Subprime Lending Collapse? – Thoughts From a Former Mortgage Broker
As a former Mortgage broker, I thought I would comment on the state of affairs of the Real Estate Market, sub prime lending and the increase of foreclosures nationwide. Many people are left to wonder what happened, I saw this coming, it was inevitable, many of the mortgage loans that were written were disasters waiting to happen.
Between the years of 2001 – 2005, our nation saw a HOT Real Estate Market, a Real Estate Bubble if you will. Real Estate Bubbles are characterized by a rapid increase in value of real property but are unsustainable in relation to rate of inflation and median incomes.
” NO MONEY DOWN”, ” 100% FINANCING”, ” Bad Credit, Poor Credit.. Your approved”, these along with the ” Reduce your mortgage payment by 40%” were all a precursor to the problems we see today. I believe that bad things happen to good people, loss of a job, unforeseen expenses, health issues , divorce can wreak havoc on someone’s credit in an instant, however lending hundreds of thousands of dollars to a new home-buyer that had trouble making their revolving credit card payments, or car payments should have been a clue. The sad fact is that except for in some situations, a sub prime borrower will always be a sub prime borrower. To approve them for a 100% loan was like giving a loaded gun to a suicidal person and tell them to play Russian Roulette.
Thinking about it, what did these borrower have to lose anyway? They invested little to no money in the purchase of their share of the American Dream of homeownership, they were caught up in the moment, they were able to obtain loans with little to no documentation to prove that they could repay their debt and because interest rates were relatively low for even the sub prime borrower, Realtors and Mortgage Brokers had a field day. Why settle for this home $200,000.00 that you can afford, when we can approve you for this bigger, better $500,000.00 home. It was a win- win situation for everyone.. Or so they thought, now the very same borrowers that entrusted the largest investment they would make in their lifetimes to unlicensed, inexperienced, greedy mortgage brokers are facing foreclosure.
These creative financing type mortgage loans were not a blessing, they were a ticking time bomb. New home-buyers were victims of mortgage brokers that preyed on their ignorance of taking out a mortgage loan, they didn’t understand that the low introductory interest rate came with a hefty increase when the ” fixed ” period expired, increasing their mortgage payments on an average of $200.00 more a month. Many of these borrowers only saw their initial monthly payments and did not stop to consider that homeownership came with more costs then just the principal and interest payments, many didn’t take into consideration Real Estate Taxes, Homeowners Insurance premiums or Homeowners Association Fees. No one stopped to tell them that if they financed 100% of the purchase price of their home, that when it came time for their adjustable rate mortgage to recast ( interest rate increases) they may not have enough equity in their home to refinance into a fixed rate. Some were not told about the significant prepayment penalties associated with their loan which made it expensive to refinance into a fixed rate ( if their credit score was good enough) or another low introductory adjustable rate mortgage. The singapore personal loan are here to provide you a loan with a fewer percentage over interest so the individual will be at ease while clearing the whole amount.
Who was looking out for these borrowers? The sad fact is NO ONE. Mortgage brokers were unregulated during most of the time between 2001-2005, only recently all states except 2 require that a mortgage broker be licensed. Unlike Realtors, Financial Planners and lawyers, Mortgage Brokers do not have a fiduciary duty to their borrower, they are in the business to ” sell” money. During my time as a Mortgage Broker, I saw an influx of ” sales” people to my profession, during 2001-2005 some sales people saw the Real Estate Market and low interest rates as a way to get rich quick. There were mortgage brokers that were earning anywhere from $6000.00 to $20,000.00 per loan if the borrower had less then perfect credit and fell into the sub prime lending status. Along with charging loan origination fees that depended on the size of the loan ( usually 1% to 2% of the loan amount ) the Mortgage Broker received a payment from the lender as a ” reward” for selling a higher interest rate then the actually rate the borrower was qualified for ( YSP is often in .25 increments The Mortgage Broker who was able to sell a higher interest rate AND include a prepayment penalty ( a fee charged that makes it expensive if not impossible to refinance the loan before the ” fixed period” of an adjustable rate expires) made a truckload of money, fortunately there is a cap of 5% in closing cost fees in most states. Mortgage brokers are in the business to make money, some never had their borrowers best interest in mind, some still don’t, because of the stricter guidelines of the traditional Mortgage Lenders, many sub prime homeowners are left hard money lenders, and because the market has cooled, it isn’t unreasonable to think that the Mortgage Brokers that got accustomed to a certain lifestyle will or have changed , if anything I would expect that they are charging higher origination fees then they had previously, because sub prime loan applications are few and far between, and placing loans is more difficult.
The end result of unlicensed, untrained, Mortgage Brokers coupled with naive borrowers has cost this country a lot, sure we will recover, but I predict that it will take at least 3.5 years for the market to correct itself, during this time, sadly an untold amount of homeowners will lose their home to foreclosure. I hope that everyone has learned a valuable lesson, one not to be forgotten or taken lightly.