When Lenders Mess Up, Everyone Suffers!

by | BiggerPockets.com

The days of the “Fogamir” mortgages are gone. Surely you remember the Fogamir?

“Yes Sir! We can give you a mortgage. If you would just take this application and rather than fill it out, could you breathe heavy onto that reflective square at the bottom?” If it fogged up, you got the mortgage.

It was nuts. The lenders were granting mortgages to borrowers who had no business merely applying for a loan. It was beyond nuts. Remember the late 90’s? Lenders held firm at only lending up to 80% and buyers had to secure a second mortgage for 15% and just about everyone buying needed to bring 5% down to the table.
During this recent boom, the lenders were loaning 100% of value and some would even roll closing costs into the loan.

My specialty is pre-foreclosures. Most people not in real estate keep telling me that I must be on Cloud-9, considering the record number of foreclosures.

Let me tell you something . . . Just because the number of foreclosures have gone way up does not mean the number of deals has gone up as well. When you have an abundance of 1, 2 and 3 year old mortgages at 100% of value in default… No investor wants any of those houses. Why would they when they can buy a new construction home at 20% off market? No one is going to bid on a house like that at the auction. All those houses are making their way to the lenders’ REO departments.

The lenders messed up. In fact, they messed up REAL bad. Bad enough for smaller lenders to go belly-up. Bad enough for Countrywide to lay off 12,000 people and on and on and on.

The lenders are taking back properties like the Titanic took on water after hitting the iceberg.

So the lenders finally take notice of this problem and decide they need to fix the problem fast. So what do they do? They tighten up their criteria to get a mortgage. No, wait… That isn’t really a fair explanation. What they really did was over-compensate to the point to where the sub prime market has slowed to a trickle.

How nice. The lenders mess up by approving nearly everyone and their REO inventories continue to grow.

They messed up so bad that all of the public attention is aimed right at them.
Even I have said recently, “these banks are hurting themselves again but, it won’t be too long before the government has to step in and slap the lenders’ hands before buying out all their inventories and having an early 90’s-like HUD fire sale.

And the public eye will still be on all the lenders because they are the ones that took the hit for their mistakes. It is at this point that I disagree. Yes, all the lenders are either starting to or have drowned. What the media isn’t paying any attention to is all the other real estate professionals that the lenders have pushed into the water along with them.

When a lender denies a new mortgage to someone, it means an inspector will not get hired to submit a report. An inspector is only the start.
How about appraisers? How about contractors losing out on repairs that would have been needed? How about title companies? Escrow agents, abstracters… it keeps on going. No loans, no buyers, no listing agent or buyers agent commissions. Loan officers lose out. Mortgage brokers go hungry. Sellers like me, feel the pain because our houses stay on the market longer.

When all of those real estate professionals start complaining that the lenders are killing their business… That is when I predict the government will step in and bail the banks out again and hope all the lenders learned their lesson.

Why would they learn this time? They made a mess of things again less than 15 years after they made the last mess.

I for one am ready for the government to come in and slap their hands, bail them out and start the fire sale. Just don’t go overboard and drown yourself because history shows that it won’t be long until the lenders are back doing what they do best… Making a mess of things for the rest of us to clean up.

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  1. I do not think the government will step in to bail out lenders. I don’t think they should. The issue was not caused solely by lenders making bad loans, it was the ratings agencies and investors that were the problem. When rating agencies say this portfolio will perform as such and then it doesn’t then investors lose out on money, then lenders can’t sell to investors, and on and on. It is very important to understand where the real issue lies. The only lenders hurting right now are the ones who securitize their loans with investors. Portfolio lenders are loving it right now as conduits are falling off left and right. Here is a quote from Bernanke…

    “It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions.”

  2. The Austin, TX real estate market was very healthy until the lending mess caught up with us. We were selling homes as fast as we could get them on the market in many cases. For the last six or so weeks we have seen probably 35% of buyers drop out of the market and listings are sitting in many parts of town, especially low priced homes and ones requiring jumbo loans. It will settle out over time, but we must be one of many once quite healthy markets that got hit.

  3. I think that you’ve made a fair assessment of how lenders contributed to the current state of the real estate market. Lenders did suddenly tighten their qualifications causing many of the negative repercussions that related industries have experienced. It’s unfortunate that their lending practices weren’t more tightly regulated, which would have prevented the rising numbers of foreclosures. I tend to agree that the government will likely step in and bail out lenders again… and that the lenders will likely be back to abusing lending practices before long.
    What, if anything, can be done to prevent this from reoccurring?

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