The Mortgage Blog

I have heard a lot of politicians and news media talk about how mortgage brokers created the problems that are plaguing the mortgage industry. That is a bunch of baloney! I am a mortgage broker and lender and here is my side of the story.

Mortgage brokers can only work within the framework of guidelines set up by the investors (banks) who buy loans from them. The bank sets down rules for minimum credit score, max loan to value, documentation requirements, etc. Mortgage brokers do not approve loans. They fit customers into programs that investor banks offer.

If a client comes in with a 600 credit score, no documentable income and no money for a down payment the mortgage brokers job is to look around the universe of wholesale mortgage programs and see if there is a program the client can fit into. If there is, then the broker puts the loan together per the program guidelines and submits the loan to the bank for approval. The bank underwrites and approves the deal if it meets their requirements. If this loan goes into foreclosure who's fault is it? The mortgage broker? I don't think so. As long as no fraud was committed on behalf of the broker then it's the bank's fault for creating a loan program that is ridiculous. Zero down, no income documentation for someone with weak credit? You're kidding right? No - these types of loans were being made routinely up until the end of last year.

Are there loans out there that went bad because of a mortgage broker? Absolutely. These are the loans where the mortgage broker did something fraudulent to make it appear the borrower met the banks guidelines and duped the bank into approving the loan. That is the fault of the mortgage broker and, like every business, there are bad people in this industry. This is a small percentage of the loans that have gone bad but there are certainly those out there.

Big banks and Wall Street greed are the true causes of the current mortgage crisis. Between 2000 and 2006 there was a huge amount of money made on sub-prime mortgage lending and some giant players entered the arena, like Morgan Stanley. They have all been bitten badly though as the reality of these subprime borrowers showed itself in the form of large numbers of non-performing loans. Now the collapse of subprime lending has bled over to the prime credit markets and to the U.S. housing market in general. Many homeowners who have lost the equity in their homes due to declining values are choosing to walk away from their homes. I have heard the words "I'm going to give it back to the bank" too many times in the past year. There is an irresponsible attitude out there right now that is adding to the problem as some people who could make their house payment choose not to because their home has lost value. If they hang in there they may yet get it back. Right now the single biggest cause of foreclosures is declining values.

The bottom line is that the mortgage industry and it's various players created the problems we are facing by relaxing credit standards to a ridiculous degree and lending money to nearly anyone that had a pulse. The good news? Over the next year or so we should see the bulk of these loans move through the system and be sold and both the real estate market and the lending industry should start to heal.