The Mortgage Meltdown - The Beginning Part One
Mortgage - CRA Loans
It has been what, three-four years since the Mortgage Meltdown began and no, the mortgage mess did not cause (ALL) of the recession, per Mr. Greenspan and quoted on television. I do know that the Mortgage Meltdown is very highly associated with the recession; it had to be, with so many people getting delinquent on their mortgage loans. I was an Mortgage Loan Underwriter long before the Subprime loan so I know what Fannie and Freddie guidelines were prior to want a piece of the profitable pie.
Fannie Mae and Freddie Mac did not cause the meltdown and that is what so many people do not understand. Yes, they went under but they did not always buy the loans made by the Bank which were less than perfect credit. They were fine until they started investing later in the 2000s in some of the non-conforming loans (subprime loans). It was the less than perfect credit loans which did not meet the minimum standards for lending money which is the largest investment most people make in their lifetimes. When you start to think about lending hundreds of thousands of dollars to people who can barely survive from pay check to pay check, anyone with any ability to reason at all should have know what was to follow.
CRA did not cause the Mortgage Meltdown either. Yes, the government did regulate the Banks to make CRA (Community Reinvestment Act) loan with regulations in 1977 which implemented that so many of the Bank’s loans, a small percentage should be made to certain neighborhoods with restrictions less than a normal loan guidelines. Yes, the Government allowed these less than perfect credit loans but the Banks did not go under because of these CRA loans. These loans were not overly assessable to borrowers and never did they overuse their ability to make these loans. You can read Community Reinvestment Act which is an articles which explains this in more detail.
The Banks had a mortgage department ("A" paper loans in the beginning) and they did not began to make the less than perfect loans which were nothing more than Subprime loans, until they had a place to sell them. Some of these could be sold to Fannie and Freddie (later in the process, not when these loans first started being made) and some to other Investors. Some banks held loans in the portfolio and serviced the loans, but generally the loans were sold to Investors who would service the loans and the Banks used the money to make more loans. Some Banks still hold some of their loans when they make a loan to a preferred customer who did not meet all of the guidelines because of their banking relationship.
Fannie and Freddie had a program for years, which met the CRA rule, before they started investing in the loans which presented more risk. The loans were called Community Homebuyer Programs. The loans were not “BAD” loans, they were loans which would allow for 97% loan to values in the beginning and the three (3) % downpayment could be gifted from a relative. It did not allow for “bad” credit. Those loans did have ways to make lending more available to those who could not afford 5% + downpayment from their own funds.
Loans and more loans
Subprime in a Nutshell
The Subprime Lenders started in the 90’s, I remember it so well. I worked very briefly, at that time for a Broker who was making these loans to people (they could only have so many delinquent credit lines on their credit report and they were graded) with dangerously unsafe credit practices. Believe it or not, there were Mortgage Companies who were lighting up everyday to be able to make and sell these kinds of loan because they brought so much profit. Yes and Congress allowed all of this to happen. I left after a short time. It was a different ballgame for me because I had been accustomed to the “A” paper loans only. Strictly Fannie and Freddie who did not allow “Bad” credit loans. These loans at the early part of Subprime were identified as “B” “C” paper loans.
Some Subprime Lenders were Banks, some where called Correspondents who were approved through a Bank to make loans for them and then the Broker who did not lend the money but became the go between for the borrower and the bank. Everybody was making money. Yes, later in the process of all these loans, everybody got involved in making loans which were less than perfect.
The Subprime Market kept growing at the pace of apples on a tree during the 2000’s because everyone wanted to make the money from the pools of loans which carried a 10% + interest rate. That is why more and more; Fannie Mae and Freddie started accepting less than perfect loans and lower the underwriting guidelines to make up some of the pools of loans.
This was why AIG and Lehman Brothers plus some others, went down or almost did. AIG and Lehman Brothers had invested in their brokerage department, pools of these high interest rate loans (Residential Mortgage Backed Securities) so therefore when the borrower’s began to default on these higher interest rate loans…their pools would collapse and not bring as much money and they became overloaded with defaulted loans. All Investment Brokers that bought and sold these mortgage pools were touched by the defaulted loans and Wall Street was of course involved in the trading of all of the pools and this was the icing on the cake from them also.
The making of a Subprime loan….NOT - Fannie and Freddie guidelines
Guidelines included but not limited to: 550 + credit scores, 55 % debt to income ratios and 100% financing. The Seller paid all of the closing cost which was added into the sale price over and above the Real Estate Commission which was already added in. No funds for closing out of their own pocket. No reserves, meaning they did not have their first month’s payment which would only be one month away, saved.
Some loans were made with an 80% first mortgage and a 20% second mortgage. The second mortgage sometimes had a rate of 12 to 14%.
The credit for most of these loans was usually very below standard. They could have collections accounts up to $5000 which did not have to be paid off. Sometimes certain judgments did not have to be paid. Anyone knows that if you have a judgment which is files before your title; it must be paid to perfect the title to the property. If it had not been filed, there were times these judgments were not paid. They could become a lien at any time.
The Equity Loans
A lot of the problem with the second mortgage loans were that after closing some borrower's needed to refinance their first mortgage to add in the second mortgage so that their interest rate and monthly payments would be less. This worked okay until the values started to decline. Once the values started declining; they could not refinance the first and the second to get one payment. Sometimes, credit account were paid off with the second mortgag loans to qualify. This is never really a good step from an underwriter point of view. It is making the interest on the paid off loans for 30 years and sometimes 40 when the term was raised at one point.
This was only another mistake which caused has caused a lot of problems.
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