Guest Column
Patrick J. O'Gorman
Mortgage crisis: Plenty of blame to go around
Many factors have contributed to the reality of the current housing environment
The finger pointing has started. Who is to blame for the mortgage crisis today? Frustrated homeowners are blaming realtors, realtors condemn lenders, lenders criticize Wall Street, and Wall Street is pointing the finger at the government. In truth, all of the groups should look no further than the face they see in the mirror each morning.
One of the root causes of this problem can be traced back to 1994 when the U.S. Dept. of Housing and Urban Development (HUD) came up with a plan to increase homeownership rates to 67.5 percent of all households by the year 2000. Today there are now more than 71 million homeowners, representing almost 68 percent of all households in the United States. The theory is good, homeownership builds wealth by promoting a forced savings (equity) and tax benefits, and it's often cheaper than renting.
Increasing Homeownership with Subprime Loans
The public and private sector took this to mean that they needed to come up with ways to increase homeownership. Fannie Mae and Freddie Mac were required by their charters to grant more loans for low and moderate income households and, as such, came up with myriad affordable loan programs that allowed for 100 percent financing, higher than normal debt-to-income ratios, and marginal credit standards. HUD allowed seller-funded down payment assistance disguised as grants and expanded their allowable ratios.
The private sector, with the aid of Wall Street investment firms, came up with exotic mortgage products with slightly higher yields that pushed the envelope even further. Stated income-state assets (SISA), no income verification-no asset verification (NINA), no ratio, short term ARMs, and payment option loans became the norm for the marginal credit borrower, and the mortgage industry ate it up.
Many lenders and realtors pushed those products without regard to the ultimate consequences. A lender may offer an excuse that if he did not offer the product, someone else down the street would, or the excuse that someone other than his institution will service that debt and that will be their worry.
Where the Homeowner Fits In
The prospective homeowner cannot be absolved of any responsibility. Ultimately the borrower had to determine if the conditions of the loan offered made sense based on their specific financial situation. A common thread echoed by many a sub-prime borrower was, "I did not know... " or "my lender said we could refinance when..."
Greed also took over and potential homeowners did not want to miss the greatest legal get-rich-quick scheme of all time. Homebuyers were financing 100 percent of the value of homes and not worrying about the terms of their mortgage because they were going to leverage their way into prosperity by cashing out as the real estate values rose.
Wall Street kept offering more and more exotic products with more and more risk, lenders pushed these products and realtors sold more and more homes on the premise that you needed to get in the game now because it was only going to get more expensive tomorrow. Like lemmings, everyone followed along.
After the Bubble Bursts
Then the house of cards fell in. Low and moderate income households who came into the property with little money down and no reserves could not afford the required maintenance associated with the typical older property. Property taxes rose nationally, as did the cost of homeowner's insurance. Mix in tougher economic times and higher fuel costs, and it was a disaster waiting to happen.
For the subprime buyer, real estate prices declined which prevented the repetitive refinance and the ARMs adjusted beyond means of the average borrower. It was time to pay the piper but there was no money in the jar.
What Does the Future Hold?
More houses will be foreclosed. Home prices will continue to fall in the major metropolitan areas, both coasts, and the southwest. Fannie Mae and Freddie Mac will continue to tighten their credit standards. Mortgage insurance companies will continue to tighten their credit standards. Gone are the days of no down payments and exotic sub-prime mortgages.
Borrowers will need to stand on their own two feet and save money for a down payment, document their income, live within their means, and manage their credit in a responsible way.
Will the government come to the rescue and bail out the irresponsible homeowner? Will the government bail out Wall Street? Will the government over regulate the housing industry?
Reform is likely on the way. Look for a major change in the Real Estate Settlement Procedures Act. RESPA is the federal law that requires the disclosure of the Good Faith Estimate of closing costs. You will see a revamped disclosure in plain English with all lenders required to use the same language and terms.
Lenders will be held accountable for the fees disclosed, and all lenders will have to openly disclose the actual income derived from each origination. Title companies or other closing agents will need to prepare a plain English closing script going over the specifics of the loan that all borrowers will need to review and sign prior to the actual closing documents.
The best advice is the same advice our mother always told us, "Shop around and if it sounds too good to be true, it most likely is."
Patrick J. O'Gorman is vice president, real estate lending for Stillman Bank.
The views expressed are those of O'Gorman's and do not necessarily reflect those of the Rockford Chamber of Commerce.
