Who Is To Blame?

February 18, 2009

Finance

Everybody knows there is a huge housing crisis. Foreclosure rates are higher than ever, and property values are plummeting as a result. There?s plenty of blame to go around, from Wall Street, to the banks and lenders, to the individual loan officers, to the home buyers and homeowners.

How Did It Start?

Lots of fingers...but who is the plant?

Lots of fingers...but who is the plant?

Wall Street investors decided to buy the mortgage paper, including subprime and exotic products like the option arm, believing they are a sound investment. Banks and lenders made the loans to borrowers and then sold them to Wall Street. Mortgage brokers and loan officers offered the loans to home buyers for purchases and homeowners for refinances, believing they are providing a valuable service to the borrower.  Borrowers take the loans offered to them, believing it is the right financial decision, and planning on keeping up on the payments.

Is Wall Street to blame for enticing banks and lenders to make the loans so they could buy them as investments? Maybe. Are the banks and lenders to blame for enticing mortgage brokers and loan officers to make the loans? Maybe. Are the mortgage brokers and loan officers to blame for offering the products, and making a profit by doing so? Maybe. Are the borrowers to blame for taking a loan that maybe they didn?t understand, or really couldn?t afford? Maybe.

Was The Problem Mortgage Brokers?

I say it’s supply and demand. Like Chris Rock said, you don’t have to sell drugs. (?C?mon and try it, this is some goooood crack?).  And from a mortgage guy’s perspective, most, if not all, mortgage brokers thought we were helping people by doing 100% financing, or giving them a 2 or 3 year adjustable rate mortgage (ARM) on subprime products. Somebody might be in a jam, and it was maybe a band aid, but we usually thought it was a good move nonetheless.

The one product I never liked and steered people away from was the option ARM. That was a very dangerous product right from the start, but they were easy to sell, and brokers made a lot on them. I never liked them. But every person I did 100% financing or an ARM for, I could look in the eye and tell them it was a good deal. Sure, it’s not charity work, I get paid for what I do, but there was always benefit to the borrower, be it coming up with less out of pocket for a purchase, getting extra cash for home improvements or debt consolidation, or saving money and lowering their interest rate.

Did Buyers Go Beyond Their Limits?

NOBODY ever envisioned the type of meltdown or plummeting property values that we have seen. Sure, I knew values can’t skyrocket indefinitely, but I thought it would be more of a gradual stoppage, or just kind of level off. I can’t speak for all mortgage people, but I always tried to do right by the borrower. I had people approach me that wanted to buy way too much house. Say, for instance, they make $70k a year combined, and they were looking at a $350,000 or $400,000 house. I’d tell them, “sure I can get you a loan because you’ve got great credit on a stated income or no income verification program, but you’d honestly be in over your head. I really think you need to scale back a bit.” Probably more often than not they’d just go somewhere else to get the loan. In that instance, I believe the blame lies squarely on the borrower. Not all of the time, it wasn’t, but that scenario happened to me fairly often. In any field, there will be bad seeds. There are bad doctors, bad lawyers, bad car salesmen, and bad mortgage brokers and loan officers. But everybody was a cog in the machine. Real estate agents sold the homes and made a commission. Loan officers and mortgage brokers made the loans and made a commission. Banks and lenders sold the paper to investors and made money. And some borrowers got loans they might not get today, and maybe got the house they really wanted, or got the extra cash they wanted, or got the lower payment they needed.

Where do we go from here?

Well, there has been a 180-degree paradigm shift in mortgage lending to the extreme conservative. Yes, we have to learn from our mistakes. No, the aggressive lending that was available will never be available again. But, I believe there has to be some happy middle in between. It will probably take a long, long time for things to correct themselves. Foreclosures have to ebb and property values have to eventually come up. Investors have to become a little less skittish with mortgage lending, and allow guidelines to loosen up some.  Everybody, from Wall Street, to the loan officer, to the end borrower, has to be a little smarter, and also has to shoulder some of the blame. Mortgage brokers and loan officers have been demonized, and even compared to drug dealers.  I feel that we were simply offering a product that was available, the same way a convenience store offers soda and chewing gum.

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About Brad Walbrun

Brad Walbrun grew up in northeastern Wisconsin, moving to Chicagoland over a decade ago, and never to return, although he remains an avid Packer fan. He is married, with 3 children, living in Schaumburg. Brad’s passions are fitness, MMA, and mortgages. He has been in the mortgage industry since before the refi boom, for almost 10 years now. You can reach Brad at (847) 975-4440 or bradwalbrun@hotmail.com.

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