Picture of my Mom (Left) when she worked at Paul's Diner.I Have Posted Several Pictures of My Dad. Mainly because he recently died. Mom has been gone almost 30 years. I have talked a lot about how hard my Dad worked and it seems appropriate that I let you know that Mom was no slouch in this area either. She waited tables about as long as I can remember. I remember how proud she was of her tips as she kept them in a jar on the table. Perhaps that explains why I seem to leave bigger tips than most folks.
A Few Comments About the Mortgage Business. I started originating mortgages in the mid 1980's. The business was very difficult back then, mainly because of the work you had to go through to assemble a package that could be sold on the secondary market. A lot of people think about banks when they think about mortgages. The fact is that, only the large banks can afford to keep long-term mortgages and they often sell much more than they keep.
It Took Awhile. But we slowly gained market share because we added value be helping borrowers decide which type of loan was best for them and by preparing a file that demonstrated to underwriters how qualified the borrowers were to fulfill their obligations under the terms of the note. Our business peaked in 1993 when we made and sold $150 million in loans. We were heavily taxed to the point that, when the business slowed down, we could not keep all the people we hired. It had been my objective to keep these people as long as we could in case the market improved again.
The Government Was Always Involved The Business. They had an implied guarantee that they would stand behind Fannie Mae, Ginnie Mae, and Freddie Mac in case of difficulty arose that made it impossible to repay the bonds they sold to provide the funds to make the loans. This allowed these agencies to sell bonds at lower rates than most private companies. Some time later, numerous non-profit companies came out with statistics that showed that minority borrowers were turned down at a higher rate than non-minorities. This was true even though turned down minorities had the same income as non-minorities that were approved. All of these studies were flawed because they failed to take into account many other crucial aspects of the mortgage approval process. The government imposed a system called the Home Mortgage Disclosure Act (HMDA) that required all lenders to carefully audit each file and report the results to the government proving that no discrimination was taking place. This increased the workload across the board for the mortgage industry. As if that weren't enough, they pushed for relaxed guidelines in most aspects of the business so that less wealthy borrowers could get loans.
Getting a Mortgage Loan Became Easy. It became so easy that it attracted people with very little financial background into the business. They didn't need expertise, just sales skills. Large broker dealers got into the business. They could barely spell mortgage but they could raise money and sell to their vast network of investors. As underwriting guidelines became more and more relaxed, anyone who could fog a mirror could get a loan that they had little ability to repay. Probably the worst culprits in this fiasco were the rating companies that gave these so-called sub-prime loans an A rating, the same given to large companies with a considerable assets and a long term history of meeting their obligations.
This Made Our Services Less Valuable. When borrowers came to me I expended a considerable amount of energy showing them the implications of getting these loans. I made few loans during that time. What makes it even harder to accept is that many of these borrowers went to other companies who told them what they wanted to hear and approved their loans right away. The result of all these irresponsible practices lead to the breakdown that occurred in 2008.
A Concise Summary of Who Is To Blame. Strictly my opinion but here they are.
1. Mortgage Originators. Although a lot of them didn't know the harm they were doing, it was their obligation to find out. The worst players were those who knew but didn't care.
2. The Government. They pushed for more relaxed lending standards so that more people could buy houses. This was a laudable goal but one for which they lacked the vision to understand.
3. The Large Brokerage Houses. They didn't understand what they were encouraging their investors to buy. Again, it has long been their main function to raise money for business through the sale of bonds and securities. Although they should have taken some time to understand the implications of what they were selling, they treated these packages of loans the same as they treated other securities that they had more experience selling. When delinquencies occurred, they had little idea of how to enforce the terms and ultimately recover and market the properties that they acquired.
4. The Rating Agencies. They should have known that these loan packages were risky and undeserving of the high ratings they were getting. The public believes in these ratings as objective opinions of unbiased third parties who understand risk. No longer can we trust their opinions as being objective.
5. The Borrowers. In the final analysis, it is the responsibility of the borrower to understand the implications of the obligation they are undertaking. While lenders need to be able to explain these, and disclose the underlying risks, borrowers should not take their responsibilities lightly. In the absence of outright fraud by the lender, borrowers have little right to expect the government, charities, or lenders to excuse them from the consequences.
This Should Give You A More Comprehensive View of What Went On. Still, it is a vast oversimplification. One thing should be clear. There is plenty of blame to go around. Those who blame the president, congress, or wall street may be partially right but it goes further than that. I am definitely sorry for those who are losing their home to foreclosure but they definitely participated in this fiasco. Hopefully, they will be more prepared next time.
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