to make riskier home-purchase loans to
make up for the lost refi volume.
In 2014, the Consumer Financial
Protection Bureau issued regulations
defining qualified mortgages. If lenders
follow the guidelines, their risk of being
forced to buy back mortgages is diminished. A loan may be deemed a non-qualifying mortgage, however, because
it involves stated income, interest-only,
a high debt-to-income ratio or a 40-year
term, for example.
Chain of distrust
Scrutiny should be paid to lenders who
do a large volume of fully documented
non-qualified mortgages. It also may
be the case that scrutiny should be
paid to private equity companies making mortgages. Not all of these types
of mortgages, however, are high risk.
One example is someone who is retired
and who has a low income but significant liquid assets. If someone has a low
income but $5 million in liquid assets
and wants a $1 million loan on a home
worth $2 million, do you really care
about their income?
The mortgage industry is a chain
consisting of the borrower, the loan
officer, a mortgage broker, the bank
and finally the holder of the beneficial interest of the payment cash flow.
What happened during the financial crisis a decade ago was that a lot of borrowers stopped making their mortgage
Consequently, the chain of production became a chain of distrust. Commercial banks stopped trusting mortgage banks, commercial banks stopped
trusting each other and Wall Street
stopped trusting commercial banks.
Mortgage lending essentially ground
to a halt. The other part of the problem
was interbank lending dried up. This
was relevant to the mortgage business
because many of the subprime mortgages at the time were made by mortgage banks that depended on credit
lines from large commercial banks.
n n n
While the root causes of the financial
crisis 10 years ago may have been else-
where, mortgage originators generated
the bad mortgages and became the folks
who got a good share of the blame, scru-
tiny and regulation. It’s likely they’ll get
the same treatment if it happens again. n
appraisers, and few people are willing
to do this lately. Not enough people
see the benefits of the job outweigh-
ing the negatives.
To solve this problem, the indus-
try may come to value computerized
appraisals rather than ones done by an
experienced professional, and this has
risks which are not yet known. There are
databases which can do a fairly good
job of estimating home values. They
may even provide drone photos of the
exterior. Still much could be wrong and
go unnoticed with an inspection that
skips the home’s interior.
Interest rates have been on the rise this
year and that’s led to a dramatic de-
crease in refinancing. Some lenders
who thrived on refi volume may decide
to dive into risky territory and gener-
ate more loans of lower quality going
These may be subprime first liens,
home equity lines of credit and other
second-lien loans. Keep an eye on the
big companies that have thrived on
refinances, as some may be tempted
<< Lessons continued from Page 146 “Some lenders who thrived on refi volume
may decide to dive into risky territory and
generate more loans of lower quality.”