Mortgage Meltdown

[JOEBIALEK]

Until recently I was an underwriter for a sub-prime mortgage company that is about to close.   It seems that most media outlets and government officials fain ignorance about the real underlying cause of the problem.   There is either a tendency to blame the borrower or act as though no one in the industry {or outside of it} saw this coming.   They fail to mention that those who gained the most financially got off scot free while leaving the mess behind for everyone else to clean up.   In my former company, the sales managers and loan officers "held the keys to the safe" while deciding which guidelines to ignore sometimes going so far as to bribe fellow underwriters to "look the other way".   Sales managers often overrode an underwriter's decision they did not agree with.  Other times fellow underwriters would be threatened with their job for "impeding company growth and progress" just because they refused to go along with the flagrant disregard of guidelines .   I complained to the sales managers about the bribing but all I got was a formal write-up for making "inappropriate comments". 
 

There was absolutely no support from the owner of the company all the way to the human resource representative.   This company is as corrupt as they come.   I can't tell you the number of sexual affairs that occurred between married and unmarried people; primarily among the management staff {at the workplace itself}.   Promotions were strictly political thus moving people "up the ladder" who never proved themselves worthy or were on a final written warning to be terminated {for poor performance}.   As a result of the corrupt management of this company, I and several hundred others were laid off.   I believe the federal government needs to investigate this company and bring to trial those corrupt individuals who broke the law.  This would set an example for the rest of the mortgage industry that absolute corruption corrupts absolutely.

[Democratic Hawk]

I never watched it but a long-running current affairs documentary on the BBC Panorama I gather ran with this whole 'sub-prime' thing earlier this evening. From my understanding, which may or may not be accurate, I gather 70% of 7000 repossessions (I read it somewhere) were sub-prime

But the message is that the mis-selling of mortgages to those with bad credit records could cause a financial crisis in Britain similar to that in the US. Guess, we'll have to wait and see ...

Dave

[opebo]

Haha, affairs between married and unmarried people..

Anyway, this sounds like the normal way a 'business' is run..

[David S]

Justice is one of the primary purposes of government. So if laws were broken the guilty parties should be punished. The officials who were responsible should also be held financially accountable.

[David S]

BTW Joe since you have worked in the business maybe you can answer a question I've been wondering about: Where do the mortgage companies get the money they loan out?

Besides the borrower, who loses when the loan is not repaid and the house cannot be sold for enough to cover the mortgage?

[Small Business Owner of Any Repute]

BTW Joe since you have worked in the business maybe you can answer a question I've been wondering about: Where do the mortgage companies get the money they loan out?

Besides the borrower, who loses when the loan is not repaid and the house cannot be sold for enough to cover the mortgage?

Loans are bundled together to minimize risk, and sold to large investment firms.

[??????????]

Joes description of what happened in his company, politics wise, happens in every company. Nothing really "shocking" about it. However, the main problem with these sub prime companies is that they were giving loans to people who shouldn't ever have been able to attain one in the first place. It's not all the companies fault, to be fair, the people who couldn't pay should've known they were getting in way over their heads.

[Wakie]

Promotions were strictly political thus moving people "up the ladder" who never proved themselves worthy or were on a final written warning to be terminated {for poor performance}.   

This is how it happens in EVERY company with which I have ever worked.  How good you are at your job has little to do with whether you get promoted.  And the higher you climb in a company the less it has to do with your advancement.

[??????????]

Promotions were strictly political thus moving people "up the ladder" who never proved themselves worthy or were on a final written warning to be terminated {for poor performance}.   

This is how it happens in EVERY company with which I have ever worked.  How good you are at your job has little to do with whether you get promoted.  And the higher you climb in a company the less it has to do with your advancement.

Yep.

[Smash255]

I was a loan officer for a Mortgage Broker for about a year.  I worked mostly with refinancing as opposed to loans for home purchases, which is where the biggest problems have come out from.  However even working with refinancing their were certain programs that are a bit risky that were pushed too much.  Things such as Interest Only loans, adjustable loans, Option Arm's (MTA) when they were not needed.

