This NPR radio episode runs just under 54 minutes. Click on the “download” button; it will take several minutes to download. While you’re waiting, browse through some of our other articles on Ethics in Mortgage Lending!
In order to better understand why we are currently facing massive mortgage loan defaults of epic proportions, this radio program takes us back in time and helps us understand how investors looking for high yields created a groundswell demand for risky mortgage loan products.
So are these investors to blame for the mortgage industry crisis?
It’s safe to assume that no wholesale lending reps held guns to the heads of loan originators and demanded that the LOs originate pay option ARMs.
Perhaps it is a choice. There is at least one bank that decided not to participate in subprime loans and now that bank is not seeing record default ratios on their residential loans, though their story has not yet been told in relation to commercial development loans and construction loans.
I’ts amazing how everyone is finger pointing at each other, really I think the whole problem started with the government and eded with the greedy LO’s.
The government waited a little to long to start investigating what was behind this mortage loans. LO’s never put the borrowers interests first, it was their own selfish interest first.
At this point we can say that “everyone” that was suppose to be taking care of the borrowers interests “FAILED” them.
When disasters of this magnitude occur, with SO many complicit in the benefits from group think, it is counter productive to waste too much human capital and energy assigning the blame.
Better to grab a shovel, a hammer, whatever tools at hand, and work to make it better, and try to piece together what happened, and how we might avoid similar mistakes in the future.
Coming on the heels of another greed fueled Christmas buying frenzy, I don’t really think it has sunk in yet, that our worship of pathological excessive consumption is at the root of the problem.
Exactly! That was great…finally a piece that everyone knows about but hadn’t heard at one sitting. LO’s to blame? I don’t think so…a portion of the problem perhaps, but they didn’t create the monstor…Dr. Frankenstein were the Mike’s on Wall Street and their greed! Now, LO’s like the originator of the “Marine’s” loan, yes, blame his lack of ethics…so tell me, what laws, guidelines or regulations would have protected any consumer from him…Answer: None…will he go to jail? Perhaps, but what about that consumer. What if that LO had a degree or certificated as a mortgage professional, would it matter? Again, not to the consumer. So what is to keep history from repeating itself? New cool laws that someone can put their initials on?
It starts at the top. During the Clinton administration lenders were told to loosen up. They did. Wall Street loved the yields and demanded more of the same. Lenders obliged by offering rediculous loan programs. Originators and consumers all got caught up by it, and the news sold it. Frankly, with as low as 30 year rates were for much of the time in question, it’s hard to understand why so many stupid loans were made and gotten. Hopefully we all have learned, and will take the higher and safer road.
Mark Johnson
510-LO-44600
509 457-1944 Fax
I think that everyone should share in the blame for the mortgage crisis. Politicians were partially at fault for asking for guidlines to be eased for first-time home owners. Investors for demanding high yields. Banks for making products available. Some Loan officers for pushing the NINA and Option Arms. Realtors for trying to sell anything. I home that this crisis has taught everyone to be more professional, etical and to work with more integrity.
To hear this program just reiterates the simple fact that blame goes to all parties. Consumers buying into dreams they couldn’t afford and now pointing the finger at lenders and brokers who were just trying to help. Competition drove this into the ground. The simple fact of the stockholders demanding more from the production staff and management doing what they could with the products they were given to sell.
Blame goes to all involved who acted in a manner that jeopardized the well being of the consumer. And shame on those consumers who didn’t simply get their calculator out and do their homework on the front end.
I be;ieve that we all should share the blame for this moergag cisis. Banks got greedy, LO did not explain programs good enough to the clients and the LO’s were not educated enough on the prograns to explain them in an educated manner to the clients.
The Investors who created and promoted the Option ARM program knew what they were doing and how Loan Officers would fall over themselves to originate this product. I recall a loan officer charging 3 points on the back end, charging the client the highest margin possible, with a 3 year prepay penalty, and telling me that the client requested this. Huh? Now that’s a great tribute to educating the customer. I recall another loan officer sending out thousands of flyers a month and closing 5-10 Option ARM loans a month through this advertising. When the client would call to ask for for more info about the loan, he would focus on asking them how they were going to spend all that money they were saving on “cashflow”.
So yes, I do put considerable responsibility on the investors because they did not confine the recipients of these loans to sophisticated borrowers, much like the SEC mandates guidelines for accredited investors. The pricing structure was designed to give incentive to the loan officer to charge the highest margin while giving the investor security through prepayment penalties.
I applaud HomeStreet Bank for exercising integrity for the not only their borrowers and investors, but also for the economy at large.
