Winds of Change; The Rise and Fall of the Subprime Market

This is part one of a series of blog articles on the subprime mortgage market correction. In today’s article, I will briefly sketch the rise and fall of subprime loan products and their relation to predatory lending practices within a capitalist system.

When I first entered the industry in 1985, Conventional loans were the cream of the crop. There was no risk-based pricing. Everyone received the same interest rate on their conventional loan whether they had great credit or a few late payments. Homeowners with very poor credit, lack of job stability, zero cash reserves, and unverified source of funds to close, were not approved for a mortgage. It was a very big deal to decline a loan. As a mortgage loan underwriter, I was told our job was to make loans, not decline loans. We had to try our very best to help our company figure out a way to help the homebuyer. Declining a loan was serious. We had to state rational, good reasons why a homebuyer did not qualify. That all changed with the introduction of risk-based pricing into the mortgage lending market.

20% down
10% down
5% down use to be considered very risky.
3% down buyers were directed to FHA loans
0 down use to only be available to veterans
0 down seller contributions to closing costs is currently the norm for first-time homebuyers.
0 down seller contributions, pay-option ARMS, interest-only, negative amortization use to be available only to the most savvy and credit-worthy of homebuyers.

Hard money which was re-named subprime lending moved in the same direction. Subprime started out years ago with high interest rates and a very large down payment required. In our capitalist economy competition heated up and we saw a relax of credit standards in the same direction; from high down payment to 0 down, which coincided with the introduction of risk based pricing. The more risk, the higher the price.

This ended up pushing a huge amount of homebuyers into the market, and infused the industry with a tremendous amount of job growth in the lending, banking, title, escrow, appraisal, and real estate agent arena. Corporations must earn a profit (within the bounds of the law) so corporations continued to push for profit growth. We live in a democracy (although my econ professor believes we live in a system where corporations control our political system.) It doesn’t matter which political party holds power: Democrats or Republicans. BOTH parties push homeownership onto the American public as the dream every person in America ought to be able to achieve. Government-sponsored, low down payment homeownership programs sprung up all over the country. On a side note, it might be an interesting topic for a longer post to see how those homeowners are doing default-wise.

About four to five years ago I started seeing a lot of real estate agents structure offers for 0 down clients + seller contributions to closing costs. The mortgage products were out there being marketed by wholesale lenders to street-level loan originators.

In the classes I teach, I continued to bring up the question: “What happens if the house doesn’t appraise?” The agents answer, “The house will always appraise; we’re in a rising appreciation market.” My follow up question is, “When you create a new Comparative Market Analysis (CMA) a couple of months later on a similar home just down the street, don’t you want to know if that sales price included seller contributions?” Everyone answers “yes,” but at that time, there was no way of obtaining that information short of calling the former real estate agent. Some agents return phone calls of this nature, some do not.

With little regulatory oversight in existence for mortgage brokers and consumer loan companies, (although they argue that they are HEAVILY regulated) the mortgage brokers, consumer loan companies, and the wholesale lenders have had a field day with profits. ALL the real estate agents I talk to, and I meet thousands of real estate agents every year, with regards to predatory lending considered this a problem of the mortgage lending industry, acknowledging that there “could” be effects on the real estate market, but without actually feeling any of those effects it was always someone else’s problem.

Our state regulators DO have money set aside to go after the most egregious cases of predatory lending and mortgage fraud. However, government was never intended to police every single deal written by mortgage brokers and consumer finance companies. There is just not enough government re$ources available to do this, and there never will be. In Part Two of this series, I will outline possible solutions that go beyond harsher government regulations.

Every one of us in the industry WILL feel the effects of the subprime collapse. We might feel it in more or less intense ways, some of us sooner, some of us later, but this will affect us all. From Rhonda having to make those difficult calls to homebuyers to real estate agent’s homebuyers who were approved last week and now those loan products are now no longer available.

On the up side, the industry might experience a rush in homeowners seeking to refinance into fixed rate mortgage loans which will lead to an increase in business for title, escrow, appraisal, and lenders this year. Mortgage brokers and consumer finance companies that blatantly ripped off consumers will not see repeat business. Those customers will go elsewhere, as they should. Mortgage brokers who have ONLY done subprime will find it challenging to become approved as an FHA lender as FHA has many rules to follow including the requirement for loan originators to be W-2 employees and many brokers pay their originators as contract workers. Consumers are sick and tired of bait and switch advertising and hopefully won’t fall for it this time around. Those companies will go down, their loan originators finding jobs scarce since their only training has been hard-core, script-memorizing, pressure-laden sales tactics. They have specifically chosen to be in subprime for the money and only the money. They will exit the industry and find another unregulated industry.

Treating home buyers (and refinancing homeowners) only as a tool to maximize profits is one business model that is no longer growing profits at previous rates. These companies are refi machines built on marginally to blatantly deceptive direct mail or email campaigns and they exist in every market in the United States. The market now sees a decline in profitability and in a capitalist system, profit drives morality: what’s profitable is good, what’s not profitable is bad.

