The Congress of this great nation is trying to come up with a bill to help the mortgage industry manage itself and protect borrowers, brought on by the sub prime crisis. Great idea if it would work, but how do you get people to stop being people? Unfortunately, borrowers will not always tell the truth. I know that probably doesn't shock you, but the damage done by these false statements can be seen in today's real estate market. I didn't mean to cast dispersions on borrowers alone when the mortgage industry, especially mortgage loan officers are right up at the top of the list of those who more than bend the truth. There is enough blame to go around for everyone. And while we are spreading it let us not leave out the mortgage companies who not only bend the truth they simply tell lies: "We make enough on you during the term of the loan so we do not have to charge you any closing costs!"
Let us look at the three areas of the problem that could just be turned around if we could get everyone to stick to the truth. They are borrower's misstatements, loan officer's omissions and lenders need to deceive.
We will start with the borrowers. Years ago lenders put in stated income loans to help self employed people get loans. Self employed generally write off everything they can to reduce their taxable income and thus their tax bill. Looking at their tax returns would not tell any financial story and thus the lenders allowed them to state what they made, depending on their credit score. The lenders would check their income and make sure it fell within a range for their profession. As a mortgage advertisement states " people are smart" and thus they upgraded their profession or job. Gardeners became landscape contractors, handymen became finished carpenters, salesmen became sales managers, paralegals became attorneys, etc. The better the job title the higher they could state their income. The borrowers had plenty of help from the loan officers in their creative writing so you can't just blame the borrowers.
As long as stated income loans were performing well it was a better way to finance a house.
The borrower needed less documentation and the lender had less to analyze and everyone was happy. Sub prime borrowers got into the act and allowed stated loans for self employed people with lower credit scores. Even that seemed to work out well. Then came the sub prime lenders who gave employed borrowers the right to state their income which wasn't bad enough, they did it to 100% financing with low credit scores to fill a niche that was "ripe". It was also very dangerous and they eventually paid the ultimate price and went out of business.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.