If you don’t have thick skin and don’t want to know the truth, you will not want to read this.
As a relocation specialist I get asked questions about the housing slump daily. In fact I have been interviewed 10 times the past 2 months. It irritates me how facts can be manipulated. Again, if you don’t have thick skin and don’t want to know the truth, you will not want to read this. My research is based on countless hours of pouring through real estate sales, foreclosures and interviewing many professionals related to the real estate industry. Although most professionals will not state the obvious and prefer to give some long winded explanation that doesn’t make sense, I’m going to give you the good, bad and ugly. I’m annoyed at all of the ridiculous reasons why the country is facing a housing slump and I’m going to tell the truth. Although there are some minor reasons causing the housing slump, one of the major reasons for the housing slump is abusive lenders. I will explain abusive lender have a huge part in the down turn in the real estate market.
To start, back in the 80’s a mortgage professional most likely worked for a bank had an extensive educational back ground and had many years of mortgage experience. The laws didn’t require experience and an education; the banks required their employees to have experience and an education. When the real estate market turned around in the early 90’s, a mortgage company opened up on every other street corner. In some cases, they opened up in garages and basements. Not all of the mortgage companies were bad and in fact some offered good mortgage products with good service. The abusive lenders hired employees with no mortgage financing experience. Most of these employees were lured into the easy money of the mortgage industry from their low paying sales job. A perfect employee for an abusive lender was a salesman who could sell ice to an Eskimo. The average mortgage professional went from having 15 years of experience in the 80’s to 1.5 years in early 2001. With the number of loan programs offered going from 20 to thousands and the number of wholesale lenders going from less than 50 to hundreds in the same time period, most mortgage professionals lacked the education to offer consumers the correct loan programs or the best advice. It was nothing for a higher risk borrower to be charged 6 points (1 point is equal to 1%) on a loan. In fact one lender bragged that they jammed a borrower at closing and charged 20 points on the loan. They said that they knew they would close because they were in a pinch. Borrowers looking for the best rate would settle for the lender who quoted the lowest rate not knowing that that lender would make up the rate somewhere else in the loan or change the rate at closing.
Abusive lenders knew that they all they had to do were advertise the lowest interest rate, whether it was true or not. They ran TV ads, radio commercials and sent junk mail. Most of these abusive lenders only cared about profit and the turnover with their employees was very high in their offices. Many of them folded within a couple of years and opened up under a new name the next day. In the late 90’s, the abusive lenders had to change their lending practices when real estate brokers started educating their real estate agents about the abusive lending practices. Real estate agents representing buyers changed the abusive lenders marketing. Soon after, many of these abusive lenders left the real estate purchase market and started going after the refinance business.
The abusive lenders were growing at unbelievable rates while mortgage interest rates it the 20, 25 and 30 year lows. It was easy to do mortgages, everyone wanted one. The consumers were borrowing at money at alarming rates. The abusive lender knew that the borrower was rate sensitive. You have seen their low interest rate advertising. They piled in the money and ran targeted advertising to draw more refinance customers. When borrowers got to closing and faced a switch and bait by the abusive lenders, the borrower closed because the lender had them over the barrel. A prefect referral to an abusive lender was a borrower who didn’t do their research and didn’t shop around.
In 2004 mortgage interest rates started edging up. In order to stay in business the abusive lenders had to change their business.
First the abusive lenders used good loan programs and bent the rules to lend the borrower more than what they could afford. An example would be a stated income loan program. In some cases these loan programs were good loan options. An abusive lender would take a borrower who couldn’t qualify with other loans and get them to state an unreasonable income. I have seen cases in which a cashier made $75,000 on a loan application. The abusive lender knew that the chances the borrower would default but they didn’t care because they got paid up front.
Next the abusive lenders offered vacations or some other type of inducement in order get more business. Some states, lately, have made inducements illegal; however, there are a few that say it is fair game to trick borrowers. To me, it is hard to believe that people still fall for inducements. These lenders make up the difference by creating another fee at closing. Abusive lenders started hiding the inducements by offering kickbacks to the people who referred them the business.
Lastly, the abusive lenders hoped to push borrower’s credit risk higher. A higher credit risk means a riskier loan. The abusive lender invented ways to charge more fees or raise the interest rate. They would tell the borrower that a trade line which had been paid pushed their credit risk higher or they would give bad advice to the borrower. The abusive lenders goal was to push the borrower’s credit risk higher so they could charge the borrower more points and fees, thus increasing their profits. If the credit risk couldn’t be pushed up, the abusive lender would find a way to lend more money. In some cases, the abusive lender would lend more than what the home was worth. What could a consumer do when they have a $175,000 loan on a $150,000 home? The consumer can’t sell their home and they can’t refinance their home. What options do the borrowers have to get them out of the mess?
The mortgage market seems to be correcting itself. Wholesale lenders have started educating the commissioned sales agent. Wholesale lenders are dropping abusive lenders, low rate abusive lenders are leaving the business and the government has been following up on unethical and abusive lending practices. Currently, real estate foreclosures are at a high and wholesale lenders are working to make changes.
Recently, many state and federal government agencies understand how abusive lenders have negatively impacted the real estate market. Abusive lenders are being investigated for mortgage fraud as pointed out on http://www.mortgagefraudblog.com. Every day in the media a new case of mortgage fraud is stated. Some states have enacted laws that lenders are required to get a mortgage license and pass a background test. Other states have stopped the practice of inducements and have required education and continuing education for lenders.
If you are looking to obtain a mortgage in the future there are some safe guards to protect yourself. First ask for referrals from friends and family. Next do a Google Search and search for lenders. If you are looking to buy a home also search for real estate agents. Many real estate agents have good lenders that they would recommend. I did several real estate searches in Kansas City and found 2 real estate agents in all of my searches. I contacted both real estate agents and asked them who the lenders they referred out to home buyers. Chris Dowell, of the Dowell Taggart Team of Infinity Realty ( http://www.DowellTaggart.com ) is very well familiar with the mortgage industry. In fact, Chris has been in the real estate industry for over 18 years and a past Vice President to a large Kansas City lender. Chris said that he does everything possible to protect his clients and will not use a lender who does unethical mortgage practices. The next real estate agent, Jason Brown of Keller Williams ( http://www.JBPRealtyGroup.com ) , stated that most of his clients are very well educated and typically don’t fall for poor mortgage practices; however, if a client would like a list of good loan officers he would be happy to provide them the list. Jason also pointed out that he doesn’t accept perks from lenders of any kind.
After you have formed your list of mortgage lenders. Interview all of them on the phone. Ask for references, how long they have been a mortgage officer, what type of loans they do and what type of loans they originate. Even ask how many loans they do a month and why you should do business with them. After you have narrowed your list, schedule an appointment in person with the loan officer. Ask for all possible loan options. Once you have narrowed down the list of loan options ask for a Good Faith Estimate (GFE). The GFE will show you the cost on closing day for your loan. Send a copy of the GFE to the other lenders on your list and see what they recommend.
Make sure you understand what kind of loan you are obtaining and how it works. Make sure you understand the true cost of the loan over the course of many years by examining a Truth and Lending Statement and you are aware of possible future changes.
With the market being a buyer’s market in most real estate markets, there is no better time to buy. In fact, many real estate investors interviewed are finding this is the best real estate market to buy a home in the past 25 years. Remember to do your research and you will most likely decrease your chances of falling prey to an abusive lender.