Many politicians in Washington who attempted to help with the problems created bigger ones. One senator trying to light a flame under the Office of Thrift Management leaked his letter of concern about a hefty bank’s solvency to the press and almost singlehandedly took down the institution. After looking at a rate sheet that showed that the worse the loan, the more the broker could make, the same official decided that the brokers were the problem. A more prudent student of the mortgage market might have reached a different conclusion, realizing that the lender created the rate sheet and thus initiated the problem, not the broker.
The politicos have popped up for sound bites and head shots with archaic ideas and little knowledge to draw upon. I wrote a column several months ago, "The 1% was the Culprit," which pointed out the biggest problem about the worst loan that this industry ever developed: the option ARM. Contrary to what the press has reported, this is not a new loan but one that had been around for decades. It was the darling of the savings and loans but had a more reasonable teaser rate. The teaser rate, or pay rate, is the one that is advertised and was generally a couple of percent lower than the actual interest rate. People liked this loan because the payment was less than interest only and they weren’t concerned about their balance on their loan going up because real estate seemed to increase in value.
When the 1% teaser or pay rate was introduced, it was one of the greatest marketing successes of all time because people could get an amazingly low payment on a rather large loan. Therefore, they could actually buy more house than they could afford and the rest is history. Have you heard any politician point this out to anyone? They have nibbled around the edges and discovered some uncomfortable facts about this type of loan but could never put the whole problem together.
That is why new legislation will do nothing to help, but I am not sure if anyone from any side really cares. I have seen a report about tougher standards for loan officers that simply stipulates what we’ve had in California for about 70 years. They want fingerprinting of loan officers, background checks, education and tests. We’ve done that, been there and yet have the same problems that most of the other states have.
When will people learn that you can’t legislate honesty? The good news is that about 75% of the loan officers in America have left the business, and I can assure you they weren’t the true professionals for the most part. The bad news is that once the industry is back on its feet, we will have a rush of the same types that we lost, returning to wreck havoc again. There aren’t any simple answers to our complex situation but those who have stayed are trying to make sense of it. I am optimistic enough to believe that the good guys in the white hats generally win. If that is true, then you can believe that the public will be well-served and the mortgage industry will once again be on sound footing.