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Carver Communications - Index

Carver Communications - 10.1.08 - Index

Vol.XXVI, No.19 © Carver Communications, Inc. October 1, 2008
Getting Past the Mortgage Crisis
Compliments of Champions
School of Real Estate
Compliance is now the buzzword
when it comes to the mortgage lending
industry. The industry, after the huge fallout,
is now going back to the way it used
to do business. Proof of income, proof of
assets and good to excellent credit scores
are once again the benchmarks by which
consumers are able to obtain loans. Gone
are the days where you just had to have a
pulse (in some states a pulse was not even
needed) to qualify for a loan. 560 credit
scores, stated income, stated assets and
100% financing are no longer viable.
People who never should have qualified to
begin with will no longer qualify. The
market needed a correction and lenders
have tightened their purse strings. The
sub-prime market is gone and dead….for
now.
So how was it that an entire industry
moved away from their normal standard
operating procedures and got to this
point? Why were these loans granted to
people who normally would never be able
to qualify for them? There is no one good
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answer for the crisis but instead there are
many factors that led to it.
“This American Life,” a weekly
radio program based out of Chicago, did a
show back in May in collaboration with
NPR news called The Giant Pool of
Money. The show did an excellent job
putting into layman’s terms how the housing
crisis happened in the United States
and what caused it.
The show explained that there is a
Global Pool of Money in the world that
consists of all the money that is being
saved everywhere. Insurance companies
saving for disasters, pension funds for
retirement, money being saved by central
banks are all part of this pool. From 2000
to 2006 this pool went from 36 trillion to
70 trillion mostly because of the rising
economies of several nations. What took
several hundreds of years to create doubled
in just six short years. With all of this
new capital needing to be invested somewhere,
investment managers had to find
things to invest in that would give them a
good return.
So Wall Street figured out a way to
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give these investment managers what they
were looking for: low risk, high return
investments. These low risk, high return
investments were found in residential
mortgages. Wall Street investment firms
would buy thousands of individual mortgages
and package them together as a
mortgage pool or mortgage-backed securities.
Shares of these mortgage-backed
securities would then be sold to these
investors. The demand for these mortgage-backed
securities became so great
that the Wall Street investment firms could
not keep up with the demand. It is this
demand which eventually led to the
requirements for loan qualifications to
decrease to the point where a borrower
could qualify for a loan with no income
and no assets or what is more commonly
known as a NINA loan.
While all of this was taking place
home prices were drastically increasing as
well, which made these mortgage pools
seem all that more stable because they
were backed by real estate. Many Wall
Street investors erroneously believed that
since real estate property value had been
so stable over the years, there was no reason
to believe that property values would
change anytime soon or ever go down.
These mortgage pools were compiled
by taking Triple A top tier loans and
combining them with bad “toxic waste”
loans which would make these loans look
good on paper but in all reality these loans
were doomed to fail because of the “toxic
waste” loans that could never be repaid.
Once the pool started to go bad then the
good money was pulled down with the
bad money. The insurance companies and
banks couldn’t back the loans and the
money disappeared.
In order to begin to rectify the
mortgage crisis, the Federal Reserve has
put together subprime mortgage rules
regarding Regulation Z. Rules that on the
surface seem like they should have been in
place a long time ago to avert such a crises
that has affected the industry.
"The proposed final rules are
intended to protect consumers from unfair
or deceptive acts and practices in mortgage
lending, while keeping credit available
to qualified borrowers and supporting
sustainable homeownership," said Federal
Reserve Chairman Ben S. Bernanke.
"Importantly, the new rules will apply to
all mortgage lenders, not just those supervised
and examined by the Federal
Reserve. Besides offering broader protection
for consumers, a uniform set of rules
will level the playing field for lenders and
increase competition in the mortgage market,
to the ultimate benefit of borrowers,"
the Chairman said.
These new rules will go into affect
October 1, 2009 and can be found in the
press release section of the Federal
Reserves website.
There is some good that has come
from this. Consumers have become more
educated to the process of obtaining loans
and new laws have been put into place that
will prevent this from happening again. A
well educated loan officer that is confident,
ethical, driven and understands the
business is now a hot commodity once
again. A field that was once recognized
and highly regarded as one that has helped
millions of Americans achieve the
“American Dream” is now rebounding to
achieve that recognition again.
"Ref:" “This American Life” –
From Chicago Public Radio® 5/09/2008
The Giant Pool of Money.