The Great Blame Game

It wasn’t too long ago, that as a Mortgage Broker, I was the life of the party. Everyone wanted an opportunity to discuss real estate and mortgages with me. It didn’t matter that I was also well versed in other areas and could easily hang in political or sports related conversations. It was the Lending business that everyone wanted to talk about! But then came the great subprime debacle and the later melt down of the prime lenders too, along with declining values of homes. I went from being the toast to the roast in just one short year! “My, how the mighty have fallen”, as the saying goes.

So even though it would be fun to discuss the Presidential race and appear on some TV news program as a political pundit, I however, write about mortgage related matters. Fortunately, there is enough misinformation about the state of the industry to write volumes.

Not a day goes by that an article appears about a major bank setting aside billions of dollars for future losses. The more they set aside, the lower the value of real estate goes. The lower the value goes, the quicker the government backed lenders, Fannie Mae and Freddie Mac tighten their guidelines, making it more difficult to refinance, or to purchase a home. Then the major lenders join in, blaming losses on evil mortgage brokers or third party originators, not ever taking responsibility for their own actions. And so it goes, day after day, week after week, with more and more pressure to blame whoever got us into this mess.

We read how with government intervention the GSE’s raised loan limits in high cost areas allowing millions of people to refinance into safe 30 year fixed mortgages or purchase a home. We were told that rates would be comparable to under $417,000 loans, and the bleeding will stop. Except when introduced, rates were 1-2 points higher than 30 year fixed on under $417,000 amounts. Many economists said that with lower rates and this boost in lending limits the market would stabilize. Salvation was here courtesy of the U.S. Government. We read how the government wants to convince banks to short- refinance loans as a way of keeping less people from heading into foreclosure. And we read how FHA with increased limits will be able to rescue homeowners in trouble.

But the opposite has occurred. Rates have come to market at levels higher than subprime in 2006. So tell me, if you have a 5 year fixed loan at 5.5% are you going to jump into an 8% -30 year fixed? And even if you chose to do just that, it is highly likely that you wouldn’t qualify for the payment, or that due to declining market phenomenon (anticipation of future loss that may never occur) they will finance 5% less. Self-employed individuals are essentially unable to purchase a home or refinance, no matter how good their credit may be. Mortgage insurers who insure loan amounts over 80% for lenders are refusing to insurer most borrowers, so loans above 80% loan to value are getting scarcer and scarcer.

Not only are guidelines forcing good borrowers out of the market, higher rates are making it impossible to complete a loan. When criticized by mortgage brokers and bankers about the high cost of loans in the oxymoron conforming jumbo market, Fannie Mae responded that their average cost was less than half a point higher than conforming loans and Freddie Mac says they can do even better! But, rates brought to the market are still considerably higher than lower conforming loans. If Fannie Mae and Freddie Mac are to be believed, then should we blame the actual mortgage lenders? Are they adding a higher margin on, so they don’t do business at all? Is it possible that the billions set aside for potential losses we keep hearing about is actually encouraged by the big banks for some sinister rationality or should we just assume that the government agencies can’t add?

Bottom line; don’t blame current borrowers for losses of past years. Good quality borrowers should not be penalized for bank decisions to lend money to people who should never have been in the market. Don’t build in higher rates for anticipated losses that may never occur, and don’t trust politicians who don’t understand this business who are just grandstanding.