In the Subprime Mortgage Mess Wanting to Help And Getting The Blame Are Two Different Issues
George Boelcke CCP
April 16, 2008
Last week a national cable network announcer used the word "crisis" in reference to the current mortgage, subprime and foreclosure situations five times in one sentence. It was followed by an excerpt of a speech from President Bush in 2002, "By the year 2010 we must increase minority home owners by at least five and a half million."
The excerpt seemed to imply that somehow President Bush was to blame for setting off an avalanche of subprime loans, which is somewhere between politically motivated, patently false and inaccurate.
One of the greatest tools available to any President is to set long term policy, to inspire, raise the bar or perhaps get the country as a whole to think bigger or better. But what transpired as a result of this long-term and very laudable goal should land squarely on the shoulders of many lenders and brokers. Many lenders believed this was a hunting license, or a blank check, to do whatever it took. The goal was noble; the implementation however, was not what President Bush envisioned, or how it turned out.
It wasn´t just minority groups who were now targeted; it was also lower income families without sufficient incomes, and certainly no down payment. Since many or most of these clients couldn´t possibly qualify for a conventional loan, the subprime market exploded. A relatively small, specialized and high risk area of lending became hugely profitable and grew overnight. After all, it is always much easier to rip off poorly informed and undereducated clients.
This new goldmine attracted more and more shady brokers and lenders, all with an attitude of doing and saying "whatever it takes" to get the deal and turned the entire focus from "helping" to "shafting." But just subprime loans and rates wouldn´t do the trick. They would only make monthly payments higher and not lower. What brokers needed was a way to lower the payments. No, rates weren´t a priority for those clients who knew they really didn´t qualify, had credit problems, no income or no down payment. Every person knows there´s a surcharge to pay and that rate always equals risk.
The magic was giving these families hope, and the task was to get them to sign on the bottom line – whatever it took. After all, you can´t rip off anybody without a signed deal. But it had to be only semi-suicidal and not impossible. That is, not many people would sign a loan that exceeded their total income. That´s where the beauty (and subsequent deadly trap) of adjustable rate mortgages (ARM) came in.
A low rate today to get people to sign and… well, who cares what happened to them down the road. If home values had kept going up, those same brokers could easily (and did for many early borrowers) go back again and again to refinance these loans. In many cases it was only to forestall the inevitable, but not until they were able to collect a ton more fees and profits.
When the market stalled and these ARMs exploded in rate, most of the kinky brokers quickly got out of the business and many of these families were left holding the bag – or more likely packing up and moving out of their home now under foreclosure.
What is certain is that millions of these families trusted a lender or mortgage broker. It isn´t a stretch to assume most of them also believed that, like a realtor, their broker had a fiduciary relationship with them, would look out for their best interest, and supply advice with their best interests in mind. Wrong on all four counts!
They signed complex legal documents, most were first time homeowners, for many English is a second language and they were trusting, hopeful, excited and naïve. Yet they were up against unscrupulous lenders using mortgage jargon, misleading information, often fraudulent practices and feeding their clients´ hopes and dreams. Those families never had a chance.
Could there have been more or better legislation in place to regulate lending practices, the subprime market, simple-language disclosure or a host of other angles? In hindsight, you bet. Should millions of these people have asked a whole lot more questions or any questions? Certainly. Were they naïve to think they could make these payments for any extended period of time? Perhaps. Should many of them now receive specific help? Each person´s political view has a lot to do with that answer. Are these people accountable for their own actions? You bet. But any discussion of personal accountability seems to be more and more politically incorrect these days.
A goal to increase home ownership in significant ways is something that should continue to be part of any governments´ policy. But perhaps in the next effort, many lenders should help to accomplish this goal by focusing on doing the right things right. Just because something, anything, is legal doesn´t make it morally right. And while some of the media want to find one "bad guy" to blame, they have the wrong person.
Just ask many of the families whose homes have gone into foreclosure. They might remember or even credit the President for setting the goal and starting the dream but for the rest of their life they will never forget the name or face of their mortgage broker who contributed to killing it just as quickly.
The excerpt seemed to imply that somehow President Bush was to blame for setting off an avalanche of subprime loans, which is somewhere between politically motivated, patently false and inaccurate.
One of the greatest tools available to any President is to set long term policy, to inspire, raise the bar or perhaps get the country as a whole to think bigger or better. But what transpired as a result of this long-term and very laudable goal should land squarely on the shoulders of many lenders and brokers. Many lenders believed this was a hunting license, or a blank check, to do whatever it took. The goal was noble; the implementation however, was not what President Bush envisioned, or how it turned out.
It wasn´t just minority groups who were now targeted; it was also lower income families without sufficient incomes, and certainly no down payment. Since many or most of these clients couldn´t possibly qualify for a conventional loan, the subprime market exploded. A relatively small, specialized and high risk area of lending became hugely profitable and grew overnight. After all, it is always much easier to rip off poorly informed and undereducated clients.
This new goldmine attracted more and more shady brokers and lenders, all with an attitude of doing and saying "whatever it takes" to get the deal and turned the entire focus from "helping" to "shafting." But just subprime loans and rates wouldn´t do the trick. They would only make monthly payments higher and not lower. What brokers needed was a way to lower the payments. No, rates weren´t a priority for those clients who knew they really didn´t qualify, had credit problems, no income or no down payment. Every person knows there´s a surcharge to pay and that rate always equals risk.
The magic was giving these families hope, and the task was to get them to sign on the bottom line – whatever it took. After all, you can´t rip off anybody without a signed deal. But it had to be only semi-suicidal and not impossible. That is, not many people would sign a loan that exceeded their total income. That´s where the beauty (and subsequent deadly trap) of adjustable rate mortgages (ARM) came in.
A low rate today to get people to sign and… well, who cares what happened to them down the road. If home values had kept going up, those same brokers could easily (and did for many early borrowers) go back again and again to refinance these loans. In many cases it was only to forestall the inevitable, but not until they were able to collect a ton more fees and profits.
When the market stalled and these ARMs exploded in rate, most of the kinky brokers quickly got out of the business and many of these families were left holding the bag – or more likely packing up and moving out of their home now under foreclosure.
What is certain is that millions of these families trusted a lender or mortgage broker. It isn´t a stretch to assume most of them also believed that, like a realtor, their broker had a fiduciary relationship with them, would look out for their best interest, and supply advice with their best interests in mind. Wrong on all four counts!
They signed complex legal documents, most were first time homeowners, for many English is a second language and they were trusting, hopeful, excited and naïve. Yet they were up against unscrupulous lenders using mortgage jargon, misleading information, often fraudulent practices and feeding their clients´ hopes and dreams. Those families never had a chance.
Could there have been more or better legislation in place to regulate lending practices, the subprime market, simple-language disclosure or a host of other angles? In hindsight, you bet. Should millions of these people have asked a whole lot more questions or any questions? Certainly. Were they naïve to think they could make these payments for any extended period of time? Perhaps. Should many of them now receive specific help? Each person´s political view has a lot to do with that answer. Are these people accountable for their own actions? You bet. But any discussion of personal accountability seems to be more and more politically incorrect these days.
A goal to increase home ownership in significant ways is something that should continue to be part of any governments´ policy. But perhaps in the next effort, many lenders should help to accomplish this goal by focusing on doing the right things right. Just because something, anything, is legal doesn´t make it morally right. And while some of the media want to find one "bad guy" to blame, they have the wrong person.
Just ask many of the families whose homes have gone into foreclosure. They might remember or even credit the President for setting the goal and starting the dream but for the rest of their life they will never forget the name or face of their mortgage broker who contributed to killing it just as quickly.
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