Brokers, lenders, and banks that have always operated their business with a foundation of treating consumers with respect will survive and thrive. By respect, that means declining some loans because sometimes this is the most respectful thing to do, and yes, real estate agents, this WILL affect you, no matter what price range or neighborhood you’re in.

It is way past time for a mortgage market correction and I am hopeful that our current subprime crisis will lead us to a better place in the mortgage lending industry. I for one welcome the winds of change.

Part 2 of this blog article will examine the deeper relational-structural issue at the foundation of our current mortgage market correction and propose possible solutions.

190 thoughts on “Winds of Change; The Rise and Fall of the Subprime Market

  1. Jillayne! Your description of market change is right on! Saw two properties “not appraise” late last year and suspected it was a sign of things to come. Thanks for shedding light on details.

  2. I’ve seen this coming for many years. One of the first questions I ask my clients is not, “How much were you approved for.” It’s “How much can you afford?” It’s important to me that my clients realize that they may want to have money to go to a movie every once in awhile.

    To some degree we can’t place all the blame on the lenders. When a Realtor works with a potential client, it’s that agent’s responsibility to know their client’s limitations and financial plans for the future, and to not sell them homes which get them in over their heads. It’s not just about selling and putting more money in my pocket – it’s about having a life-long customer that will trust me and come back.

  3. As a first time home buyer who has been watching the market for the last couple of years I have seen many friends take serious risks with thier financing. I think consumers need to educate themselves and follow the rule of “too good to be true”. Thank you for sharing your very informed analysis. I can tell that you have done your home work and know the many layers involved.

  4. You have a very nice blog…Truth in advertising is probably the core issue when it comes to consumers making informed decisions – especially when they are making decisions that will affect them financially. If a consumer wants to make a decision (about deciding on a loan product – or anything else, for that mater) she or he should have perfect facts about the costs involved in their decision. If there is a need for the consumer to have the advantages and/or disadvantages of thier avaliable choices explained, then the provider should disclose to the consumer that all products are not for all cosumers (even though they may qualify). What are you doing this Friday?

  5. I agree with Julie Lin-Jillayne you’re right on. I know, as a Realtor, this correction will effect my business but I think we are in high need for this adjustment. I look forward to future additions to this series.

  6. I agree that it is time for a flushing out of not only unscrupulous mortgage “professionals”, but also those opportunistic agents that have flooded the sales playing field. It is high time that the education and training levels be raised such that it is commensurate with the job that we are entrusted to do for our clients.

  7. Jillayne, I totally agree with most of what your blog material states, whether it be fact or opinion. The one part I disagree with is what I believe to be a generalization for what consider to be “subprime” loans. Let me first say…. blame should not placed on the product…..the blame should be placed on the greedy lenders, their reps, inexperienced loan officer’s, agents, appraiser’s and so forth that found it no longer necessary to educate our consumer’s about the programs or the risks they face if deciding to take them on. Therefore, most people that are in hot water due to these products should not have been placed in them, nor did they have the education to prepare themselves with how to deal with them. Alot of subprime product’s do have it’s advantages if used properly, and were initially intended for your more savvy borrowers who had previous experience in home ownership, a considerable down payment, equity in their current home and/or verifiable reserves…although having trouble with credit scores or income verification. Now I think that the major mortgage purchaser’s are acting in a state of panic, resulting in a major crackdown in loan programs being offered, licensing requirements for industry professionals(which is way overdue), etc…. not considering the amount of good business they are closing the doors on.

  8. Yes, and I see that not only overvalued house prices will start to effect the market, but also the continued sucking out the homes value through house equity loans could. Hopefully the economy will be strong enough in the Seattle area that the house price ceiling will not continue to breakdown though other bank paper house value ceiling levels. Bob

  9. Call me conservative, but I would always be shaking my head when many of my friends would buy houses almost 10 times their family income, just to get into a flashy house or something like that. I would always wonder how were they getting approved for the loan. I guess all is coming to an end now.

    I strongly believe that eastside market is getting way too pricey. With the decline in wealth from Microsoft stock options and this combination of free flow loan money I would expect people to stop paying whatever the seller is asking.

  10. I’ve had people spend ten times their income on a house, but they didn’t finance it. Are you saying the mortgage was ten times their income? Or just the price of the house?

  11. Jillayne, what is the current criteria for a subprime loan? I noticed a few studies that drew the line at 3% above prime (A-paper) rates – but when I look at the rates being offered to people with sub 640 credit scores, more often than not it’s been less than 3% over the A-paper average – at least in 2006.

  12. Jillayne, I can’t to read your next post on subprime. I’m not sure if you have the link you wanted when you referenced all the fun I’m having contacting past clients. Which in fact, I am. Yesterday I sent an email to my entire database to let them know the importance of their credit scores–using this as an example. Clients with 100% financing and/or credit scores below 680 are receiving a letter from me as well to see if they would like to have an “Annual Review” (something I offer to my clients) of their credit to see if I can offer any counseling to help improve scores.

  13. PS. I would like to add that a lot of this mess is, in my opinion, fueled by investors who made great gains due to the high risk of these loans. They kept wanting more, as these many of these subprime companies are publically traded, the investors pushed for more volume of risky loans…the greater the risk, the higher the reward…and the greater potential for loss. Which is what the industry is experiencing now. Another huge factor is with the low doc features the alt-a market provides, mortgage fraud has hit hard at the same time as many subprime ARMs are adjusting.

