Felicia Muftic: Bonfire of the mortgage industry
Grand County, CO Colorado
In the mid-1990s I had just finished nearly 12 years of immersion in housing finance issues, including eight as Denver’s public trustee administering foreclosures, several as an executive with the nonprofit Consumer Credit Counseling Service (CCCS), simultaneously serving as chair of the Colorado Housing Coalition assisting qualified low-income homebuyers fighting banks’ refusing to approve mortgages in minority neighborhoods. I polished it off as a part time loan originator for a mortgage company.
All of this took place before the late ’90s, the time when the housing market went haywire.
The 1980s were rocky for housing, too. I had watched a bubble burst long before the recent 2008 crash. Causes of the ’80s debacle were short-term mortgages ending in unaffordable and unrefinanceable balloon payments, overbuilding of new homes, high interest rates, fraud in savings and loan institutions, and a local economy that was hit by a crashed energy boom.
Like the current mess, owners unable to meet their payment schedules, with houses worth less than the loan amount, walked away, leaving banks holding the bag. Even large financial institutions were devastated. Foreclosures and bankruptcies were commonplace. For years thereafter, many consumers sought refuge in credit counseling.
My boss at the mortgage company called me in to his office in the mid-1990s to tell me that the company would now offer mortgages to those who had a bad credit history (called sub-prime lending) and asked if I would make the sales connection with CCCS clients. I refused. The purpose of CCCS was to keep those who could not afford debt from digging themselves into more bad debt. I had been Ms. Conservative, requiring 20 percent down, documentation of income, correct ratios of debt to assets and I had faith those loans I originated were going to be paid. While the lenders had their “favorite” appraisers to make sure the property being financed had an evaluation to justify lending 80 percent of value, the appraisals were within reason.
That was soon to change as hyper-inflated appraisals cited hyper-inflated comparisons to justify value . No down, no documentation of ability to repay the loan, became the standard. Predatory lenders reaped origination fees based on loan size and convinced wannabe homeowners they could afford to pay back these impossible loans. Some steered them to the most expensive terms when better ones were available. Buyers wrongly assumed if the bank thought they qualified, they could afford the big house.
In the late ’90s, Freddie Mac and Fannie Mae, quasi-governmental FHA lender/underwriters, lowered loan qualification standards to get minorities into homeownership. Other mortgage bankers followed suit in lending to others and fueled the bonfire of the mortgage industry. To stimulate the immediate post-Sept. 11 economy, the Federal Reserve greased the skids with low interest rates.
However, blame does not rest alone on Fannie, Freddie and the Fed. Shame on all of those who took those shaky loans, mixed them with the solid loans, and passed them off as good risks to investors. Whether those investors who then resold them winked and knew the game or were fooled themselves is a good question. These toxic bank assets (loans that could not be repaid) poisoned our economy.
Others also share blame for the worst financial crash since the Great Depression. Holmann Jenkins writing in the Wall Street Journal Dec. 28, 2011, believes Wall Street could have absorbed these lemons, but giant financial institutions in the U.S. and Europe were weakened by excessive overnight and short-term borrowing to hold onto suddenly unsellable mortgage derivatives and unregulated bets on other mortgage investment instruments.
Less regulation would do nothing to prevent such bad practices in the future. Been there; done that. While we now have higher lending standards, requiring more capital to cover loans, controlling of derivatives, and anti-predatory lending measures would help. Wall Street Reform addresses some of problems and deserves protection from those who would roll it back.
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