When Did Common Sense Go Out the Window?

Today Fannie Mae reported a 2.3 billion dollar loss.  It seems like every day there is more bad news about the mortgage fallout.  I have been in the lending business for over 30 years and as I was driving to work today, I was asking myself the question-When did common sense go out the window with all of these institutions?

The numbers and the losses are staggering and in many ways incomprehensible to the average person. Just what went wrong?  There are many people and businesses to blame for the mortgage failures, but I keep returning to the idea of common sense.  I grew up with parents who were raised during the great depression and I was taught some things that for many years I thought everyone knew:

1) Live within your means, 2) Don't borrow money to finance your lifestyle 3) Qualifying for a Loan means you have to have good credit, enough income to afford the terms of the loan and enough collateral to secure the loan, should you default.

So how did these institutions lose their way? 

Back in the late 1980's I remember a lender created a no-income verification loan.  Your clients needed to have excellent credit and needed to put 20% down.  I remember thinking, at the time, are they nuts?  Who ever heard of lending money to buy a house without verification of enough income to repay the debt?

Well over the years the pendulum sure did swing with the creation of stated-income loans, 100% loan-to-value loans (on investment properties for gosh sakes!) stated asset loans and on and on.  As a lender I used to shake my head at some of the programs that were almost monthly being introduced-at one point there were even 125% second mortgages.  I think it was then that I thought the end was near.

Today, these stories (of mounting loan losses) do not surprise me.  They just reinforce some of the tried a true lending principles that I learned, oh those many years ago.  We used to call them the four C's of Credit, they were: 1) Credit History-Will they pay you back?, 2) Capacity-Income verification or Can they pay you back?, 3) Collateral-The security for the loan or what happens if they don't pay you back and finally 4) Character.  Have you noticed that noboby talks about character anymore? 

Many years ago I had an old boss who, when talking about lending, used to say-you have to like your borrower or your collateral, but you better like one of them.  Remember when a hand shake was all you needed to seal a deal? 

Maybe the old pendulum is going to swing back the other way again and a person's word will become their bond and people will return to living within their means and...I can dream, can't I?