  14. “When you create a new Comparative Market Analysis (CMA) a couple of months later on a similar home just down the street, don’t you want to know if that sales price included seller contributions?

  15. Caleb,

    I have heard that some mls systems (not ours) record the seller contributions when the agent inputs the SOLD status. I’m pretty sure it was Jim Lee who mentioned that feature of his MLS system.

  16. Hi Bill,

    Regarding comment #11, are you looking for information on current retail interest rates on a subprime loan or the wholesale interest rate that consumers do not see?

    Or are you inquiring about what criteria makes up a subprime loan?
    (credit score, combined with Loan-to-value ratio, downpayment, documented income v. no docs, and so forth)

    For wholesale pricing, the industry uses Scotsman. Here is a link to their website:

  17. Jillayne – both actually.

    I’ve browsed scottsman, and in the Loan post section and for the loans marked “non-prime” the interest rates pitched are rarely 3 points above prime. I’m just wondering what is subprime now – since some stuff that was subprime is apparently un-fundable now – I assume “subprime” designation has shifted up a bit.

    I see articles talking about subprime finance that don’t give any guide on what they consider subprime – basically meaningless.

    If the wholesale rates differ that much from the posted rates, yeah, I’d be curious to know.

  18. Bill-

    I concur with you. What our office is seeing is generally about 1.5-2% over conventional rates (full doc & excellent FICO score borrowers) for those lenders categorized at sub-prime. In fact I believe that we had a purchase that was an 2yr fixed- 6mos. LIBOR indexed Option ARM close last week, so that stuff is still going on. The good fixed rates are around 5.875-6% for a 30 yr note. Right now most of our purchase deals and a good handful of our refi’s that we are closing are weighted toward sub-prime lending (60-70% I would guess without pulling stats). Our office is in Snohomish Co., so the mix of loans probably is a bit different from those closings occuring in Seattle proper or Eastside where the income base may be higher. I’m hopeful that the the pendulum swings the other way soon. The removal or tightening of qualifying for 100% or 80/20 loans for borrowers at the moment is making a mess for some purchases that were slated to close but failed to fund.

  19. Bill,
    With the state subprime markets are currently in, the rates and ltvs are changing often. A few months ago, I could have easily answered your question with a 600 score, 100% ltv, rates are xyz. There are still a few lenders I work with (and I certainly don’t work with all of them) who are offering to lend to lower scores. I’ll do a survey of the lenders I work with to let you know where the current bar seems to be. The lower the score, the higher the difference in rate, of course.

  20. Hey, thanks Rhonda!

    Bill, there’s a story in this morning’s Inman news that will go behind the member’s only site at midnight, Wed. Here is the link:

    Look for continued guideline changes in all loan products in the near future. The pendulum has swung too far one way and now it is swing back in the other direction. Historically, the industry tightens and constricts underwriting guidelines in reaction before loosening up again. It is a back-and-forth trajectory.

    Subprime and exotic loans will swing back into favor again someday, when the market demand rises and banks/lenders are ready to take those risks all over again.

    There has always been a demand for hard money loans. In the past, those loan products commanded a large down payment, came with very high fixed interests rates, and borrowers were full-doc qualified. These loans will move to the private sector before becoming institutionalized and marketed to the masses all over again.

    However, here in Seattle we are still experiencing radio, print, and direct-to-consumer fax advertising of subprime/exotic loan products by mortgage brokers/consumer finance companies who are trying very hard to find clever ways to keep the phones ringing:

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  22. I know you’re not asking me, and maybe my appraiser is an exception…he has “come in low” on appraisals. This happens more often with refi’s than purchases. And can happen easily in a market like this when every homeowner feels their home worth an exagerated amount. It’s been a while since it has happened on a purchase.

    Plus, many lenders we sell our loans to do AVMS (automated appraisals) of their own to verify that the appraisals supplied by the originating lender is in line (thanks all you fraudsters out there).
    Underwriting may call for an additional comp or an explanation of a value.

  23. Hi Justin,

    Thanks for the tip to put my name in Google Alerts. That’s been great. From yesterday to today there have been many other bloggers who have commented on this blog article in their blog.

  24. >Are you asking me out on a date in a blog comment #4 or are you just flirting with your teacher?

    Good luck , Steve.


    I might disagree with the volume of your message but wholeheartedly agree with the message. Lenders who see borrowers as “marks” should be drawn and quartered. Well…maybe I don’t disagree with the volume, either.

  25. Hi Brian,

    About a year ago, I taught an ethics class with a roomful of mortgage brokers and loan originators. During a group case study, we discovered that the primary business model used by the students in the room was based on specifically choosing homeowners to target who will always need to constantly refinance, thereby generating an opportunity to earn fee each time for the LO.

