You can thank me later mortgage man…

There are a few things I wish to address in your argument.

I agree with your idea that the lenders did not plan for long term problems within the sub-prime market. I do however believe that it is not as cut an dry as it was put in your entry. Everything is so interconnected that blaming the mortgage industry is ridiculous. I also believe that some good has come from having lowered mortgage standards in the past decades.

First, the reason for the lowered loan standards came partly from the use of new technology to report credit information and assess someone’s risk at a faster and cheaper rate. Should we blame technology for their advances that took us into the age of easy loans?

Secondly, yes the lenders definitely knew that they were taking more risk with their lowered underwriting standards, ARM’s, and “no doc” programs but the fact is their loans still had to be sold and the buyers of these loans knew what kind of portfolio they were accumulating. When the default of mortgages started to rise a lot of these companies (such as the recently bought out Bear Sterns) merged, downsized, or went bankrupt therefore increasing unemployment. Should we blame these investors?

What about the housing market itself? New York with its millions of residents have had to pay around 400,000+ for a home. If the conforming loan limits were set below 400,000+ then to avoid a higher rate for a “jumbo” loan, many people had to take out a second lien or “piggy back.” Two loans=two risks that may or may not be at the same bank.

Also, programs allow an average loan to value (LTV) of below 90% and those higher LTV’s require lower risk/better credit scores. Even if the property was within conforming limits, a sub-prime borrower would not be able to have just one loan to cover the mortgage, closing costs, and taxes.

So why lend to sub-prime borrowers? Ownership is the key to upward mobility and the “American Dream.” The sub-prime market although a higher risk isn’t always a problem. For example, the Hispanic population is growing in the housing market during this hard time because of the chance they have had to gain access to ownership and build their credit in the process. I work for a brokerage firm that has helped many Hispanic families (among others) achieve ownership and keep their homes when the “near prime” market would have denied them access to it.

Extra Comments

You said: “A non prime mortgage or a sub prime mortgage is a loan given to a person with bad credit, or to a person who doesn’t report their income.” It is true that some sub-prime borrowers have bad credit but others may just not have adequate credit history. This could be older generations who do not believe in credit, immigrants, or students. Sub-prime is just for borrowers with higher risk characteristics.

You said: “The average nonprime mortgage loan is $130,000, while the average nonprime mortgage borrower earns $54,165 a year.” These numbers may be true but to clarify, this would be a totally appropriate scenario. Without thinking about down payment and LTV’s the monthly mortgage payment would be around 900 dollars which is affordable for someone making $54,165 per year and borrowing $130,000. The problem however would be in our scenarios in NY where the average mortgage payment around $3000. Taking into consideration the average non-prime borrowers salary that you listed, the scenario would never even happen because it is completely not affordable. What does that say about NY’s housing market?

You said: “Lenders, whether you want to blame the banks, or the brokers, have been “living for the moment” for way too long.” Dishonest brokers and loan officers have been a huge problem in the mortgage industry. They came in for their easy commission and left when the market became harder profit from. I don’t believe that brokers should disappear because of this but there should definitely be a more regulated system. Licensing loan officers is a good idea.

Additionally we can also blame things like the education system and families who do not promote delayed gratification in their children. We are a fast food nation aren’t we?

Another catalyst in our recent economic problem could be unemployment itself. High unemployment rates/recession could have kick started the foreclosure trend, not the mortgage industry.

Furthermore, borrowers themselves also have a hand in the problem. Some of them went for that 2% option arm they saw on TV without doing their research on why the rate might be so much lower than other places. It is the responsibility of the borrower to seek out information for themselves without solely depending on brokers, lenders, and loan officers they neither know nor trust.