I feel that this market is where it’s at today because of everyone’s misconception. From what I read and hear of people who were in this industry during the last refinance boom, it seems like we were living in fantasy thinking that value will keep going up and loan programs will get easier and easier. It just had to happen when it did, and it had to happen in the volume it did. Today the market seems great to me, because I started when everything got bad. My second week in the industry during the beginning of August 2007, I would listen to fellow co-workers lose deals that were supposed to fund that day because their lender went out of business, along with 120 others to follow shortly after. That is brutal. Fortunately, I have managed to keep my head above water while experiencing the ups and downs of this cut throat industry, and today I realize that I was born to close loans the right way at the highest level of service, putting our clients in the best financial situation, and practicing good ethics, and being a consultant by going over the pros and cons of each scenario, rather than to think of that dollar sign like a salesman does.
Alot of blame to go around starting with Greenspan. Greed from the whole industry has effected the world economy. What amazes me is that the world pool of money can double in just a couple years and then greed sets in. All the bad loans. (SIVA,SISA,NINA) I remember the 70’s and it was a scary time. Where in for alot of changes. Changes for the better.
Keep blowin’ in a balloon and it will pop! I’m really glad that I listened to this broadcast. It was very well done and enlightening too. I have skirted around some of these issues with my friends and customers. Many of my answers were generalized based from media opinion. Now I have a pretty good grasp on what really happened in mortgage security. Interesting-The Giant Pool of Money. Asked again “what happened” I feel I can give an answer with substance.
I think thaty are partially to blame. However their are other people and companies in the mix that are just as much to blame. This crisis came from a group effort of people in the entire industry.
Yes, these companies are to blame. I also believe the brokers, And L.O’s tht put people in these loans are to blame. We know enough about loans and the industry to realze tht these loans were not suitable for all clients. Yet we put them in it anyway. It wasa ll about lining our pockets. I think the entire industry is to blame.
I want to start by saying I really enjoyed listening to this and understand more of what actually happened myself now. It would be a great idea for all LO’s to take the time to hear this. What happened reminds me of watching a snow ball roll downhill and pick up such momentum that it was unstoppable. It seems that greed did play a large part in all of this but the mortgage industry is not the only industry who gets caught up in this kind of game. For those of us left originating mortgages we have weathered this storm and will be better for it personally and for our clients.
What an interesting presentation. Well dramatized. However that said, I feel that there is big difference between Sub Prime ARMs which adjust at the 2 – 3 year point and Pay Option ARMs. Pay option ARMs aren’t for everyone but a product well worthing mentioning to a client who might benefit from the payment options. Which means that interviewing the client, looking at their long term goals with regard to their real estate, and then perhaps a POA. I think personally they have great advantages, on of which is happening now, monthly reduction in interest rates (based on each margin and index). Again this simply goes back to doing right by your clients and they will be your best source of referrals during the current market. If you educate them, treat them with respect they will remember that.
ps for Deborah Cook – the reason WAMU sold so many option arms is simple. The bank compensated it’s Loan Consultants well on this product, and paid their lowest splits on the good old fashioned conforming loans. Their managements greed only fueled their demise.
The blame cannot be put on LO originators! The lenders offered the products, the borrowers wanted it, the wall street was buying it, and loving it!!! LO are offering, what is available on the market, if the products would not be introduced, and promoted havily, like it was, it would not push LO to offer it. Borrowers, in some cases, would come in, and without and questions just aks for it: I want the neg am loan. My questions to them was: do you know what it is? Their answer was: i dont care, i want the low payment like my friend does. At that point it was really hard to talk them out of getting that loan. It’s simple lenders offered it, the borrowers wanted it! As far as sumprime – its 100% stated at 580 FICO, that is what tanked it!!! If it would be subprime ( below 620 FICO) at lower LTV’s it would have totally different effect and foreclosure rate.
So are investors to blame for in the mortgage industry? Well yes very much so! I believe the lending industry as a whole are also to blame!!They didn’t care to disclose everything to these clients.But then again the clients weren’t asking either they just wanted follow by lead of other’s and wanted to be a part of the “American Dream of home ownership Although they should have know they weren’t able to afford it.
There are so many different directions that blame can be placed. I am not sure that looking to blame one more than the other will help us make sure that this will never happen again.Greed probably played the biggest role and was shared by all.I hate to see Option Arms get so much negative publicity.I personally own 3 homes and have had option arms on them for 6 yrs. Used the way that they were meant to be, they can be very beneficial to the homeowner. I also sold them to clients and educated them on the correct way to utilize this mortgage. None of them have had problems. I also chose to never put anyone into more than a 1 yr prepay. I learned a long time go that noone can guarantee what their financial situation will look like in 3 yrs.I hate to see responsible consumers loose access to loan programs that can work for their benefit.