    We can look at it as seeing a borrower as a “mark” or we can look at it as a business model in a capitalist economy. Or maybe we can look at it as something else. I just want to expose it, for a better word, and bring it out in the open to talk about. Are you sure you want to do a Braveheart on them? 🙂

  26. The subprime portion of the lending market was able to become as large as it did because through sheer volume it was able to develop its own secondary market. A concern I have seen raised elsewhere is that if the sub-prime market dries up due to stricter regulations, it could create a perfect storm that could intensify the problem by making it impossible for additional homeowners to refinance. It is important to remember that the percentage of income which people feel they can “afford” to spend on housing varies widely.

  27. Lylene, I think/hope lenders will be more willing to make loan modifications for some of these homeowners.

    [It is important to remember that the percentage of income which people feel they can “afford

  28. Lylene, I think you hit on something important, but maybe the emphasis should be on ‘feel’ instead of afford.

    I find it strangely coincidental that the banking industry lobbied so hard for stritcter bankruptcy regulations just 18 months ago. Ya think they saw this coming?

    Bob H

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  34. Hit the nail on the head again. Risk based prcing was the beginning of the end. Not only were all common sense underwriting practices thrown out the window, but we exchanged ethics for greed. Common practice up till the 90’s was that people would put a significant down payment towards their home. This showed that they had the wherewithall to save and budget their expenses. Also by having people put a down payment, you would be less likely to see them just walk away from the home. They had too much already invested. When people can get a 100% loan with seller paid closing costs, where is the incentive for them to stay and tough it out. So now, like here in Southern California, every other house is what I refer to as a “walk away”. A house that the person just gave up on becuase they had nothing invested. most of these were 80/20 ,100% financed loans.
    Another side effect of the risk based model, that I find insane is the allowable debt to income ratios. Some of the companies that have now gone bankrupt used to allow up to 65% debt to income. Are you kidding me? That was 65% of the gross income. Even some conventional DU approved loans allow this. That’s just nutty. Forget about just putting this on the Subprime side, this is something that is in desperate need of fixing. In England,the amount of house you can buy there is 2.5 times your annual income. It makes for a safe and steady real estate market. When we allow 65% DTI, who can live on that?
    I agree that change needs to come. I just hope it doesn’t come too fast and too strong. The dust still has to settle before we just start slinging around legislation that may end up hurting us in the long run.

  35. I didn’t do many sub loans, to be honest, I didn’t like to do it. I think that people should really need to improve their credit (their financial matters) before taking high risk such as financing a home.. that is way too much risk to take while in the past they have not managed money well. I think the mortgage industry definately needs a reform to help stablelize everything.

  36. When working with/for Homebuyers & Homeowners it’s imperative that Mortgage Brokers and Real Estate Agents are educated in today’s market. Homebuyers & Homeowners need to be able to make an informed decision after reviewing all of their options, and the pros & cons that come with each option.

    Only a short time ago you could Purchase or Refinance a home and not only look forward to your home appraising for much more in a year or two, but also fell confident that the guidelines you used to qualify for your mortgage still exist the next time around. The only thing you can be sure about in today’s market is, you cannot assume anything.

    Its imperative that Mortgage Brokers put their clients future plans in any proposals they offer, and Real Estate Agents need to keep to the Homebuyers budget. If the Mortgage Broker says their client can afford home with a sales price up to $375,000, the Agent has NO business showing houses that will cost $400,000. If test-drive a Mercedes are you really going to buy a Honda????

  37. Although the recent credit based loan decsion have made purchasing a home available to many that previously could not fit into the traditional box, a person doing a 100% IO or neg am purchase should probably lower their prequal price. This is up to the LO though and we all know that the LO gets a percentage of the loan amount. So, the more they prequal the borrower for, the more money they get.

  38. Having been in the mortgage industry off on on since the early 1990’s, I have seen the substantial rise (and now the fall) of the subprime market. I have also worked for one of those “re-fi” machines wirh the motto: “get the fees as high as you can” followed by management repeating over and over that we needed to contact our previous clients to see if they “needed” to re-fi again. Why would they? Most of the Loan Originators stuck these borrowers with as many junk fees as they could. Frankly, that experience turned me away from the mortgage industry for quite a while.

    I agree with the previous post – we Real Estate Professionals, no matter what aspect of the industry we are in, need to help borrowers realize that their dream of buying that Mercedes may be out of their reach – for now. Save money, repair the credit then buy what you want.

  39. Great article! It remindes me of the sharks circiling the flayling shipwecked survivors, awaiting a bountiful meal. But what caused the shipwreck in the first place? The navagator, the Lookout, the Captin…their all responsible for their paticular duties. When we lose site of our true destination our ( honesty,integrity & character) and we seek out the immediate, the easy way, the justifiable…(everyone else is on board why not go along). Then we sail right into TROUBLE.
    We’ve not only created a sinking ship for the passengers but for ourselves as well. Only a few survive in the limited lifeboats avalible.
    They survive to tell the story….History repeats it’s self, unless we learn from it and apply it to our lives and the lives of those who follow.

  40. Wow! I really liked this article and the comments. In my line of work I usually deal with the consumer that has been taken advantage of, and deceived by,…as Rob puts it…”sharks”. Also thanks for the history lesson on motrgages and how they have evolved.

