Monday, July 12, 2010

Some thoughts on the mortgage crisis....

This whole mortgage/real estate/lending thing appears to be getting better, but there plenty of reasons it has gotten as bad as it is. I worked in mortgage for over 10 years for various lending institutions, including high risk loans and banks. I have also had 5 mortgages, so my personal and professional experiences have formed my personal views. 

There are just so many things buyers don't know when going in:

1) You don't have to get a loan through a broker. I have seen every Realtor I know steer their clients to a broker. A broker does what you can do for yourself, except he adds on commission that YOU pay. Generally it can be several thousand dollars. Go to your local credit union, banks, as well as your national chains. You can almost always find yourself a better loan. I only recommend using a broker when you need a specialty loan product.

2) Brokers and lenders were getting greedy. They saw an opportunity to make double the commission. They figured that they would encourage buyers to take these risky loans (like ARMS) on higher priced homes (more commission for broker, lender and Realtor), and in a few years the broker/lender would refinance the borrowers (more fees and commission for them). 

3) Loan documents are very difficult to read and understand. I worked in loan audit and quality control, so have have spend hundreds of hours reading loan documents. While there are specific areas that are more borrower friendly, they are written to protect the bank. 

4) Very little of what you are paying on your loan decreases your principal balance, and in some cases, your loan balance may be increasing. For those that were pressured or advised to take ARM loans probably realized this a little too late. Once you are in this situation there is really no out. Can't sell the house without losing massive amounts of money and can't refinance because the lending laws changed mid stream. Mean while the banks are making thousands of dollars on these loans up front. 

5) Let's look back to #2 and #4. For those who were advised to take an ARM loan and to refi in a few years can't because the laws and rules have changed. House have decreased in value, so even though lenders could have reduced their interest rate, they are claiming they can't, forcing people into foreclosure.

6) When you do a short sale, the difference in the sale price and what you owe may be considered income and the Federal Government may require yo to pay taxes on that amount, so in essence, you are contributing to the money used to bail out banks.

7) Forecloses and short sales do about the same amount of damage to your credit, and when you have a foreclosure, you will be sued and may have your wages garnished. You will keep paying.

8) Banks have collected millions, if not billions, in PMI (Private Mortgage Insurance) to help cover losses. Where is this money? Why are we expected to save for the future and lean times, but yet these financial institutions are not?

Also, realize that a good portion of these loans were backed by FANNIE and FREDDIE. Congress controls the dollar amounts funded. I personally believe that Congress opened the flood gates and allowed people who should have never qualified for loans to get them. The government contributed as well.

I am big on personal responsibility, but I know that consumers were at a HUGE disadvantage here.