IT'S THE LOAN PROGRAM, STUPID……
March 8th, 2011
Written by Greg Frost
Categories: Fannie Mae, Federal Housing Administration, FHA, Freddie Mac, GSEs, Mortgage Banker News, Mortgage News
As I listen to the talking heads and government policy experts in Washington discuss mandating 20% down payments for future mortgage programs I get sick to my stomach. Aren’t any of these people doing their research before suggesting such a draconian response? Are they not aware that FHA, VA, and USDA have been insuring high ratio (96.5%, 100%, and103%) loans for over 70 years? Are they not aware that, barring a short period of time in 2007-2008, when sub prime lenders successfully crammed some of their loan products into the FHA programs, that these government insured loan programs performed admirably?
Please note, on the attached graph, the default rates, during the 10 years preceding 2007, before the wheels came off the economy. Note how well the Prime Fixed Rate and Prime Arm Mortgages (Fully Documented) performed during that entire decade compared to all other mortgage instruments.
So why doesn’t Washington recognize that it was very specific and easily identifiable loan types that were toxic; eliminate them; and stop trying to make us and our industry out to be outlaws? Their own Federal Reserve Bank of Kansas City shows, in the attached report, that it is the loan program that was the culprit.
I can’t find any of my counterparts who designed those toxic loan programs. We just originated them. So who are the culpable “outlaws”?
The government’s attack on our industry is unprecedented. Why isn’t the government going after the car salesmen who sold all those Toyota’s that wouldn’t stop? Why aren’t they attacking Standard & Poor’s, Moody’s and Fitch who rated the securities filled with those toxic loans AAA? Why didn’t they attack the contractors who installed all the asbestos, or the painters who once used lead based paint? Again, what they are doing to us is patently unfair and unprecedented in scope.
We sell mortgages, we don’t design them. We sold what the mortgage industry, with congressional oversight, provided us to sell. Remember Barney Frank stumping for relaxed guidelines?
Admittedly, during that period of time, most mortgage brokers did not have access to FHA and VA loan products so they sold what they had, which in many cases was not the best product for their customers. Therein lies the biggest problem. The toxic loan programs were so “fast and easy” that mortgage brokers and mortgage bankers alike, shied away from traditional full documentation products in order to facilitate faster approvals, minimize documentation requirements and increase throughput.
When the smart guys who were designing loan programs for, and within our industry, allowed a W-2 employee to use a ”stated income” loan program, they established a scenario for lying or fraud. Remember, how we referred to those mortgage products as “liar loans”?
Why on earth were these loans designed and thrust upon our industry?
To facilitate the Executive Branch of our government’s goal of increasing home ownership, that’s why. The Executive Branch, during the Clinton administration pressured HUD, FNMAE and Freddie Mac to come up with loan programs that would utilize the stated income feature of the Acorn loan, that was being originated by Commercial Bankers, to meet their CRA lending requirements. That Acorn loan program was the magic product that brought sub prime lending into the mortgage mainstream.
The attached Federal Reserve Bank of Kansas City chart is so important because it shows how things were, prior to the economic melt down. It categorically shows that the full doc, 30 year mortgage (Prime ARM & Prime FRM) were loan programs that lenders, bankers, investors, along with domestic and international investors could count on to perform.
We were enticed, by our industry leaders and regulators, and enabled by the securitization efforts of Wall Street, to substitute the loan programs that we prime lenders had originated for our entire careers, with the “fast and easy” loan programs that were now considered to be “main stream”, and thus replace the exceptionally well performing industry standard loan programs that clients demanded and we originated in order to remain competitive in our markets.
We all participated. We all were drawn into the mess in order to be competitive. And now we’re all suffering, as our industry is targeted by our government and made the scapegoat for most all that went wrong with the national financial system and our economy.
If I, with my insignificant B.S. in Business from a mid major university can see what happened, why can’t those learned leaders of ours? There is an old saying….”don’t throw the baby out with the bath water”. I find, as I grow older, that those old sayings are around for a reason….they are forever relevant.
This baby is tired of the bath, the bath water and the mis-guided and unfair efforts of my government officials, many of whom I helped elect, all of whom I support with my tax dollars, who are trying to make me and my industry the fall guy for a political agenda that was ill conceived, short sighted and mismanaged.
The toxic loan programs are gone. The investors got rid of them, not the government. The investors realized, after poor performance, that they were not good investments. We don’t need the politicians to show us the folly of deviating from the previous industry accepted risk assessment standards. We all did what we were encouraged to do, and we all have suffered, as a result.
I implore my government to get back to what we elected you to do. Stop the wars and balance the budget. And for God’s sake, stop trying to tell me how I can or can’t pay one of my employees for the services he or she renders my company. My company is not trillions of dollars in debt. I know what I’m doing.
Please take a moment to learn more about how Frost Mortgage can help you. If you're looking for a mortgage, please visit our Find a Loan Officer page. And if you're looking for the best Branch Partner opportunity in the business, please visit our Branch Opportunities page. Thank you!
Also, please follow us at
2 Responses to IT'S THE LOAN PROGRAM, STUPID……
-
-
John, thanks for the comment. They didn’t get the same rate. In most cases, they got a 2/28, 3/1 or 5/1 ARM with a teaser rate. Rarely was the fully indexed accrual rate equal to or below the 30 year fixed rate at the time of origination. It was all about short term ARM rate with minimal documentation. Home Builders and Realtors alike recommended LOs who had the “Fast & Easy” loan programs. I recall several instances where a realtor or homebuilder would not accept a purchase agreement that showed FHA or VA financing. They simply didn’t want to wait or stand the rigors of a FHA or VA approval.
-
Leave a Reply
2501 Wyoming Blvd. NE, Suite A, Albuquerque, NM 87112
Greg Frost, thank you for your concise history on what really happend. It was very difficult to originate Full Doc. loans when one could get the same rate and a higher LTV at No Doc., just down the street. How do you compete with that? You must join in to some degree, or go fishin’.