  41. I agree with this article for the most part. I have worked in all aspects of lending. I have worked for banks, brokers, prime and subprime companies. What separates the good from the bad, is not really the type of lender, but the philosophy of the Loan Agent. I have always wanted to create “Customers for Life”. So I have always educated my borrowers, and made sure they understood exactly what the loan was about, and what effect it would have on them. I further educated them to include their Mortgage into their total financial plan.

    I will be the first one to say that there were many Preditory lenders in the market place. I, for one, am extremely glad most of them have had to either, change, or get out of the business. These types of lenders make all of us look bad.

    I have been the business long enough to ride through the waves of the rise and fall of the mortgage market. This wasn’t actually a fall, just a little speed bump in the road that was necessary to get everyone back on track.

  42. Being new to the mortgage business I cannot imagine deceiving my clients by recommending a product that does not benefit them or one that they can afford. I remember when there were very few loan options and you either qualified or not. I think going back to a more traditional or conventional loan qualification process is good but there needs to programs for the more challenged consumer too.

  43. I am also new to the business of Loan Origination however I am very familiar with commission based sales driven environments. I am the manager of The Redmond Town Center Zales Jewelers and in this industry as in the mortgage industry it is a very competition driven business. I believe after the introduction of risked based lending and having less qualified people pay more for loans that a crash of the market was inevitable. The mortgage brokers overlook loans which they could have seen to be falsely represented by their loan originators for profit was a big contributing factor to the crash as well. If people take a little time to think things through and evaluate their situations then instances like this crash can be further avoided.

  44. I think change is a good thing especially to correct the wrong and to move forward. I think with all the chaos, if borrowers, LO’s and even Realtors can continue to educate themselves the better we’ll all fare in any weather. Knowledge is power.

  45. I certainly believe our current subprime crisis will lead us to a better place in the mortgage industry. But with the tightening credit standards and regulating mortgage industry, the effect on real estate market is obvious and negative. As a part time realtor, I am worried about it and the impact on our economy. How do we deal with that?

  46. I have been in the money lending industry for the last 19 years. I have seen ups and downs in the market. in the early 90’s you could not get a stated loan unless you were self employed. once they changed it to w2 worker the flood gates opened, then the stated w2 option arm,then it really got crazy. every body wanted to refi every couple years to pay off debt they had concurred, but i might add that alot of clients did call and insist on the option arm to lower their payment. so yes we can put the blame on realtors and greedy lo’s but alot of clients wanted the option arm loan. the good lo’s that had clients who wanted option arms or neg am loans should have explained the loan in full detail .

  47. When I first got into this business I started out with Ameriquest. I quickly realized that the subprime area was not where I wanted to be. I ended up leaving after 3 months with the company They were doing 2 yr fixed loans with 3 yr pre-payment penalties. A lot of the discussions around the the water cooler centered around how much money was made off the client. Not how the clients were being benefited. I agree 100% that what is going on right now, will ultimately benefit our industry. The low hanging fruit is long gone and now it is time to center on benefits for your clients. Because, if you don’t, you won’t have any. This will make the consumer a whole lot smarter.

  48. The real estate market has definitely shifted to a different direction since I started just 16 months ago. The days of refinancing your home as a vehicle to repair past credit mistakes are clearly over and more conservative options are now offered. Re-education of homeowners is what is now needed. Fear tactics, like the blanket denunciation of all ARM’s or Interest-Only products, do not help correct the errors of the past. Only through informing homeowners of the options available, the benefits and risks associated with each option and full disclosure of the costs associated will rebuild confidence and protect us all from repeating the collapse last year.

  49. I believe that the market is not always the same, economy ups and downs is normal. As a Loan Originator I have always try my best to educated my clients and recommending the type of loan that they can afford.

  50. I am really glad to see the sharpening of the subprime market and requrements to borrowers. Subprime products ( when utilized properly) are very neccessary for some of the best borrowers. The unfortunate downside to them in the in the past is the notion that you only need a “heartbeat” and a tolerated “credit score” to get a mortgage. Thankfully, this time has ended. It needed to. I think we will see the rise again of subprime at a more moderate rate that still offers products for a niche consmer.

  51. What happened in the subprime market was destined to happen. And not much different than what may happen in the US banking industry in the next 3-6 years. After 911 the economy was in a serious depression and the international community had lost faith in the American economy, as a result, the government did everything they could to create stability in the US economy. By keeping interests rates low house prices will go up and then it will create a domino affect that will stimulate the economy for the short term untill the bubble bursts. So it may be unfortunate what happened to individuls from the subprime lending, but any economists worth their salt knew what the final results would be. Just like an actuary working for an insurance company.

  52. Again principle based thinking has to win out. Buyers need to be responsible too. What can we AFFORD. Every part of the industry is feeling the pain, the buyer getting it the worse after the dust falls.
    The sub prime mkt is now the culpret where it was looked at as an answer. What price to pay? For a silly house!

  53. Yea I really have to agree on this article. Especially when it comes to the Greedy Mortgage Brokers and the practices the companies have put in their employees. It has driven the market down and the money that can be made in the mortgage is ridiculous and it has turned people into greedy paper chasers, and people have forgotten about their morales which is sad. Long term it leads people into losing their house, jobs, and ultimatley even their families. If you can survive thru this tough time in the market your gonna end up being able to do real well when the market recovers from my standpoint.

