My team and I feel the stress and concern from our fist time home buyer clients about what occurred with this foreclosure mess and they want to take some comfort in the fact that they won’t lose their home like so many others have. For someone outside of our industry to fully contemplate what occurred as a main causal effect of the foreclosure crisis, we need to look back to the times of 2003 to 2008 and first analyze the differences in our lending climate. In this post, we need to break down three main points of the foreclosure crisis:
- How did this happen?.
- Why did this happen?
- What has the mortgage industry corrected to assure it does not happen again?
The most concise way for anyone outside of our industry to understand how this Wall Street Mortgage meltdown, mortgage crisis and housing bubble occurred, is to look at what was going on in the world of lending from 2003 to 2008. There have been countless blogs, publications, news reports, and articles written about what the main or group of culprits was and it’s pretty simple to “point the finger” at an endless amount of causes, yet, my team and I believe these four are at the core of the “how”.
Sub-Prime Mortgages, Borrowers with less than perfect or even horrible credit were able to buy homes with little or no money down and get a semi-competitive interest rate. Unfortunately the borrower side of this equation put a lot of risk on the mortgage investors on Wall Street because of the high default rate but couple that with the aggressive loan terms that caused the payment to be unaffordable for the homeowner within 24 to 36 months of owning the home, and you have a recipe for disaster.
Crazy Financing Options, The array of mortgage products and vehicles was immense. It was less likely you couldn’t find a mortgage product for a client that was looking to purchase or refinance then to find one. This “monkey see, monkey do” mentality along with mortgage companies being competitive and “gobble up” market share developed mortgage products that put people into homes with highly aggressive terms.
No Income Verification, Now, I am not sure of the percentage of originated mortgages between 2003-2008 that did not have income verified, but, I can tell you it was a lot. The ability for an American citizen to get a mortgage without showing, proving, validating or even resembling the income they disclosed on an application was staggering. Note to industry: When lending someone hundreds of thousands of dollars………….might want to check they can pay it back.
Non-Existent Quality Control, The mortgage industry from 2003-2008 has been called by some the “Wild West” or everyone was “riverboat gambling”. So what does that mean? It means our industry was so inundated with volume and new horizons of lending, people were to busy with their hands out to take some time to verify what the borrowers or loan officers were saying or doing. The levels of fraud amongst industry professionals and mis-representation from consumer was overwhelming.
After someone reads those first four culprits, the next obvious question is “why did all of these apparently smart people allow this to happen?”
Greed, It’s just that simple……….winning cures all, money cures all, greed blurs vision and eventually kills all.
Belief That Real Estate ALWAYS Goes Up, Real estate owners were realizing a minimum of a 5.00% appreciation on property across the country. Buying and selling real estate seemed like an “automatic” investment win……..”land and real estate will NEVER depreciate”…….fail………it did, big time.
So it’s real easy to look at the game tape and identify what went wrong. Question is, just like a New Year’s resolution, can you implement a plan for change and stick to it? I am proud to say I am part of a new generation of responsible and qualified mortgage practices, procedures and professionals. Those loan products we talked about are all gone. Truth be told, there is only “5 ways to kill the cat in the alley” anymore, and all of those loan products require and mandate several levels of underwriting, compliance, quality control and due diligence. There are five quick and big factors one can point a finger at to attest to my stance:
- Implementation of predatory lending guidelines and safeguards.
- Documentation and enforcement of responsible lending practices.
- The Loan Quality Initiative.
- Creation, allegiance and funding of the Consumer Finance Protection Bureau.
- A more “old school” lending approach involving the 5 C’s of lending.
The point of today’s post is to help alleviate any inhibition for a potential buyer in today’s market due to what millions of Americans did prior to them. Word to the wise, surround yourself with good real estate pros and mortgage pros. Slow down and figure out what YOUR situation is, NOT what the situation was of people before you. If you’re thinking about buying, do not let this mess in the past keep you from taking advantage of a great time to purchase.
If you or any of your loved one have any questions regarding mortgage financing, home ownership or banking in general, please don’t hesitate to reach out.
Until next time-Yours Financially, Milly
Jamey Milheiser, NMLS #284184