Follow the Money
The first two parties in this Mortgage Mess have been the Federal Reserve and Wall Street. Today, I want to cover the third party involved in this mess and it is my own industry, the mortgage lending industry.
First and most importantly, many "leaders" of my industry have fought against the attempts to enforce ethics or licensing in my industry. They were seen as barriers to entry which were supposed to be bad. I have always considered them useful and very much needed. Personally, it's a bummer I have to take time off from work soon to take 40 hours of licensing classes and to take an exam; but I will do it for the greater "good".
Many mortgage "professionals" in the last 10 years have been anything but professional in my opinion. Most of them are in the business only for themselves and for how much money they can make on a borrower. Some of them have been "liars and cheaters" and have brought down our industry to the level of car salesmen.
Next, with no licensing or training in most cases, many mortgage brokers did not really know or understand what they were selling. Most of them did not realize that their clients could not afford these loans now or in the near future. Unfortunately, most mortgage brokers have no financial training or experience besides selling mortgages. These people are dangerous to their clients.
The most toxic mortgage of all has been the Option ARM that was pioneered by WAMU and World Savings Bank. I have met very few if any mortgage brokers besides myself who really knew how these loans worked and could explain that to their client. In my 10.5 years of experience I have never closed one of these loans because they have never made financial sense for my client.
But, many mortgage brokers only saw the FAT commission checks that came with these loans. In the summer of 2006 lenders and banks were offering us commissions as high as 6% of the loan amount or $18,000 on a $300,000 loan to close one of these loans, which were six times our normal commissions from a bank or lender. This is why these loans were sold to borrowers.
Second, a huge majority of mortgage brokers only offered their clients sub-prime loans even if those clients might qualify for a prime loan or a FHA loan. Why? Follow the money, big fat commission checks. This was a common strategy for home builders' lenders as well. FHA loans were more work and more headaches; but they were always a far better loan for the client. As we now know hundreds of thousands of sub-prime loans have imploded because they are bad loans for the clients.
Third, was fraud committed by mortgage brokers, borrowers, and occasionally appraisers and real estate agents too. Mortgage fraud is a huge white collar crime. Mortgage brokers have falsified borrowers' employment status, job history, income, assets, credit, home values, etc. to get their clients a loan. This fraud led to "artificial" home buyers which led to more demand and higher prices until the deck of cards was blown over when these buyers could not make their house payments.
Next week I will cover the final two parties to this Mess and the final party will take some time and it may surprise you as this party is getting no blame at all in the mainstream media right now.