A small discussion & history on subprime lending

Recently there has been a lot of discussion about how loose qualifying guidelines of mortgages has led to the financial meltdown. Even Warren Buffet has spoke about how mortgage lenders has to qualify a borrower based on income and how income documentation has to be carefully reviewed in order to ensure the soundness of the loan.

Very few will argue against owning your own home and many feels homeownership is the foundation of ones financial security. Yet many are also blaming the current financial crisis on the mortgage industry. First, by the subprime category of mortgages and now spreading to all classes of mortgages causing an overall lack of confidence in mortgage backed securities across the board and weakening the financial institutions who owns these type of assets (i.e. Fannie Mae, Freddie Mac, BankAmerica, Citibank, to name a few.) In turn these events have greatly impacted everyone, from daily spending to erosion of their hard earned retirement accounts.

I found a comprehensive article on Wikipedia titled Subprime mortgage crisis (http://en.wikipedia.org/wiki/Subprime_mortgage_crisis) that does a pretty good job of describing historical data, origin, participants, current and ongoing impact of the crisis. This article is not short but I found it to be accurate and objective in nature of the crisis. A very good article for those interested.

In the article, just about everyone involved in the mortgage industry is revealed andit analyzes their actions and impact in great detail. What is not discussed is the circumstances and motivation of the individual borrowers who took out these mortgages other than irresponsible speculation fueled by greed.

It has been almost twenty years that I have been a mortgage broker. As brokers we play no role in the creation of the loan products nor do we play any role in approving a loan other than making sure our borrowers fit the required guidelines as presented by the lending institutions. We get paid a fee for the origination process and have no inherent risk over the performance of the loan; meaning we are not impacted when a borrower does not make their payments. Very few of my borrowers belonged in the subprime category. When assisting and fighting for an approval on borderline loans, any argument would have been augmented by the fact the borrowers can well afford the monthly payments. Sometimes the issue would just be a documentation issue required by the low documentation loan products.

In hindsight, almost everyone was caught up by the spiraling price appreciation of the housing market, whether it is your first home, upgrading to a bigger home or buying an investment property. Many thought if you waited any longer it would be too late – the market would pass you by.

So I don’t think we have changed from the way we help our borrowers. It is just that at the present time, people are more cautious and conservative in their borrowing versus the past few years when borrowers allowed themselves a more aggressive attitude because they were more optimistic about their finances. Let’s see if we can light a fire for the industry to recognize there still are many qualified borrowers deserving of the best the market can offer.