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Did Greed Cause The Economic Collapse?
By Vic Hurlstorm | June 26, 2010
“Greed is good.” Those are the now famous words spoken by Gordon Gekko, one of the lead characters in Oliver Stone’s movie, “Wall Street.” We all have experience with the benefits of this character trait, as well as the costs.
Before we entered into the new century, the mortgage industry was embargoed from making loans to borrowers with a poor credit history and lack of supportable income because we were all operating under the guidelines established by the consortium of Fannie Mae, Freddie Mac and the FHA. They collectively made the loan underwriting guidelines that proved to be acceptable to the secondary market institutional investors, including the Wall Street community, pension funds, insurance companies, and other investors in Mortgage Backed Securities. The loan broakers and lenders who offered loans, whether for new purchases or refinances had to follow these underwriting regulations, unless they were able to hold them in their own portfolios as an asset.
Savings and Loans across the country also looked at mortgage lending products as either salable in the secondary market, therefore subject to the same basic guidelines, or produced their own products for their own portfolio. The now reviled “Option Arm,” “Interest Only,” and “Stated Income” loan products were initially developed by some major S&L’s and Commercial Banks as portfolio loan products. They had been utilized by these institutions for more than 20 years and were available to clients who would qualify for them. The exception to these commonly used underwriting guidelines were those of the then-evolving Alternative-A paper lenders and “sub prime” lenders that became the 21st century dominant sources of mortgage capital to potential borrowers who had income documentation problems, credit issues and/or credit backgrounds that made them more challenging to the prime institutional lenders.
During this period, the stunning growth of companies like Ameriquest, New Century, Option One and the other players in that area made these usually conservative lending option programs available to borrowers that would not have been able to use them in the years earlier. Thus was started the slippery slope that enriched many people in the years from 1997 through 2005, which ultimately caused most of these participant companies to close their doors by the end of 2007.
Greed has many handmaidens. First off, you have the home buyers, who realized their fantasies of a bigger house by taking on more debt than they could handle. There were mortgage brokers who didn’t live up to their professional responsibilities and mortgage lending companies that ignored many of the warnings that were there to be seen. Rating agencies like S&P, Moody’s, and Fitch hid behind financial structures that were truly halls of mirrors created by financial intermediaries that also paid their fees for the ratings they issued. There were also the institutional consolidators like the major Wall Street companies and the institutional investors who bought these products after they had been converted into Mortgage Backed Derivative financial instruments and given Investment Grade ratings.
As in most major screw ups, including financial upsets, every player had a role in its success – and failure. “A rolling loan gathers no loss,” was the way of business, and as these mortgages passed through many hands, no one saw a need to consider the implications of their actions – as long as they made their money. Consequently, there is on one absolved from the shared responsibility in causing this industry crisis.
“Back to the Future” was the title of a series of movies in the late 1980s and early 1990s that is also the vision of our collective financial near future in Mortgage Lending. By near future, I mean the next three to five years. We have looked back to the time when we made loans that required loan underwriting standards would be universally understood and applied. Down payments for new homes were usually assumed, and loan applicants knew that their credit histories would be analyzed, and if found to be insufficient, no loan would be given.
That image seems to be what’s in store for us, because timidity and dejection always let up eventually. Somewhere in the financial hemisphere, there will be a “great idea” to focus on short term money gains and let the future work itself out, not even considering the risks at hand.At this time, numberous banks and brokers will no doubt assure themselves that they are wiser this time around, know what mistakes to avoid, and can can deal with any hike in default risk, all in the name of a prettier balance sheet.
And so it will start again. Just see what happens.
The author of this article is a 43-year mortgage lending professional and legal mortgage expert witness providing professional consultation and expert witness testimony. He is listed with Consolidated Consultants, an expert witness services company along with many other legal technical expert witnesses. Get their full C.V.’s online. This is a free service.
Topics: Mortgage Refinance | Comments Off
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