As the mortgage crisis has intensified over the last few years, I have had many people come to me and place “blame” for the whole fiasco squarely on the shoulders of mortgage loan officers. I have always said there is plenty of blame to go around but I thought it best to share some secrets of the mortgage world so people understood what we were up against. Over the next few weeks, I will try and share some of the intricate details of our business. As a mortgage banker all this time, I have worked for companies which fund their own loans and then sell the completed loan to an investor. As such, I have always been on the more conservative side of the business. If we did not have a sellable loan, we did not make the loan- it was that simple. But even if we did have a loan we could sell, we were not always in the clear. An example- For the last ten or so years, FHA has had a system called a “compare ratio.” In short, any loan we sell is graded for the first two years and if the loan goes bad, our grade is affected. While this may seem fair to most, loans can go bad for reasons such as job loss, medical issues and even death of a borrower- factors out of anyone’s control. If a lender, over time, develops an unacceptable score, they lose the ability to originate FHA loans. Fannie Mae and Freddie Mac also track these issues, though not in the same manner, and can cut off funding approval at any time. For those who blame mortgage bankers for our troubles, you are going to have to look farther. In the early part of this decade, hundreds, if not thousands, of mortgage wholesale companies popped up and opened shop. They purchased loans from brokers and other lenders not concerned about long term performance of the loan and that resulted in thousands of horrible loans being placed into the hands of the FHA. As of June 2009, a full 8% of FHA loans are 30 days or more past due. Their reserves stand at 3% of outstanding loans, down by half from just a year ago. If reserves in the FHA program reach 2% or below, the Federal government will have to step in with a bailout for FHA. I think most people will find it interesting that on hand the government has been pushing home ownership and looking for more loans for more people, while at the same time punishing lenders for making loans to reach those goals. In mortgage news this week, economic data released last week was mixed and had little effect on pricing. There has been little drastic change to rates in the last three weeks.
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