Subprime Mortgage Meltdown - What Really Happened Article

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Subprime Mortgage Meltdown - What Really Happened

The recent meltdown in the Subprime mortgage market had a lot less to do with complex market fluctuations and real estate values and more to do with human values...or lack thereof.

Author: Stefan Lubinski

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There is a lot being written about these days regarding the "fall-out" in the mortgage industry, specifically in the subprime arena.

Quite a bit of commentary as to the effects and affects of the related markets. I think that the answer to the question "What happened?"

is a lot more simple than analysis of various economic indicators. Greed is what happened. That is the one word answer to which everything ultimately boils down.

However, I know that I need to qualify that broad brush stroke with some evidence and specifics.

I am sure that one could argue that there are a number of facets involved in the so-called, collapse of the subprime market. As a brief aside, the subprime market has not

in any way collapsed. However, there are several companies within the subprime arena that have indeed collapsed. At any rate, I think Paretto's Principle applies here as it

so often does in most situations. The fact is that at least 80% of the problem had to do with Greed, Irresponsibility, Lack of Ethics and Integrity and lack of Education and Training.

What happened? Loan officers around the country knowingly put borrowers in harm's way. Loan officers helped scheme and package so called "stated" loans where income verification was

waived allowing loan officers to inflate income on the application to keep the balance of debt to income (or DTI ratio as it is known in the business) within underwriting guidelines.

In plain English? Loan officers were involved in lying about how much money a borrower really made so they could be approved for a home loan. Reminder: A loan, that if the underwriters

actually knew what the income was....would decline the loan! Here is the real problem, by the way. It's not the poor lender, who ultimately was lied to....it is the borrower, who with the help of or

at the advice of...got a loan that greatly exceeded their ability to repay. They were doomed the minute they signed the application.

In many cases the loan officer knew that there was no way that this borrower or this family would ever really "survive" the loan...but hey, the borrower wanted it....so they got it! So integrity and ethics were

sacrificed for the commission from a loan that likely will be the stranglehold that chokes the life out of the family's finances. In some instances the loan officer just didn't know any better. That simply

attests to the lack of training so many in our business get. Can you imagine? It is estimated that as many as 78% of all of the loan officers in the business today, has less than 3 years experience!

This is not so much a Subprime issue as it is a "Stated Loan" issue. Certainly, the fact that these borrowers credit suggested that they already struggled financially (and that...by the way is really what bad

credit means for most people....that at some point, or currently, they struggle to pay all the bills on time...or at all.) certainly adds fuel to the fire. But it is important to distinguish what the problem really

was or is in order to avoid making the same mistake again...but furthermore not to tarnish the subprime borrower or lender for the wrong reasons.

The problem lays much less with FICO score for most of these defaulting loans than it does with generous DTI (debt to income) guidelines or low or "no-doc" income or asset documentation. Some of these loans allowed for the stated DTI to be as high as 60 or 65%. This means that even if the income on the application was legit...and was not inflated (as so many were)....that 65% of the GROSS INCOME was being devoted to the housing payment!! If the income was indeed inflated then many of these loans were extended to people that were likely carrying debt to income ratios more like 70-80%. You do not have to be a Certified Financial Planner to know that you cannot

possibly dedicate three quarters of your GROSS income to just your mortgage.

The fact that seems to be forgotten somewhere along the line is that the reason that there is an application in the first place is not to say "yes" but rather to say "no" when someone does not meet the guidelines that protect BOTH parties.

As experts it is responsibility of the loan officer to advise people what they can and cannot afford...NOT to simply be a conduit to approvals for debt hungry borrowers.

Loan officers that can see the forest through the trees recognize that by helping their clients stay solvent in the long run they keep a client for life. For if they ultimately lose their home, they are of

no use to that loan officer anymore.

The mortgage industry presents one of the most wonderful opportunities in the professional world today: An opportunity to serve, to help and to profit.

For those who forgot about the first two, shall know what it is like to do without the third.

About Author

Born in Montreal Canada, raised in New Jersey and a graduate of Rutgers University, Stefan Lubinski is a nationally known trainer, speaker and consultant in the residential mortgage industry. Prior to becoming a Professional Speaker Stefan's diverse professional background included: Restaurant Management, Executive Recruiting, Corporate Sales & Marketing and Residential Real Estate Finance. His unique combination of humor, "hands-on" industry knowledge, and ability to make complex ideas simple to understand put him in a class of his own! Stefan is a proud member of the National Association of Mortgage Brokers, the Association of Coaching and Consulting Professionals on the Web, and The National Speakers Association. He is also a certified Mortgage Planning Specialist. Stefan lives with his wife Shelley and his son Carter (his four dogs and one horse) in Pleasanton, California. Although, most of the time, you will find him in the training rooms of some of the best companies

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