  For certain home owners those loans make sense (those who plan on moving in a few years, those who plan on using the $$ they save for other investments (though wise ones) to dump it back into the house later).  For example in a typical fixed rate loan, you pay most of the interest up front, and very little comes off the principal, so in some cases it could be better off to get an Interest Only loan, and then put the money you save back into the house to pay down the Principal.  For the first few years of a loan you would actually pay off more principle than you would with a typical fixed rate.  However, its not for everyone you don't know how the market will be down the oad a few years when its time to refinance.  You have to be very careful with how you manage your $$ in a situation like this, and many borrowers simply aren't told.  The bottom line all of these programs main purpose is to come up with other ways someone can free up $$ to use it in other ways, but were not meant to be sold  as a way to afford something you otherwise would not have, and unfortunately many of these loans (especially on the purchase side of things) were done because that was the only way that house can be afforded.  The other problem especially with the Arm's again has to do with not taking into consideration how the market will be in a few years.  In some cases the borrower does bear some responsibility, but many brokers simply failed to explain the risks involved.  thoughts about whether the borrower can afford the home after the initial fixed portion of the loan was casted aside, as it won't go up that much or if it does, you can always refinance and have no problem. 



Now their are times when those loans are needed.  For example someone coming from a higher rate that can't afford their home now, and might lose it.  Those who need to pull $$ out in order to pay medical bills or something of that ilk, and can't afford the higher fixed rate.  their are other purposes as well, such as different ways to finance, invest or manage money.  However, thats not the only way these loans were sold.   Loans were sold in part only on the basis of the borrower's ability to afford the home at the moment and not taking into consideration the borrower's future ability, many of these loans were used as a way to afford something that the borrower couldn't afford under the other loan programs, and that was not how these loans were ever suppose to be sold.

[David S]

Joe and Smash since you two have worked in the business you probably have better insight into the problem than most of us. What do you think should be done with the current situation and to prevent similar problems in the future?

[Smash255]

Joe and Smash since you two have worked in the business you probably have better insight into the problem than most of us. What do you think should be done with the current situation and to prevent similar problems in the future?

Give the homeowne the option of rolling some of the high risk loans into a fixed loan without having to refinance.  Now you might not be able to give them the same exact rate they were getting during the fixed period of the adjustable loan or whatever, but you can at least be in the ballpark without a sharp rise and not have the fear of sharp rises in the future.

As far as what to do in the future to avoid these type of problems.  The borrower must be made more aware of what is involved in these higher risk type loans.  More documentation explaining in details the possible risks of a loan like this.  Another option or possibly in addition is to have some type of session or meeting with the buyers and a third party (perhaps by the govt) to explain the possible risks and whatnot as opposed to relying on the mortgage exec (similar along the lines of what is done involving reverse mortgages, but not far as long). 

Another thing that could be done, which is something I didn't mention earlier is cracking down on stated loans (loans which do not verify income)  The general purpose of a stated loan was to provide income documentation for someone whose tax returns might not accurately reflect the $$ they make.  For example someone who is self employed more than liekly has quite a bit of write offs and actually make more than they report in taxes.  However, it has gone much further than that.  However, in many cases what happens is income numbers are often inflated or just made up (and not just in the case of self employed borrowers) in order to have the income meet certain ratios that are needed for the loan to go through.  For example someone who makes $60,000 and thats what their W2's show, but the particular loan program needs them to make $75,000 the loan will state they make $75,000 without verifying it. 

Another possibility has o do with the ratios I was just talking about.  Though in some cases the rate might be a bit higher some banks will allow the DTI (debt to income ratio) of 50 or even in some cases 55%.  This means total expenses such as mortgage, property taxes, credit card bills, car payments, etc over income.  Basically your monthly bills over your pre tax monthly income, generally doesn't take into account your daily expenses.  Their should be some type of cap on what the DTI ratio can be determined by the govt, because the levels some banks accept such as 50 or even 55% is just too high. 

 

[JOEBIALEK]

good points