that is going to affect a lot more people than we can properly calculate. One of the unfortunate side-effects is that capital to other segments of the economy (having nothing to do with real estate) is drying up also. Real estate has always been one of the "safe" investment/loan areas, and when it takes a bath, everyone else gets wet.

GOING FORWARD

I'm sure you have all heard about the unscrupulous lenders (they call them predatory) and other bad people. Out here in the retail world, they are either gone, in jail, or under indictment. The free market and criminal courts sort those folks out in one grand hurry, and those of us in it for the long haul breathed a sigh of relief. Of course, now we have the lawmakers coming in (a day late and a dollar short) to pass new laws and "protect the consumer".

Gee, thanks for the help.

What about the lawmakers, what about Fannie and Freddie, and what about the political cronies who made zillions off of this thing?

Don't hold your breath.

GOOD GUYS STILL REMAIN

There are still lenders standing up and trying to do business after all of the mess and disruption. These are the guys who have been trying to do the right thing, kept their noses out of the slimy tactics, and tried to actually counsel their customers. Unfortunately, the current financial situation is about to handcuff them, and normal folks are already finding out that getting a home loan isn't a total cakewalk.

I have had the pleasure of working with one of our sponsors who is one of the good guys (count on FM to come through!), so there is hope for the average guy looking for a home loan. However, things may be rough for a bit, so if you're looking to buy or refinance your lender is going to really have to dig in to make things work out.

Choose your lender wisely.

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Rob,

Nice informative piece.

I also worked in the mortgage industry for a couple of years, just before you started, as an originator.

It was interesting to see the differences in how people "managed" their own money. I saw borrowers with average incomes with money in the bank and great credit histories and many with higher than average incomes with lot's of debt, lousy credit ratings and getting a gift from mom and dad for the downstroke.

One commonality back then was the number of people that secured a mortgage based on a recommendation from their realtor, (one of the reasons I got out). The internet brought more choices and more competitive rates. I also believe it accelerated the process to bad loans. We darn sure took a left turn on underwriting standards.

Finally, two and a half years ago some good friend's of my wife got into buying new construction in the exurbs with the hope of flipping the houses. How they qualified for these loans based on their income to debt ratios is beyond me. The first few went great. They saw profits of $20K net with a $5-10K investment. My wife encouraged me to get in to this easy money game. We stuck with "our" plan.

You know the rest of this story. They ate up the profits as the market soured and they couldn't even find renters. They defaulted on a couple of these and have foreclosure proceedings in process.

This problem goes a lot deeper than a $700B bailout can remedy. While I'm certain we need action now, I'm unsure if taking the institutions and borrowers that allowed it off the hook will provide the path forward that those of us that made the "right" choices deserve.

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