We cannot blame the investors for this whole mess. It’s a combination of investors, banks, brokers, etc. I hope we learn from this crisis and never implement loans like NINA, SISA, again. There are many Clarence’s out there and the only thing we can do is learn from our mistakes and trust our instincts. Banks who have been in business for years should have known better not to create loan programs that instinctly many felt were “toxic or liar loans.” I think we should get rid of ARM’s, prepayment penalties, etc. to regular homeowners and leave it with the investors.
Greed got in the way common sense. Everyone was suppose to make money on these risky loans. Investors thought that they were getting safe investments with higher interest because they bought consolidated debt obligation “‘CDO’s” from wall street. They where suppose to be safe because wall street bundled a lot of loans together to even out risk. What more interest take on more risk. LO’s made money because they originated more loans. Home buyers thought they could just sell there house and collect the appreciation. Who’s to blame? As Thersa Reyna said “Every One and NO One”
This is a very interesting story and good way for people to understand what was going on behind the sceans in the lending world.
Today we see the fat cats from Wall Street sitting before congress explaining their big bonuses and many other missuses of money.
To not understand that that the LOs were mearly the messenger not the provider of the loans that consumers were asking for. We didn’t make up those pools of mortgage backed securities or step all over our selves like Allan Greenspan did, inviting all those overseas investors to Wall street to make money.
As I mentioned in my Ethic’s comment on this same NPR episode, this is a good example of what could happen and did happen. Again education of the consumer and honestly explaining the programs correctly is the job of the LO, but we were never pressed to sell anything. These programs were not made up by the originators but wall street.
Wow, where do I start. First of all I live my life with Integrity and service in mind any time I work with my clients. If I am not meeting their needs then a loan will not be processed and closed. I do not believe the problem lies directly within just the lending community alone. The problem lies in the consumer and in the leadership of our country. When the Feds allow loans that are stated income, stated assets, high DTI and high loan to value… that is the problem. Do not blame this on me the mortgage broker. I have not nor will I ever write a loan that I would not put my self into. On that note people more specifically clients need to be fully informed. RESPA is very confusing… work off referrals and check references of the Broker you are going to work off of. Consumers don’t be a sucker and also do not play dumb… you knew exactly what a ARM was, you knew that it would adjust at a specified date and that your loan would be due. You home is not Las Vegas and you should not gamble with money that is not yours. Now because of you I have to pay more in Taxes to bail you uneducated *** out. America wake up.
Well, chalk another one up for greed run “amuck”. I’ve never pushed the “rip off” loans, but I have had a few borrowers after being told the loan they want is total crap insist on going ahead with it. Why? Because it was the only way they could get the house at the time and they thought the most important thing in life was to own there own home. And the nightmare began.
I blame the banks, Wall Street, a “paid for” government and all the other greedy participants in this endeavor. In my younger years I may have got caught up in this mess. I understand all sides, the LO pressured by the realtor, the need to make a little more $$$ and the rising value of your home will make it all ok. I also agree with Jason, I won’t help people hang themselves but hey consumer, pay attention, look at what you are doing, what the heck happened to personal accountability. We are responsible for what we sign, wake up, we have fallen into some mystified world where someone else is always resposible for what we do to ourselves, no wonder our country is in shambles!
Well, chalk another one up for greed run “amuck”. I’ve never pushed the “rip off” loans, but I have had a few borrowers after being told the loan they want is total crap insist on going ahead with it. Why? Because it was the only way they could get the house at the time and they thought the most important thing in life was to own there own home. And the nightmare began.
I blame the banks, Wall Street, a “paid for” government and all the other greedy participants in this endeavor. In my younger years I may have got caught up in this mess. I understand all sides, the LO pressured by the realtor, the need to make a little more $$$ and the rising value of your home will make it all ok. I also agree with Jason, I won’t help people hang themselves but hey consumer, pay attention, look at what you are doing, what the heck happened to personal accountability. We are responsible for what we sign, wake up, we have fallen into some mystified world where someone else is always resposible for what we do to ourselves, no wonder our country is in shambles!
When I started in the Mortgage Business the Loan Officer that was training me had a very strict rule, “not everyone is qualified to purchase a home”. Yes the Global Pool of Money and the Banks made it very easy to dip into large commissions by offering loans that masked the initial doom to follow. It still comes back to the business accumen that you as an idividual follow. All lessons always return to greed and ill gotten gains are easily lost. We have a new era before us and I hope to be a part of the change that offers hope and committment to clients by all in our industry.
