Where does the blame for the mortgage and housing crisis lie? That is the big debate still raging. I receive hundreds of emails each week and a year ago everyone blamed the home owner. Now after two years of constant lies and discovery, things have changed considerably.
Most are finally coming around to understand the truth — that the greater housing and mortgage crisis is not a result of millions of borrowers going wild, buying beyond their means blinded by greed. Nor was it caused by some massive consumer driven multi-year mortgage fraud era where everyone lied to buy a home. Gangs of mortgage brokers who cruised the streets with loan applications and pens in hand recruiting straw buyers to steal homes didn’t cause it either. And before you even think it…SHORT SELLERS ARE TO TO BLAME EITHER. This crisis was caused by fraud alright – but not by the consumer or loan officer to any great degree.
The greatest real estate bubble of all time was only able to occur because of the unregulated investment and commercial banks’ insatiable thirst for parts for their Frankenstein securities. As parts ran low when housing stretched or interest rates rose to levels that made the asset class unaffordable every few months, the constant re-engineering of loan programs focusing on low monthly payments and the elimination of income and assets as a variable brought affordability back in check. This continually repeated for years until virtually anyone with a heartbeat and a hand needed to sign the loan documents were active participants in the market. By turning a blind eye, regulators endorsed their actions.
The extraordinary leverage created through these exotic loan programs and easy credit given to anyone and everyone never existed before and never will again. Now house prices are simply adjusting to the affordability present given the leverage available through current mortgage finance, rents, interest rates, macro-economic conditions and sentiment. The air pocket under house prices created by the high-leverage and easy credit is simply being deflated. Home prices will overshoot due to the massive supply created through foreclosures, from the builders and from folks just wanting to sell their home and buy a new one dwarf demand.
Below is an actual marketing piece from Saxon Mortgage wholesale, a Morgan Stanley mortgage chop-shop. These were loans being offered in July of 2006. As you can see here, by this time they had clearly lost all sense of responsibility in lending. Programs this out of touch with reasonable and responsible lending practices are only about one thing — getting as many loans as they could for MBS and CDO machines.
Financial weapons such as these made to blow up unless housing appreciates at an incredible rate is the real reason for the housing and mortgage bubble. But why did they care — after a few months the loan was securitized and sold with little recourse back to the bank. Below Morgan Stanley’s sheet is a key to what these things mean if you don’t already know.
During the years in question, 2003 – 2007, banks, Realtors, regulators and politicians branded exotic loans as mainstream. They either knew the risks and lied or they did not due proper due-diligence. The former would compare to the cigarette companies lying about the effects of nicotine as addictive and the cigarette as cancer causing. Now they must warn people so f the consumer kills themselves its their fault. The latter compares to bio-tech companies rushing unsafe drugs through the process and hiding clinical evidence that the drug may be harmful for the ‘benefit of the greater good’. In both reasons the manufacturer is culpable.
Consumers should not be mortgage finance or housing experts. They should be able to trust their banker or Realtor. When a bank says ‘you qualify for this loan’ it should mean something — not that at 50% debt-to-income and with every last penny of after-tax income going to debt each month your income will barely cover all of your payments. Yes, there were greedy consumers who took advantage of the system. But in the grand scheme of things, the system failed the consumer. Hey guys — I am not a Democrat either.
I will highlight a new bank each week. -Best, Mr Mortgage
1. When you do loans this crazy customer service is easy — everyone loves you because you give a loan to anyone and there is no quality control making for quick and easy funding.
2. 50-year mortgages! This one speaks for itself.
3. ‘575’ refer’s to the credit score and ‘100%’ to the loan-to-value or combined loan-to-value. This is zero down/zero equity loan with 575 scores. A 575 borrower can’t even get a loan through FHA now days at many banks.
4. BK refers to bankruptcy. This is a zero down/zero equity loan to 100% with a 600 score with a BK discharged only 6 month ago.
5. BK Stmts refers to bank statements. This means they treated bank statements the same as real proof of income such as tax returns and a pay stub. They labeled it ‘full-doc’ and could get higher prices/better ratings when sold/securitized. Bank statement lending is very risky.
6. 2nd/Vacation homes are generally treated the same as a primary residence but most 2nd homes during the bubble years were really non-owner occupied investment properties, the most risky.
8. 560 credit score is very Subprime. Allowing interest only and likely qualifying the borrower at the interest only payments vs. the full indexed payments is what is responsible for the 2/28, 3/27 reset disaster.
10. This one is a crime. How many naive first-time buyers got their lives shattered from this one?
11. VOR refers to verification-of-rent in lieu of a property management firm or mortgage history. This just means ‘hey first-time buyer — have a friend sign this form, get it back to us and you have instant housing credit history’. ‘Private party VOR’s’ is an endorsement to commit fraud.
12. Refers to ‘no questions asked on how you got the down payment’. This means they could have borrowed it from a bank, credit card, friend, robbed a bank etc. Not having a seasoned down payment that belongs to the borrower makes the loan more risky.
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