Welcome Jeff. Thanks for the history lesson. I don’t think you said anything we don’t already know. We shall await your explanation of how the nothing down, I/O, no doc, 2/28 liar loan ARM was beneficial. This is your chance to explain why you were not a Voodoo witchdoctor.

I know somebody who got a loan from BWC in 2005. Her “make it” income was about $45,000 a year. Her “state it” income was about $105,000. Apparently the going rate was for the state it to be about 2.5x the make it. She bought a house in Spanish Springs. The purchase price was about 4x her state it number, but about 8.5x her real income. The value of the house is now about 75% of what she bought it for. Her rate adjusts in March of next year. She believes the rate will increase.

Since she put nothing down, she owes about 25% more than her house is currently worth. I do not believe that you were her broker, Jeff, but since it was your company, I am wondering what mortgage planning advice you might have for her. I am sure she will be soothed to hear that her decision to get into a nothing down interest only loan that will explode on her in March was wise mortgage planning. I, too, await your wisdom.

What exactly are the licensing requirements, if any, to be a mortgage broker or mortgage loan officer? Are we talking about the ability to fog a mirror, or do you have to actually know something and pass a state or federal exam?

Well I disagree with your analysis Jeff. The culprit is NOT Greenspan. It’s you [maybe not you personally, but absolutely your industry].

Sure Greenspan was instrumental in dropping the federal overnight funds rate to 1%. But when he started cutting interest rates, there were maybe a half a dozen or less mortgage products out there. Now I’m not in the mortgage industry, but a couple of years ago I heard there were more than 450 such programs! Greenspan had NOTHING to do with the explosion of “creative lending,” and its disingenuous for you or anyone else to be making the case he did.

If a Fannie Mae conforming loan prior to Greenspan required less than a certain maximum loan amount; at least a 20% cushion of equity in the loan’s security; full documentation; no secondary financing; owner occupancy; etc., etc., it required the SAME matters after Greenspan.

The ONLY thing lower interest rates accomplished [at least insofar as mortgage lending was concerned] was allowing a borrower to qualify for a higher loan amount because now the interest cost was lower.

We didn’t have 4/10, interest only, 50 year amortization, 80%-10%-10%, HELOC upon HELOC, make up your own income loans, broker kick backs, seller kick backs, etc., etc., etc. The reason we have the mess we do is because of your industry and the persons [formerly] in it. Your industry came up with creative products to entice people into buying property they couldn’t afford with the expectation they could flip their purchases for profits before it came time to pay the piper. Simply stated, your industry created a vehicle for people to become property owners when they never should have.

We also had a whole lot of borrowers who were sold a bill of goods by unqualified loan consultants. Hey don’t worry; when the teaser rate expires, you’ll either be long gone from your purchase or just refinance with teaser terms for another couple of years! Of course many of these borrowers were predisposed to be sold a bill of goods because of the lure of big dollars in short periods of time. It was nothing different than an old fashion pyramid scheme - the people first in made a killing. The people at the end lost everything.

Now I was one of those existing landowners who took advantage of the drop in interest rates to reduce my mortgage costs, increase my positive cash flow, and spend the savings on consumables which fueled the economy - just as Greenspan intended. But I didn’t lie about my income. I didn’t try to refinance a loan against a property with phantom equity. I didn’t buy into adjustable or teaser rates. I didn’t pull out extra equity I really couldn’t afford to repay. I qualified for my refinance the same way I qualified for my original loan. People like me have in no way contributed to the mortgage mess we’re seeing. It’s those who could never qualify [as well as those who aided and abetted] who have.

People in your industry used the opportunity of easy money to create a whole slew of new creative financing programs which anyone with a right mind who could understand what was really being offered would never buy into. The problem: the vast majority of borrowers had no idea what they were buying into and relied upon misleading loan “consultants” to sell them fraudulent loan packages. And whatever it took to qualify for these packages [and by the way, it didn’t take much], these consultants “packaged” their applicants so they would qualify.

And now reality is starting to sink in and people like you are pointing the finger at Greenspan. I say point the finger at your colleages; they created this mess and they’re now about to pay the price [at least the few still in your industry].

Sure; creative new loan products and hedge funds that readily offered to buy them in the secondary market may have made more money available. But that doesn’t explain why people who really couldn’t afford them [and really, had no intention of paying for them in the long run] were allowed to become mortgagors.

It’s really just like the stock market crash of 1929 [are you listenting Derrick?]. Lots of easy money; lots of margin borrowing; lots of people being encouraged to buy real estate they had no business buying and with no intent of holding onto for the long term; more people chasing less properties and in the process artificially driving up prices.

The Feds HAVEN’T reduced the flow of money to the mortgage market. All it’s done is make the cost of money more expensive than it was 1-1/2 years ago. But because the cost has increased, those easy flips aren’t so easy anymore. And because they’re not so easy, demand has slipped. And because demand has dropped, there is an excess supply of housing. And because there is an excess supply, prices are dropping. And now all the speculators who never intended to weather the storm for the long haul can’t afford to pay because their houses of cards are falling.

And because they can’t pay, originators like Countrywide and WaMu are being asked to buy back their bad loans. And that requires lots of liquidity and they don’t have it. Which means mortgage bankers are going out of business.

