Problems in the Mortgage Industry

I think we’ve all heard about the crisis in the housing market, pretty much every time we turn on the news. To date, some 200 mortgage lenders have gone out of business. The demand on the secondary market is changing so rapidly, those lenders who fund loans on warehouse lines end up not being able to sell them. So they are stuck with them, eventually clogging up their entire line leaving them unable to fund anymore loans. That means that lenders which aren’t banks, who don’t lend their own money and use these warehouse lines can find themselves in big trouble.

Foreclosure rates have sky rocketed and many more people are struggling to make their house payments. This is a far cry from the refinance boom in 2003. In 2003 things were good. Rates were low and the mortgage business was booming! That was a good year to be in the mortgage business. 2007, now that’s a different story.

We’ve all heard about the minimal qualifications that lenders were requiring for getting people into houses, who previously would have been turned down. There were stated income loans, stated asset loans, no money down loans, no documentation loans. One could go out and buy an investment property with a 620 credit score and not have to put any money down, or verify income or assets. Well, those days are gone. Everyday, qualifying gets tighter and tighter. Mortgage companies’ entire product lines are disappearing in the blink of an eye.

Now, every time I turn on the TV, I see someone saying “I got my loan through so-and-so and my adjustable rate went up and now I can’t afford my payment”. They blame the mortgage broker, they blame the mortgage lender. Yet, somehow, there’s zero personal responsibility. The state I live it, we close with an attorney for just this reason. So why do these people insist that it’s the lenders and the brokers who get them into this position?

Mortgage brokers can only market loan products that the lenders offer. The lenders can only offer products that can be sold on the secondary market. Had a broker said to someone who came to their office looking for a loan “I can get you into a loan because technically you do qualify, but it’s a risky loan and I don’t really think that you can afford it. I believe it could put you in a bad position.”, that loan officer could have lost their job when the borrower got offended and complained. People don’t like to be told they can’t afford something, it’s an insult. Not to mention, if the loan officer turned away the loan because they felt as though it was not in the borrowers best interest, there’s another mortgage broker down the street who doesn’t have quite so much integrity.

What would have happened to a mortgage lender who turned away a borrower who did qualify for a loan, but the underwriter felt that the loan wasn’t in the borrower’s best interest? A law suit, that’s what. So why are the brokers and the lenders taking all the heat here when it was the investors on the secondary market who set the lax guidelines and the borrowers who knew (or should have known) what they were getting into.

Many people don’t have the option of refinancing out of their high interest rate loan now. There are far fewer mortgage products offered, the ones that are offered are a lot harder to qualify for. Many markets have gone “soft” or are depreciating instead appreciating. The average income doesn’t correlate with the average price of a home. People have been buying too much house for what they can afford. And foreclosures effect people who aren’t struggling to make their mortgage payments too. When my neighbor goes into foreclosure, it affects my property value.

The market needs some time to correct itself. In 2003, the pendulum swung in one direction, and now has swung far to the other. I don’t know when we will be out of this slump, but I only hope the worst is behind us although experts don’t seem so sure.