Preditory lending practices are mostly to blame for this mess, but everyone played a role. There were clearly companies out there selling bad loans. Im glad there were banks out there that stayed away from this mess. We must work to restore the trust and integrity that our industry once had. This industry needs to learn that its okay to “throw one back” once in a while.
I blame liberal policticians that demanded social justice for unqualified potential home buyers. This started a process of facilitating easy unreasonable credit standards. Yes its a LO’s dream come true that you could write loans all day long and make really exceptional incomes. So too for lenders. Creative packaging of loans into CMOs with no way to rate them as investments. As someone said last year, “the chickens have come home to roost.” Maybe we’re on a better path now, I hope so.
i believe that alot of the banks back them were in just to help themselves get rich and really didnt look at what they were doing to the consumers. some of the problems do lie on the consumer for not reading everthing they should so they know whats going on before they signed on the paper. So we can say its alittle of everyone fault.
I think during the time of subprime lending and other risky loan lending, most investors probably didn’t care whether or not the consumer could ultimately pay back the loan in the future. Most people think of themselves and how to make a quick buck. Not to say every investor is that way, but it sure created alot more transactions out there which in turn creates more money in pockets.
I agree that all partied are culpable for the meltdown in someway or another. I also agree that some are very culpable and should be banned from our business for life.
But I would also say that 65% to 70% of all subprime loans would have qualified for a fannie mae or freddie mac products with better interest rates and terms without prepayment penalties.
Most just got so used to just going with stated income that they never even bothered to run the calculations to see if the borrower really truly qualified for a better product. Most bad actors during that time frame got into the business without every even knowing how to figure out the true income off the paystub. Had they just tried to structure the loan first they would have been better off trying to get the loan file approved by Fannie OR Freddie.
The biggest problem was that subprime lenders is that they didn’t run the files for an agency approval first. They felt they could get a better execution by going directly to Wall Street. Well that options is no longer available.
Why can’t we just go to a completely different model. Why don’t we have all of the verification done by Rapid Reporting and ever rely on the borrower to deliver us any documentation again. They would save us a ton of money, time and reduce the whole process down to disclosures and a 4506-T.
Most banks didn’t understand the history of the business. A major set back seems to happen every 7 – 10 years with minor set back every 3 – 5 years. Did they every think that what if the ride is over – what do we do now? Oh yea – Bail Out. The ultimate fail safe plan.
There were so many layers of greed as this process evolved and grew and then it just exploded.
Where was the regulation when they first determined increased loss due to delinquency?
It grew to a point where the pressure to originate and process these types of loans was tremendious. Offering considerably large yield spread premiums. The conservative were forced to expand into these programs if they were to be competitive and survive.
These loans with no documentation to support income or assets should have been rated properly in the first place based on risk and never should have been placed in a global investment category that most do not understand and rely soley on the rating system that it must be safe because it is rated AAA. This was a huge mistake in the beginning.
But as this crisis evolved more and more layers of risk presented itself. It all boils down to greed vs. better judgement and prudent underwriting.
Countless times my conservative borrower requesting a modest amount of cash was presented with a much larger amount available to them. Given the opportunity as with the majority of society would do they would take the larger amount because they could and all of a sudden had all kinds of things to do with the extra money and felt that it must be okay because the bank wouldn’t loan the money unless they could afford it right?
We are the professionals dealing with borrowers livihood. They rely on us to make the intelligent decision for them because this is what we do. Sometimes they need us to so no. They may not like to receive that denial (whats that) but will be much better off down the road for it.
I believe all parties involved were to blame for the fall of the market, and people are certainly money hungry. Although I have never originated a risky loan, if I were to put someone in this situation the biggest concern would be educating the consumer on what they were getting themselves into. Most people do not have the means to jump into a high risk situation such as the option arms, but if they were to do so they need to know exactly how they work and how they will perform for the better or the worse.
I don’t think the consumers should be blamed; the banks were the ones should be blamed; they just want to get rich and rich and do not care consumer’s rights. THey give you a candy attacting you to get in their house and after that you are lost and you have to give whatever you have in order to get out of the door. All those documents given by the banks just making the consumers believe everything is legally processed and they trust the bankers and do whatever they ask them to do. So again, the bank are the ones without ethic and should be blamed.
What went on at WMC was horrendous. Glen and the other sales people at WMC had no regard for the fraud and hardships they caused others. I know for a fact that Glen and almost all of the others on the sales team ended up with their OWN homes in foreclosure and now only earn a fraction of what they earned in the subprime mortgage fiasco. They were then and are still now arrogant fools who get everything they deserve…….they are truly sociopaths that deserve nothing and should be kept FAR away from any industry that deals with money or requires honesty.