subject: Lenders Need Accountability Too [print this page] The housing crisis in the United States is a serious dilemma and one that affects almost everyone, not just home owners. As we have heard in the last few years, many people bought homes that were inflated in value with risky mortgages. Many could only afford the payments for the first few years of the mortgage since they acquired balloon mortgages or adjustable rate mortgages. Since their payments would skyrocket after the first few years, home owners felt that they could just refinance, get a new mortgage at a better rate and lower their payments. Unfortunately, the bottom fell out of the value of these overinflated home values. Refinancing was no longer an option because mortgage lenders couldnt offer the same loans on the properties. Home owners couldnt afford their payments, and they fell into foreclosure and the banks were left with devalued assets. Compounding the problem was the selling of mortgage backed securities on Wall Street. The repeal of the Glass-Steagall act basically allowed for commercial banks to merge with insurance companies and get involved in investing their assets. When the house prices fell, those assets became worthless, and banks were set to fail, along with the insurance companies and investment firms they partnered with. Its understandable that banks want to make money, thats the reason they charge interest, among other things. But the risks that were being taken were not acceptable. Congress paved the way, and big businesses could help themselves to the easy returns on their investments. The outcome was catastrophic, and there will no doubt be new legislation as a result of this crisis. One thought that springs to mind as to why the housing crisis occurred is the volume of closings and accountability of the lenders. In my first job, I worked for a relocation company, and we had a division for first mortgage lending. The main concern to the mortgage lending department was volume. Pushing a potential borrowers back-end ratio to 40% or more was common. The greater the amount loaned, the greater the fees and income to the lending department. They were selling the loan off to a servicing company two days after closing, so they werent concerned with the borrowers ability to make their monthly payment. With a relatively low contribution margin, volume was the only way to be profitable. All they could really do was add a fee to every step in the closing process that would be rolled into the closing costs of the loan. They would also assess a fee when selling the loans off to a servicer. Keep in mind this was 1999, long before the current crisis we are finding ourselves in now. Again, they are trying to make a profit, and increasing the number of closings is the only way they can do it. But what if the mortgage lender was to be held accountable for the borrower not being able to make their mortgage payment? Perhaps they would not be so readily willing to lend money to them in the first place. Many consumers are extremely unaware of how mortgages work and even less aware of how they can affect their daily life. It is the largest thing they will probably purchase in their lifetime, and those consumers needs to educate themselves. But the lender also needs to help the borrower understand what they are doing, and they should not be allowed to sell the mortgage off to another company to service the loan. If they are vested in the success of that purchase the same way the borrower is, consumers would be scrutinized heavily when coming in for a mortgage. And if mortgage goes to foreclosure, there should be a review process done by the federal government as to why. This person met all the criteria to buy the home, but for some reason they now cannot pay for it. Was the borrower spending too much money elsewhere, or were they misled by the lender? Once the investigation is complete, if the lender was found to be negligent, then they will pay fines to the government and the borrower. If the borrower was simply not making their payments on time, then they would pay fines to the lender and the government. Maximizing profit is a good thing, but making sure the lender/borrower relationship is as successful as possible can go a long way in preventing another housing crisis from happening again. This may seem like baby-sitting, with the government reviewing foreclosed mortgages and lenders being forced to keep the loans they initiate. But history has shown that profits can cloud the better judgment of many businesses, and integrity and accountability can often get overlooked. Government regulation and oversight is one way to help curb those tendencies.