  54. Thank you for sharing this article with me, I founded very interesting. I feel that the mortgage industy should still offer products that will allow pepole buys homes, but we also should make sure that pepole can afford that homes we are putting them in to, this should fall on the realtor, loan originator, and the buyers that they want to make that high mortgage every moth. But I know that our industry was in a need of adjustment.

  55. Thank you for sharing your experience and how true. We have a tendacy to want to make everyone happy and the lending institution granted us our wish so that we could put anyone into a new home. What we were missing possibly was foresight. This industry has some of most caring individuals I know and yet it also has equal individuals who were born without compassion. We can make this all right, short baby steps but not without structure.

  56. Yes, we are overdue for this change. I despise lending companies that make misleading claims. The customer suffers and only realizes this later. We are coming to see loan savvy borrowers more and more often. This is usually helpful to everyone. Hopefully driving out the rest of the scum that is left.

  57. Great article, I found it very informative being new as a Loan officer and not very expierenced with subprime loans. I believe It is our job to help the consumer make educated decisions so that they wont end up in a bad situation and not be able to live in the home they dreamed of

  58. Educating consumers is a good way of protecting them from individuals who are in the business for personal gain. Although there are those whose predatory practices keep people from achieving the American dream, there are many out there who believe otherwise and practice responsible lending.

  59. I agree with your article, home buyers take the word of the Loan Officer as gospel, it is our duty as consultants to direct our clients into loans that they can afford and that meets their goals not just padding our pockets with higher commissions. I appreciate the regulations and agree our industry needs accountability.

  60. One of the things I found interesting in this article is the mention of the huge influx of jobs that became available in the mortgage industry because of sub-prime lending. It seemed that people everywhere were wanting to get in on the “easy” money being made by many mortgage professionals. However, as mentioned in the article, there were not very many regulations in place to police most of the finance companies and mortgage brokers. Unfortunately this meant that there was a lot of bad lending going on, and people were being allowed to buy homes they couldn’t afford. I think there was a huge problem in lending when through stated loan programs a loan officer could get someone qualified for a loan that they couldn’t repay. No wonder there are so many foreclosures happening now!!

  61. Thank you for sharing your very informed analysis. You have a very nice blog … It very much a vital topic. I think on many parameters the market of the loan have been raised. Yes it was easy money, but borrowers suffered. We see crisis of this process, as well as crisis of the market of the real estate. Therefore from ethical point declining a loan is actual

  62. I like how you described how lending was in the 1980’s and how it has evolved (maybe ‘morphed’ is a better word) into the lending practices of the 1990’s and now.
    Some are quick to put the blame solely on mortgage brokers for the current lending enviroment we are in. I see it as the greed factor on all sides from the investors, lender, real estate agents and, of course, many mortgage brokers. I agree with you I think in the long run this will all end up improving lending for borrowers and brokers.

  63. The market once again has righted itself. I remember the first light doc loaned I brokered. Quality control couldn’t believe there was anything of the sort. You would have thought that we where experiencing a international crisis by the time my processor at the time a scrutinized the loan. This was in the early to mid 1990’s.
    Indeed once we got the hang of it it made brokering a real option. There was never any idea that such gross manipulation would happen in regards to subprime loans. What a mess.
    There was never enough regulation.
    Know one could have anticipated the gross manipulation and greed the was brought to our indusrty with the inception of the light doc loan.
    Our profession needed this facelift. I am delighted that we have seemly lost some excess fat.
    We should all look forward to the new and improved landscape of the mortgage indusrty.
    All sides will benefit.

  64. You couldn’t be more right! It has become a scary thing seeing how many people willingly get in way over their heads, and the unfortunate part is how many “professionals” in the industry not only allow it to happen, but encourage it. People are buying homes that are way over their budget, and making it work through the use of interest only and Pay Option Arm loans, overstating income or going no ratio- the options were pretty much unlimited. As a loan originator and a real estate agent, I’ve felt the lag in business due to the revised regulations, but I think this was a necessary corrective step and I look forward to working in an environment where we’re held accountable for writing loans in an ethical manner.

  65. You can put lipstick on a pig, but it’s still a pig. Hard Money, Sub-Prime…name it what you want. Still causing us headaches. Why pay rent when you can make a mortgage payment for the same amount. Real Estate agents with “in-house” lenders that feel pressure to make the deal happen. Appraisers feeling as though they might lose a referral source. Crazy stuff all the way down the line. Electronic Underwriting…trash in, trash out. This is a Spring Cleaning that was very much needed.

  66. Q-Diddy, I agree with you that when that it’s a potential conflict of interest when there is an agent/LO. There are times when I’ve worked with buyers who don’t want their agent to know how qualified they are in fear of being steered to more expensive homes. I cannot imagine staying on top of all the changes in lending right now and wearing an agent hat…Jack of All Trades…Master of None.

