Confessions of a Mortage Broker: One Perspective on the Impending Housing Meltdown

As home prices continue to slide and we are in the midst of record foreclosures, as Pamela noted here a few days ago, I wanted to share with readers my perspective of the impending housing meltdown.

I first began selling mortgages in 1993. At that time the riskiest mortgage available was a loan to persons in a Chapter 13 bankruptcy, and this form of financing took place under standard FHA guidelines. In some ways I could honestly say that I have never seen, on balance, a riskier lending scenario than making mortgages to persons in Ch. 13, and that is one loan that no subprime lender I ever saw was willing to make. I throw this in only for perspective.

In 1998 Lehman Brothers started to offer some loan products that the industry considered to be unprecedented. At that time all of the new products required down payment/equity and all were available only to persons with what is considered to be “A” credit. Where the departure came from is that down payment requirements were loosened at the same time that options were made available to qualify without having to document income or assets. There was even one flavor that permitted a loan application that made no mention of employment or, really anything beyond identifying information, and the rates for this entire group of niche loans were not much higher than for conventional loans.

The FHA, conventional, and Lehman Brothers mortgages were mostly 30 year fixed, and anything else was an exception. There were subprime loans available as far back as 1993, and they were typically designed to have a payment set for two or three years before changing. These loans also had prepayment penalties imposed for being repaid quickly, and these penalties were very rare otherwise. Rates were high, which made them not a popular option, but the main thing restricting use was down payment/equity requirements of at least 20%. However a few people had both bad credit and equity so the subprime segment technically did exist.

FHA always had extremely low down payment requirements, and ways to basically get around even those. In addition FHA took more of a second chance approach to people, and worked with credit pictures that were substantially lower than standard A credit grade. In that sense, FHA showed the way. On the other hand, FHA has always been conservative in areas of housing condition and valuation, income documentation, and employment track record.

The “Alt A” lending area (Lehman and followers), meanwhile was enjoying success working with borrowers who were substantially underserved and started liberalizing guidelines in several respects. Credit rating was lowered a little bit (“A minus”), and rates were increased to pay for the additional risk. Likewise with down payment requirements, at least to some extent because FHA had broken some ground in the area of no cash out of pocket from the borrower. The major departure, though, was for folks buying rental properties, but, again, this area was liberalized only for borrowers showing excellent credit history.

In this same time period (1998 to 2002) software was introduced by both Fannie Mae and Freddie Mac (quasi governmental entities that act as intermediaries between mortgage companies and Wall Street) that “underwrites” loan files. They also started to utilize data bases of real estate condition and value information. Within this package of innovations loans were approved without appraisals being required, and borrowers received low or no down payment loans at standard rates without having to provide employment or asset documentation. Software was designed to make these things happen largely because the area of “credit scoring” finally became accepted. Significantly, this body of loans does not seem to have issues with repayment.

At the height of “subprime mania”, then, people with bad credit were given loans without having to prove income (and sometimes employment), without having to pay down payments or closing costs, and, in some cases, without even having a property looked at by an appraiser, and even at astonishingly low credit scores. These, however, were bad loans, meaning higher rates (though still scaled to credit grade), payment increase at two or three years, and substantial penalties for repaying too soon. Room was even found within this general framework for people buying “investment” property. And the way that the mortgage industry got to this point was by gradual evolution, one guideline modification at a time.

From the perspective of the loan officer, these deals were really two fers. Sure, the rates were going to skyrocket but no one involved believe that anyone would ever have to face making payments at those rates. The borrowers would clean their credit, season their employment, have a track record on that newly opened company, and/or any of a number of other things that would allow them to qualify for the gold standard of mortgages, a conventional loan. Or, barring that (because borrowers are human, after all) the folks would come back in in two years and we’d reset them with a new subprime, thereby keeping payments down in the comfort zone, and every one would be happy and prosperous.

As the numbers of unqualified borrowers started to mount, so did the defaults. Defaults flow to foreclosures and foreclosures to losses, and losses to a cut off of fresh money to subprime lenders, and the money cutoff to more foreclosures because the lending cycle ends and the piper finally must be paid full due.

And in the end, there’s still the current economy to add into the mix.

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7 Responses to Confessions of a Mortage Broker: One Perspective on the Impending Housing Meltdown

  1. Pingback: Confessions of a Mortage Broker: One Perspective on the Impending Housing Meltdown

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  3. fha loans says:

    a lot of ppl were put into subprime loans when they could’ve gotten a 30yr fixed rate with FHA!

  4. Pingback: Mortgage News Aggregator » Confessions of a Mortage Broker: One Perspective on the Impending …

  5. ironxl84 says:


    Thanks. Your insights put a clear perspective on the subprime crisis. Obviously the days of easy money (read “easy credit”) are over.

    It is difficult to envision a happy ending in the current reality.

    As those that sought a quick buck from the loosened policies of the “Federal Reserve” are finding, there ain’t no such thing as Easy Money.

    Now they pay the price ….and so on up the food chain….right to the doorsteps of the most “prestigious financial empires of the modern USA, and indeed the International Financial Cartels”.

    It seems they all got caught with their fingers in the pie.

    Yet throughout all of this, I personally find it comforting that those suffering as a result of this imbroglio (sp?), are not only those forlorn homeowners now facing foreclosure – and not only the local realtor brokerage – but the shareholders of those harbingers of supposed “safe investments” such as Merril Lynch, Bear Sterns, Goldman Sachs, etc.

    IMO, this “Unwinding” is far, far from over.

    If nothing else, I am personally sickened by hearing about the Billions of Dollars in Annual Bonuses granted to the foot soldiers of these mega-financial corporations.

    May their Ferraris meet the repo man, and may they share in the suffering around them – which they participated in the creation thereof, in the days when they laughed all the way to the bank!

    Maybe they will watch “Its a Wonderful Life” this Christmastime and get a clue. Maybe not.

    Lets see, the USA can afford to spend nearly a TRILLION Dollars on an arbitrary Invasion and Occupation of Iraq, based on trumped-up “Intelligence”, yet cannot allow expanded Health Care benefits for underprivelaged children. Something stinks to high heaven.


  6. Paul says:

    I think no matter how much the government tries to do to make artificial “enhancements” to the market the more the market suffers. I agree that the market should be allowed to play itself out. Probably the first step is to ensure sound money and stop these inflation cycles which cause problems for the less fortunate.

  7. Darrell Prows says:

    fha loans: I wish that you were wrong, but we both know that you’re right. Sad, isn’t it.