Mortgage for Kalm

[89Hen]

Am doing my annual training and thought Kalm would appreciate this page from the online class...

Whether it was the government, the private sector, or both that fueled subprime lending, the market exploded. As the subprime market grew, so did the abuses that became associated with it. Many subprime borrowers were first-time homebuyers with little experience or knowledge about mortgage lending. Others were immigrants who did not have adequate command of the English language to understand the lending documents that they signed.

Regretfully, unscrupulous loan originators took advantage of these vulnerable groups of borrowers by offering them loans with abusive or predatory lending terms. It was lending terms such as balloon payments, prepayment penalties, negative amortization, and low introductory rates with resets early in the loan term that resulted in sharp increases in monthly payments and inevitable defaults on many subprime loans.

The expanding lending market led to an increase in the numbers of professionals who worked as loan originators. Credit was easy to obtain, and wholesale lenders secured credit lines and worked with a new group of mortgage professionals known as mortgage brokers to match borrowers with loans. Under less regulatory scrutiny than traditional lending institutions, brokers and the originators who worked with them were able to originate loans without complying with rigid loan suitability standards.

Nontraditional originators had less motivation than traditional originators, such as bank-employed loan officers, for ensuring that borrowers had suitable loans. When loans are held in a bank’s portfolio, loan performance is easy to track, and the success of a loan officer’s career can depend on demonstrated success in matching borrowers with loans that they can repay on time. With most loans sold shortly after they are funded, it can be difficult, if not impossible, to identify the loan originator. Even some lenders were lax about underwriting during the mortgage lending boom. Knowing that they would sell most of the loans that they funded, they understood that they could transfer any risk of default to investors that purchased their mortgages.

Loan performance became a virtually irrelevant concern, even in the secondary market, where investment bankers were creating extremely speculative investment products out of mortgage debt. Securitization of mortgages was the first level of investment products built on mortgage debt, with more exotic products known as collateralized debt obligations (CDOs) and CDOs-squared built from repackaged pools of mortgages.

The blame for the current lending crisis does not belong to any one sector of the lending or investing community, and consumers should also accept some degree of responsibility. “Creative financing” was a term that represented the overly optimistic attitudes that prevailed among borrowers and lenders. Countless consumers, including borrowers with sterling credit ratings, over-extended themselves buying homes that were beyond their means and taking out home equity lines of credit to finance pursuits other than homeownership. Others represented that they would occupy homes that they were actually purchasing as an investment property. When the market crashed, some of the first loans to fail were often those held by consumers who had never even visited their investment properties.

Lax lending standards facilitated these transactions. The concept of creative financing often meant that lenders were willing to offer nontraditional mortgages, such as interest only loans and payment option loans to a broad range of borrowers. In the recent past, these types of products were only available to very well-qualified borrowers who were seeking financing for a short term investment. For many of the consumers who used this type of financing to purchase a home or an investment property, the ultimate results of creative borrowing have been devastating.

Settlement service providers, particularly appraisers, were also subject to pressure to use creative methods to finalize lending transactions. With the valuation of property as the principal factor that would determine the outcome of a loan application, appraisers often found homebuyers, sellers, real estate agents, and loan originators encouraging them to hit a certain number.

[kalm]

Thanks!