We need to let this mess play itself out. We need to get back to reality. We need to learn that we don’t make loans to people who really can’t afford them [or have no intention of paying the moneys back]. We need to get back to maybe half a dozen or so mortgage products that require archaic things like the ability to repay; real cushions of equity; etc.

If and when your industry takes responsibility for what it has done; and rectifies the wrongs it has allowed to take place; and we still have a real estate depression; you can talk to me about Greenspan’s role in all of this. But not until then and you and your colleagues have a long, long way to go!

Jeff, thank you for your post; I look forward to your post explaining the benefits of a 2/28 ARM. These insidious products put unrealistic buyer power in the hands of financial fools while the responsible 30-year-fixed-buyers could not compete; where is the benefit?
Casa

Also…let me say this - remember, I did say that “I was probably preaching to the choir”…this post is just an intro to the real dynamics of the last week - if I had included all of this in my first post - I would have gone from “Captain Obvious” to “Lieutenant Longwinded” and booted out on my first try. Jeff.

Jeff,

I think the majority of this problem can be attributed to an industry that saw its customer base shrinking as home prices were rising so it set out to generate new customers. This was accomplished by allowing people into loans that they had no business being in. Further by encouraging people to take loans that they might otherwise have not chosen.

Over the past few years my wife and I have had some experiences with various mortgage companies, both for our own homes as well as some rental property. I have to say that every time we were both encouraged and pressured to take on a loan product that was something we didn’t ask for. We would specifically say 30 year fixed every time and the loan officer would try to talk us out of it. We were made to feel unintelligent for not taking the smart money as it was often put. We were told, you move a lot you should save money by getting the cheaper rate or you’ll probably sell this rental in five to seven. We told them we move because we can but what happens when the market turns and we can no longer move or sell the property? We need to buy each house with the forever stuck with it attitude to which we were told the market is fine blah blah blah. We told them our crystal ball was cracked and we’d take the safe money thank you.

I don’t know you Jeff so I won’t make generalizations about what types of loan products you’ve recommended over the past few years. I have to say though from our experience mortgage counselors, mortgage advisers or what ever they chose to call them selves were anything but. Unfortunately, as we’ve seen in other commission driven fields the client’s best interest are not looked after by the sales person.

RE: “You’re already upside down, you just don’t know it.”

Impossible! My realtor told me it’s worth $ fill-in-the-blank.

Jeff -

I quote from page 16A of today’s San Jose Mercury News:

“In 2000 the stock markets plummeted. Over the next 18 months, the fallout dragged the economy to a standstill. Enter the Federal Reserve. As the economy sputtered, the Fed cut interest rates to 40-year record lows. That cheap money spurred a housing boom.”

So far we’re on the same page. Although you can rightly point the finger at Greenspan for spurring a housing boom, this in no way explains the mortgage mess we’re in.

So continuing with the article,

“But no boom lasts forever. And eventually, to keep this one going, THE MORTGAGE INDUSTRY began pitching EXOTIC LOANS TO BORROWERS WITH SHAKY FINANCES. These loans…were funded by Wall Street investors hungry for higher returns. By STRETCHING UNDERWRITING STANDARDS…these exotic loans enabled millions of new borrowers to buy homes. And that easy money ALLOWED PEOPLE WITH MEAGER MEANS TO BUY HOMES THEY ONCE COULD ONLY DREAM ABOUT. As long as all, or almost all, of these new homeowners made all their payments; as long as the rate of defaults stayed low; as long as housing prices kept going up; everything would be fine. The system was flawless.

Until it wasn’t…It took some time, but mortgage rates crept higher. As adjustable-rate mortgages reset at higher rates, borrowers watched their monthly mortgage payments balloon. An alarming number of borrowers - some of whom did not have enough equity in their houses to be able to refinance or even sell - began to default. Problems cascaded for the mortgage industry. Dozens of lenders went out of business. Home sales slowed. Housing prices fell in some places, flattened in others…Lenders…pulled back on mortgage loans to all but the safest borrowers and clamped down on a range of risker loans.”

This article doesn’t talk about the flippers [as opposed to “homeowners”] who armed with easy money could invest in real estate THEY ONCE COULD ONLY DREAM ABOUT. And it doesn’t talk about real estate developers who built and built as if there were no tomorrow in order to satisfy the insatiable demand for housing.

The common denominator insofar as all of these elements are concerned is NOT the drop in interest rates per se but rather, the creation and marketing of EXOTIC LOANS TO BORROWERS WITH SHAKY FINANCES and “STRETCHING” UNDERWRITING STANDARDS.

Stated differently, the mortgage industry itself.

Commissions, 2sleepy, commissions. Mortgage brokers make a whole lot more money selling toxic loans than conservative ones. In fact, the more toxic the loan, the higher the commission. The commission on a 2/28 Suicide Special with a deadly prepayment penalty is substantially more than on a 30 year fixed. Substantially more.

Maybe Jeff will be willing to share with us the difference in commission when he explains to us the social and individual benefits of the 2/28.

This is a technical but important discussion. There are some writers here who really know their stuff. I work for a company that’s looking for paid mortgage writers, preferably professionals in the field. Please drop me a line at kmarino@quinstreet.com for more information or if you might be interested.

So, can I buy a house now?