Did we not learn our lesson? Has it been so long ago that we have already forgotten the complete and utter collapse of not only our economy but more or less the world’s because of reckless mortgage lending. Don’t be alarmed when I tell you that you had better be prepared for another economic recession within 5 years or less. I am calling it now. There are already signs there are cracks in the armor. Reuters reports (May 5th 2016) “unemployment benefits rose more than expected last week, posting the biggest gain in more than a year, and showed a 35 percent surge in planned layoffs by U.S.-based employers last month.” Our economy has been artificially propped up by the current administration through purchasing bonds and “Quantitative Easing” or a snazzy way of saying the Fed artificially infusing money into the economy.
I spent over 13+ years in the mortgage industry as not only a loan officer, but also the founder and president of my own mortgage firm from 2002-2009. I had 13+ associates and two offices, and in 2007 all of it came crashing down. For one reason and one reason only, extremely irresponsible home mortgage lending, and subsequent manipulation of the mortgage loans packaged and sold on Wall St. (but that’s another story). Watch the movie The Big Short if you want to know more. The real problem was high LTV loans (loan to value) or in other words “non-accountability” loans (as I like to call them) at 100%. When you do not require buyers to put money down you’re basically absolving them of any consequences or responsibility when they can’t or in some instances won’t pay. It doesn’t take a professor of economics and finance to know you have to require people to have “skin in the game”.
Recently another real estate agent peer that I respect highly made comment on social media that a mortgage lender with Ameris bank had taken him to lunch to tell him about a “new 100% product”, and I about fell over. Granted it’s a strict portfolio loan product (the bank isn’t going to sell them), or so they say. He also said there was a second bank he talked with offering a no money down mortgage too. I don’t know what is going on in the heads of these bank presidents but are they losing their mind? This is EXACTLY what got our country into this mess. Not all of it, but I’d guess 95% of it.
I started in real estate in 1998 in the mortgage business when 10% was the minimum if you wanted to buy a house and that seemed aggressive even. Then it continued to easier and easier to buy a home. I remember when 95% came out, then 97%, then 100%. As if that wasn’t bad enough you could also get that high of LTV without showing much in the way of collateral or significant job stability. The writing was on the wall but Americans, bankers, Wall St, agents, investors, traders, loan officers, and myself included were all too drunk on the money to see it.
Here is the kicker which makes NO sense whatsoever, lending has gotten so tight and even to some extent still is that people with only W2 jobs with verifiable income from THEIR employer can get loans. Meanwhile those of us who are self employed struggle to get approved even with perfect credit. This is one way the economy could be helped since much of America’s work force are self employed. Let me explain. If you own your own business and/or get a 1099 which is basically the same thing; good accountants will do their best to show you how you can relieve your tax burden through allowable tax deductions. In an effort to keep you from paying uncle Sam as little as possible. Sounds good right. However, when buying a home you have to show your income, which means your tax returns have to show enough income to prove you can afford the home. Understandable right. Depending on your level of success this is a catch 22 because you do not want to show significant income because you’ll pay through the nose in taxes, but if you do not show the bank enough income underwriters will not sign off on the loan. Regardless of your credit score and if you have paid every debt perfectly and you put money down. There used to be a lending product where self employed borrowers could simply show 24 months of deposits in their bank to prove income, had to have 700+ credit scores, and show liquid assets. That worked well. I digress.
If you’re smart you’ll start saving now because with a new president on the way into office who knows where our economy will go when banks are already being reckless.