In the eighties, lots of changes began influencing the mortgage industry and things have been rapidly spinning ever since. Computers were a big part of the change and IBM Selectric computers were no longer necessary. Software would do a lot of the work allowing loan processors to be more productive. Lending was becoming easier. Credit scoring was new and experimental in the mid-to-late nineties. It was easier to quickly underwrite loans. Underwriters could be more productive, too. Real estate companies started "bundling" services and added lending to their repertoire, creating their own mortgage brokerages. Previously, most would refer the loans to capable loan officers at lenders with good reputations. Mortgage lenders needed to regain that lost market share and began to look for methods to reach the consumer directly instead of through referrals. The internet helped make that possible. In 1996, the average loan origination fee charged on a mortgage was 2.1 points (2.1% of the loan amount). In 1997 that dropped suddenly to .7 points, partly because of "consumer direct" marketing efforts, including the internet. That's good for consumers. At most lenders, loan officers were paid only on commission. Part of the "points" went to pay the loan officer. Part went to pay the cost of the loan. Suddenly, loan officers were making less money. Some left to form their own boutique brokerages where they didn't have to split income with their company. New loan processing software for personal and laptop computers made that possible. Others went to a rapidly growing sector of the market. Subprime. Loans for borrowers with less that perfect credit. | Wall Street loved sub-prime because investors in mortgage-backed securities earned higher rates of return on their money at a time when interest rates were falling. Subprime kept growing, followed by Alt-A and A-minus. Alt-A isn't really for "bad credit" borrowers, but borrowers that didn't quite meet standard underwriting guidelines -- or the property didn't. A-minus was a way for portfolio lenders to take marginal borrowers that might have squeaked through and put them into something that earned slightly higher interest rates. The subprime market required less paperwork. Less qualified loan officers. It was easy. It was also easy for buyers and borrowers. A mediocre home sales market  began slowly recovering in 1997, too. By 2004 and 2005, the market was piping hot. Home ownership soared. Subprime, once a minor sector of the mortgage business was responsible for almost 20% of loan originations in some states. FHA loans were 18% of the market in 1990. By 2006, only 4% of new loans were FHA. Savings & Loans had been disappearing for awhile or gobbled up by larger institutions. Subprime was easier money, both for the mortgage industry and for borrowers. Fifteen percent of all borrowers who get a subprime loan would probably qualify for A-paper. Many more subprime borrowers default on their mortgages and the wheels began falling off subprime early in 2007. It looks like things may come to a screeching halt for that sector of the market. These influences helped fuel the "flip" mentality of the recent home market. Prices will always go up. Things are slower now, including home appreciation, partly due to the effects of easy money. |
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