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Are Exotic Mortgages Really to Blame for Rampant Foreclosures?

The media in particular, aided by many so-called "experts" have been laying a lot of the blame on exotic mortgage products such as Option ARMs, Interest-Only mortgages, and even regular ARMs. I have even heard them blame the Feds for raising rates too fast.

Why do they blame the mortgage products? Are they really at fault? Come on people, let's get a grip on reality. The products themselves are not to blame!!!

So who is to blame? That is the real question and it depends on each particular foreclosure. Looking at many foreclosures, there are numerous reasons why the homeowner got there, none are truly the mortgage programs fault. Reasons for foreclosures typically end up being due to job loss or medical incapacity to work or some other unforeseen financial crisis. Many are due to homes being destroyed by a natural disaster.

So why is the media and others looking to blame mortgage products for the increase in foreclosures? Well, the "experts" are not going to want to blame themselves for the fact that the number of foreclosures due to rapid increase in monthly payments is due to these products. The reality is that these "experts" could actually be the ones to blame. Is it any wonder they would like to divert blame to a loan program instead?

What about the homeowner? Many homeowners are to blame as well. Why? They have entered into these loan programs in order to obtain a home they would not otherwise be able to purchase. They really had no business purchasing that property in the first place.

What about investors? Here is another real group to blame. The investors that really shouldn't have been investing is another reason for the increase in foreclosures. How many of the potential flips turned into "flops"?

So, are we really going to allow others to shrug off the blame to mortgage products? I have even heard about the fact the Government should bail out homeowners in foreclosure. Is this really the right thing to do?

While I feel sorry for those faced with the foreclosure scenario for the normal reasons, like job loss, medical issues, or other unforeseen crisis, I have a hard time feeling sorry for those that had no business being in that home and/or loan program in the first place. I do feel sorry for them, though, if it was due to a mortgage "expert" that pushed them into it.

Posted by Florida's #1 Mortgage Planner on 04/16/2007 08:30 AM

Comments (11)

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11 Comments on Are Exotic Mortgages Really to Blame for Rampant Foreclosures?

APR

2007

Robert

You make some good points.

There are still companies in this area marketing option arms to first time buyers.

Don't blame the product. Every type of mortgage has a group that it was designed for.

Terry,

Thanks for the comment. Option ARMs are a great product for some, including some first time homebuyers, but they have to know all the advantages and disadvantages of the program, not just get "sold" the product.

The Option ARM products in particular allow mortgage personnel to make large amounts in YSP, usually without the borrower's noticing. The product is sold by many just to make the money. It's unfortunate that people do this type of activities.

Thanks again for the comment.

Of course the media, congress, and all those that have brought about the current foreclosure situation are going to be the first to lay blame. Mortgage brokers will be on the receiving end of their accusations simply because mortgage brokers as a group have very few outlets to publicly defend themselves.

This is not a complicated scenario. The best living wage jobs have been outsourced. Our manufacturing sector has been moved to countries where "slave wages" are the norm. The remaining service sector jobs in construction and dining that "no one else wants to do" are being taken by our "guests" from the south.

The simple fact is that our economy's health has fallen into a death spiral. If you take the time to actually research the current foreclosure crisis you might find (as I have) that it runs across the board of credit scoring. Foreclosures are occuring at a much more rapid pace for nearly everyone, not just those that are in the subprime classification. In addition many of those that are now subprime mortgage candidates were A and B credit classifications not so long ago.

We can add to this mixture the change in bankruptcy law, weakening of the dollar globally, (as evidenced by the soaring price of precious metals), and the constant recycling of consumer credit into mortgage debt, and you have a recipe for the perfect economic storm. And it has arrived.

I'm sure the media would never allow their news broadcasts to by lenders screaming for people to refinance that consumer credit. Would they?

So,,,how is this the mortgage industries fault? Because they are the easiest to blame. Happy Crisis.

Daniel,

Thanks for the comment. I never said it was the mortgage industry's fault in and of itself. I also never stated that foreclosures were limited to subprime only.

If you reread the post, you will see I blame certain mortgage professionals, namely the ones that did not act in the best nterests of the borrower. I also blame those who used flawed thinking when they purchased or refinanced their property which is what led to the foreclosure situation in the first place.

You do touch on some very interesting points in your comment and I thank you for your contribution.

APR

2007

Robert - just saw in one of our local business journals that one of the biggest proponents of those mortgages and one of the last standing in the market is in trouble again!

David,

Why does that not surprise me? Thanks for pointing that out.

APR

2007

Yes they are to blame. The foreclosure numbers have just come out in Georgia and the increase was incredible. When you consider last year was the worse years on record for the same areas with foreclosures.., OK add 246% more on top of that! It is pretty pathetic when you consider the mortgage products you are talking about were dispensed like PEZ here! Yes they are fine loan if you have other Cash reserves, you are on a diet, and your last name is Trumph, However, these loans were never meant to be used carte blanc for that average home buyer with little cash and no reserves. That is criminal. These products are basically the same products that were used in the 1920 prior to the great depression. Everyone knows what happened then. Well guess what, it can happen again.

It is absolutely sinful that so many people were steered into these loans. And Yes, I used the term steered, because everyone in real estate knows there is more money generated off these products than the conforming 80/20 30 year fixed loan.

Im really sick of all the blame being pointed at the lenders and brokers.

The clients have to take responsiblity for their actions as well.

I will get anyone a loan if they qualify for the product. That being said they have to know what they can and cannot afford.

If they over extend themselves and have problmes why shoul we be the ones to blame.

Everyone talke responsibilty for their own actions.

I just recently posted the story of a woman whom i got a good loan for and even helped her improve her credit. I told her now dont overextend yourself cause i know things are tight.....what does she go and do? buys 2 new cars, new furniture and god knows what else......she now declares BR....are people kidding me? somehow im sure that will be blamed on the mortgage industry as well

I should have known she is a person who cannot manage her own finances. My bad

DOMINICK GACCINO

First Suffolk Mortgage Corp

APR

2007

Jim...I think you are way off when you blame a mortgage product for being used improperly. The fault is not in the product itself, but rather, as you stated later, by those who steered unsuspecting homeowners into them. Now, it is not all of the mortgage professionals fault either as there are many homeowners that wanted to use these products to get a bigger home than they should have or simply blew the savings on consumable items. Investors that bought into the "get rich quick" schemes and didn't have a backup plan are also contributors to the rise in foreclosures. Again, it is not the products themselves. Thanks for your inputs.

Dominick... As a fellow mortgage professional, why shouldn't we blame those that, as Jim put it, steered borrowers into these programs to make more money. A recent article in Money Magazine quoted one mortgage professional as saying "Option ARMs are not a license to steal. But once a customer asks for it, I know I am going to make four times as much money." There are a lot of mortgage professionals that have pushed this product against the better interests of the borrowers. They deserve part of the blame. As I have mentioned before, though, they are not the only ones and certainly do not represent every mortgage professonal.

I have sold these products myself an I love them. When used as an integral part of the borrower's financial plan, they are great products. Also, as you mentioned, mortgage professionals cannot prevent borrowers from overextending themselves after the deal closes. Thanks for your inputs.

Bottom line is that there are many areas for the real blame, but the products are not the issue.

APR

2007

All the more reason to educate the borrower on exactly what type of loan program they are getting into and for how long.

Jodi...well put.

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