  67. I agree with most of your messages here ( the easy guidelines that pushed homebuyers into buyng a home when they can not afford the paymentt and the behaviors of real estate agents that pushed both homebuyers and mortgage brokers etc.), but the most interesting thing that catches my attention is the question’ what happens if the house doesn’t appraise?” . i am seeing many customers who want to change the option arm to fixed rates, but the the value on thier properties hasen’t gone up and thier loan balances have gone up. this makes a refinance hard and often times the borrowers need to bring more money to pay off the first lien. i am see the the result and pain of overpriced property value now.
    also I hope that this crisis ‘will lead us to a better place’ too.

  68. I think we can all agree that the regulation of the mortgage industry is a good thing. Obviously to late, nonetheless a good thing. I also believe that the anticipation of the sub collapse created part of the existing problem. I have clients who are “stated income” self employed borrowers who have never missed a payment, have enough liquid reserves in investment accounts to payoff most of there existing real estate who can no longer get approved because the lack of stated loans. The cycle will never end. Feds keep dropping short term rates which makes adjustable rate mortgages desirable to the uniformed borrower. ARMS are a great tool for some just not everyone and it is our job to educate our borrowers and help them pick the loan that fits there needs and budget.

  69. I’m a new LO for a wholesale lender that deals with subprime and conventional loans. My company is already starting to feel the effects of the subprime market tightening up. An option that we have instead of subprime is FHA. Something that confused me was that you said that LOs that received W-2s would be the only ones that are allowed to do FHA. Nobody at my company receives a W-2, but I believe we can do FHA. Have the requirements for FHA changed, or did my company find a loophole?

  70. It’s interesting to read the background on how the subprime market got to where it is now. It appears to me that the fall of the subprime market has caused a lot of the “rats” to jump ship and that the mortgage industry is better off for it. I completely agree that any business that treats consumers with respect and operates in their best interest will continue to survive and grow.

  71. Brady:

    I suggest you read the source material from FHA. I kept getting conflicting answers from people who should have known.

    Here’s my answer, based on what the FHA regs say.

    You absolutely MUST be a W-2 employee to do FHA, to share in revenue from FHA, and you must NOT be a 1099 employee elsewhere.

    As to the penalties and risks of doing otherwise, I’ll leave that up to someone else’s problem.

    I chose to become W-2 expressly to stay in compliance with FHA regulations.

  72. Being fairly new to originating loans, I really had no idea how far the market had changed in twenty years. I agree with LGruen on the point that there still needs to be programs out there for people with challenging situations while going back to you either qualify or don’t.

  73. I am new to the business of Loan Origination. I got into it because as a consumer I was right in the middle of this subprime and often confused by much of it. As I learned more I decided that I could help alot of people by sharing what I had learned. Now the industry is changing and for the better hopefully a happy medium will be achieved.

  74. I agree with your message but think everyone has a part for the disapearance of the subprime martket and also think from being in the business for 4 years (not long but long enough) that we def. needed a change in the way that loans were sold/presented to our clients….what ever happened to integrity and loyalty to our clients…it changed to greed, stretching that loan amount to make extra commission putting someone in a house that they couldnt afford..or that pay option arm with a 3 yr PP at 3 point YSP….but on the other hand some of the people that are losing there homes are people that locked there 4.25 + rates in the last refi boom on arms…did they think rates were going to stay like that forever? And the people that have good credit, reserves and have multipule properties but need to go stated then all the sudden they have to be punished because of the subprime market…..I dont agree with that! Long story short these changes have weeded out and will continue to weed out the bad (LO’s, Realtors, Lender and etc.) but I for one continue to ride this out because I believe this will all come out on top in the long run!

  75. You make several good points Jillayne. I have seen the reduction in buisness volume now in a few cycles. In the past rising rates was the casue and source of down drafts in lending. This time does seem more significant however. In terms of the usefulness of Mortgage Brokers, the studies out there consistently point to Mortgage Brokers giving thier clients better pricing & service than the traditional bankers. Now, I have seen quite competibe GFEs & HUDs from main lines lenders that I could not touch, meaning the pricing & costs were much lower than what I could quote. Thankfully, I am an FHA Mortgage Broker & find the maze in FHA to be not so difficult. In terms of the new regulations & laws, these will help thin-out the ranks of the Mortgage Brokers & leave few participants to compete. I frankly have welcomed licensing and tighter controls on who is a Loan Originator.

  76. I generally agree with your post Jillayne, as the free flowing mortgages over the last few years have many times been given recklessly, without much thought to the future. However, I must say that on just as many occasions I have been able to help an honest, hard working family with little or no money to put down get in to their first home because of some of these subprime loans, and years later they have never defaulted. I strongly believe in looking at the whole person when helping people get loans, not just credit scores or how much they have to put down.

  77. Absolutely, I have worked for almost every type of Business Model for Mortgage mentioned above and I have to agree. I believe a strong foundation is necessary for us professionals to not only see this ever changing market but see ourselves through. Attributes, like a love to help and teach our customer is necessary for longevity in this business. If our intent is true a client will typically see that, and we get that phone call next time they have a question. Our intent, along with making them aware of their investment, knowing there goals, and showing them the correct product or direction will help build that foundation we need to see ourselves through this ever-changing market. The end result; we all profit!

