So what's the real story? Does a crisis really exist? Clearly the mortgage industry is going through a serious "cleansing.” Lenders are closing their doors, Wall Street is treating mortgage backed securities like the plague, and borrowers are struggling to make loan payments.
If you listen to the TV folks you’ll be stirred into a bona fide panic. But is it a real crisis or is it a natural business cycle? I believe the answer is “no.”
Starting in 2001 after the 9/11 attacks the real estate and mortgage industry reaped the benefits of falling interest rates. And while many people in other industries suffered through tough economic times anyone in the mortgage business had the best years (financially) of their lives from 2002 – 2005.
And anytime there is money to be made there will be a flood of people looking to cash in – and the mortgage industry was no exception. People from all walks of life jumped in to become loan officers, processors, and managers as the industry reached higher levels than it could sustain long term.
According to Wholesale Data, the number of mortgage brokerages in 1997 was around 33,000 nationally. By 2005 it had ballooned to more than 55,000. Double the number doesn’t sound too bad – but the study shows the real problem: the market share of mortgage brokers was 64% in 1997 but had dropped to 58% by 2006. Twice the numbers of people were competing for a smaller percentage of loans.
The logical next step with so many people competing for smaller parts of the pie was for everyone to cut standards and rates to try and get what they can. Then came the advent of “easy money” with high loan to values, reducing credit restrictions and increased risk across the board. Again not good.
So is there a need to downsize the mortgage industry and regain control of guidelines and quality standards? Absolutely. But what about this crisis - what are the facts?
Fact - Mortgage money is still readily available. The main difference is that credit qualification has really tightened up in an obvious reaction to the “easy credit” guidelines of the past few years. There are still options available for 100% financing, low down payment options and rates are still quite competitive.
Fact - Credit worthy borrowers are finally being rewarded. Lending had reached a point where any and all credit problems (including bankruptcy and foreclosure) were being brushed aside in favor of volume. These trends never made sense so when they backfire does that constitute a crisis? A borrower who pays their credit on time and saves money for reserves or down payment can still get a loan.
Fact - The downturn in real estate is a natural cycle. When you look at the big picture, the real estate industry went through a historic growth cycle created by historically low interest rates. This growth was fueled artificially by something that cannot be sustained so it shouldn’t be a surprise when the ride is over.
Fact - The mortgage industry needed to be downsized. Studies show that the number of mortgage professionals more than doubled since 1997. Anytime an industry sees such an influx of new people you can expect the sort of issues we've seen in our business:
lower levels of training and accountability
new players from other industries that don’t quite understand what they are in for
less emphasis on long term relationships
shrinking margins due to increased competition
lower levels of professional standards
Fact - Mortgage guidelines had reached a risk level never seen before in history. Some tightening of credit standards was inevitable.
Those in the sub-prime market have taken a beating over loose guidelines but the facts are that this issue was industry wide. Sub-prime in particular was never a "bad" thing if done at the right rate or loan to value. If credit or income standards were not up to conventional levels it makes sense that you should get a higher rate or lower loan to value than the conventional market. The problem comes when the non-standard rates and LTVs are just as competitive as conforming products – which is exactly where the market wound up by 2005.
And don't think for a moment that conforming lenders weren't pushing the limit. In order to keep up with competition guidelines loosened for them just as quickly as everyone else. The shutdown of conforming loan operations and the mortgage insurance losses we have seen over the last 18 months confirm this.
So with all of these trends the downsizing of the mortgage industry should be seen as a good thing. Those professionals staying in the mortgage business should be wiser and more professional than ever before. You can be sure that they want to stay in the business and fully realize what they are in for.
Industry changes bring new solutions
These sweeping changes in the industry have caused mortgage professionals to make some changes. Buckle up, change your ways or get out!
The changes have inspired one mortgage broker to come up with a new service – offering mortgage advice for borrowers with loans in process for a small flat fee. The company, Trusted-Mortgage-Advice.com (www.trusted-mortgage-advice.com) offers to review a borrowers mortgage documents for the loan in process and help them negotiate the best terms with their lender. It’s a unique twist for a mortgage professional – no bait and switch, no “I can do better” – instead it’s that second opinion that most borrowers go to their friends for.
With so much uncertainty, so many changes, and so many "bad faith" stories out there I think there is a real need for borrowers to get independent, third party mortgage advice. So many times in the process borrowers call their friends or family to find out if they are getting a good deal – or if what the broker is telling them make sense. So going to another lender only assures they promise to beat your current deal. With Trusted-Mortgage-Advice.com (www.trusted-mortgage-advice.com) they will give you that second look to make sure you get the best deal possible.