Real Estate & Mortgage Insights

Foreclosures and the Housing Crisis

The housing crisis is causing a mess, because of lower home values and massive foreclosures, often blamed on the sub-prime mortgage industry.

What started it?

From 1996 to 1997, the origination fee charged on a loan went from 2.1 to 0.6 points. Folks were looking for cheap refinancing and financing for houses escaping the last housing crisis. That crisis only hit values in some states and began in the early nineties.

Houses and condominiums were suddenly worth something again in those areas.

So were the loans.

Unfortunately, the timing coincided with people falling in love with the internet. Instead of the "old fashioned" way of finding a lender, some early adopters let their fingers do the walking and used their keyboard and their mouse.

Borrowers ended up with people who said they were loan officers but only pushed paper around. Not surprisingly, loan officers did not know what they were doing. They did not know Fannie Mae, Freddie Mac, FHA, VA, and Jumbo guidelines.

When the rest of the market quickly followed with low origination fees and low cost loans, the loan officers who knew what they were doing could not get a loan if their life depended on it. The companies also had to hire loan officers who did not know anything so that they could make more profit for themselves and less for loan officers.

In the past, loan officers were commissioned employees. In other words, sales people on one hundred percent commission.

With smaller profits per loan, the only place left for them to go was sub-prime, alt-A, and borrowers who could not qualify the regular way. Alternatively, they could make less money.

These professional salespeople found they made more money. They told their friends in the mortgage industry and as the sub-prime market began to grow, and were rewarded with rich profits. Companies in this market hired new employees that did not know anything but to be commissioned salespeople, in both the retail (direct-to-consumer) market and the wholesale (mortgage banker to sub-prime loan officer) market.

In 2000-2002, the bottom fell out of the stock market and some folks who got their money out quickly decided to make more money the old-fashioned way - in real estate.

Boom!

Values sharply increased and lenders were right there to snap up the financing. These money people wanted to put as little money down as possible and they wanted things to be as easy as possible. They wanted no qualifying.

Some folks saw their values increasing and took cash out to invest in real estate, too. Or, more real estate.

The little guy got taken along for the ride, and the loan officers who had not been through the early eighties believed what they were saying, "real estate values will always go up."

And, they have (until now).

There are statistics and graphs to prove it. Until recently, the median price (nationwide) has always increased on a year-to-year basis - until now!

How do you fight it? In those states that require licensing, ask what percentage of their loan officers are actually licensed, and make sure you see the license when/if you meet them.

Otherwise, get three lenders and have them all to work off copies of the same appraisal.