  78. As a new LO most of my experiences have been as a customer. My first home loan was doen by a good friend who is a Mortgage Brocker. I got a very good deal but when I refinanced I decided to check around the market. The amount of Telemarketers, LO using bait and switch, & “hard-core, script-memorizing, pressure-laden sales tactics” was astonishing. I went back to my friend who was honest, upfront, & reliable. I have since sent him the business of my girlfriend & other friends and will be working for him shortly as an LO.
    My touchstone for any high-preassure sales or telemarketing activities is that if it makes you feel like a hypocrite don’t do it.

  79. One other thing is “profit drives morality: what’s profitable is good, what’s not profitable is bad.” an economic theory? If so I seem to have missed it in Business School.
    I could certainly see arguments against this idea.

  80. Oddly enough, I was at church today and my pastor was preaching about being debt free and had comments about homeownership and loans that people were put into that they should not have been approved for. Buying a home is embedded in everyones head as the american dream and a great investment but many were not told upfront during the process about the additional expenses that go along with home ownership is what he was preaching about. As odd as it was to hear the church pastor discussing these topics, he was right on in many of his points. its not about what you are approved for, how much credit lines you obtain, but how much you can afford and can pay back realistically living within your means was the message and a great one at that. Teh meltdown of subprime will hopefully I feel will truly reduce quickly many of the problems we are facing now in the housing market but at the same time recovery will be a process. It had to happen at some point. Hopefully lesson learned for many.

  81. I read this as part of your online ethics class; I’m just getting started in the industry, though I’ve been as assistant at a mortgage brokerage for a while. There are some very good points here.

    As with anything, it seems to me that the problems lie in human weaknesses, not in the need for more regulation–although sometimes regulation is necessary to curb the consequences of human weakness. If everybody thought of clients as people like themselves, they’d treat them more honestly. It can even be a kind of selfish thing on the part of loan originators, but good-selfish: nothing makes me a loyal customer more than a business that says, “Well, yes, you could pay us that much, but this lesser-cost thing would probably be better for your situation.” They give up money from me in the short term but secure my long-term business.

    That’s why I’m working for a mortgage broker now. I wasn’t that interested in the field, but I was blown away by how well this particular office treated me when I bought my home. Their philosophy is to find out clients’ reasons for getting a loan: is the client investing, saving up for retirement, or settling long term into a dream home? In my case, all I cared about was my monthly payments, as my home is an investment, I don’t have much income, and I have an extremely high tolerance for risk. Even so, there are certain risky products that my loan originator wouldn’t even consider (such as anything that included a prepayent penalty).

    I take some issue with your assessment of contract loan originators. All of the loan originators at my office except the branch manager are contract workers, and they have not been trained in “hard-core, script-memorizing, pressure-laden sales tactics.” They have no scripts, and they consider themselves advisors more than salespeople. I think it’s too much of a blanket statement to label contract loan originators as risky. I imagine that W-2 employees could have systems that use the pressure-laden sales tactics that you imagine most contract loan originators to use. Rather, I think that prospective borrowers should go by word of mouth and recommendations from those they trust–or, barring that, use their own intuition in working with loan originators. If there’s a sense of pressure, they should try somewhere else. That’s capitalism at its best.

    In fact, your responsiveness and honesty, as well as a friend’s recommendation, are what caused me to choose your classes over all of the other choices listed on the DFI website. Should I have considered whether you were commission-based or payroll in making my decision?

  82. Hi Jessica,

    In this blog post, I am actually taking issue with a business model where LOs no matter how they’re paid, W-2 or 1099, are taught to treat consumers only as an object to maximize profit.

    It sounds like you have found a good company to work for, that matches your value system.

  83. For the past 14 years I have been a pastor. As I now move into the mortgage industry, I am learning why ethics was something talked a lot about by my mortgage mentor. He felt that my background as a pastor would cause me to bring the same ethics into the mortgage industry and would really help my business. At first, I didn’t understand why ethics was such a huge issue in the mortgage industry. But now I totally understand.

    You mentioned treating borrowers only as a tool to maximize profits. Granted, those of us in the mortgage industry WANT to make a profit. But at what expense? Our reputation? The pocketbook of our clients? The potential future foreclosure of our clients? If we don’t have our CLIENTS’ best interests at heart, we have no business being in this line of work. We provide a service to our clients and those in any type of service industry are supposed to be focused on the needs, desires, and best interests of the client. Of course, the bottom line here is BEST INTERESTS. Taking advantage of a client’s desires (often due to a lack of education) over their best interests so that we can make a buck really provides no SERVICE at all and is predatory.

    I agree with previous comments. Our job is to educate our clients in a way that provides for their best interests…not just ours!

  84. As a Sr Processor in a Wholesale Lending department at a local bank (that is not longer in business), I would shake my head at loans that underwriters would approve. It would be obvious with zero down and/or stated income with little or no assets to support the stated income, this person (people) were going to get into trouble or not even be able to make the first payment. Foreclosures went up, MI payments went up, yet no change in underwriting guidelines were changed until it was too late. This wasn’t even subprime money, maybe risk based pricing but brokers were also getting away with huge YSP’s and closings would occur. What a shame (sham!)

  85. Pingback: Obama plans on tighter regulations for mortgage brokers | Rain City Guide

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