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The Mortgage Meltdown explained in plain English
By Capt. Krusty | January 18, 2008
The Mortgage Meltdown explained in plain English
…and how to turn it around!
I found an article the other day on MSN that attempted to place blame for the current mortgage mess. The article tried to blame several individuals from former Chairman of the Fed Alan Greenspan to the head of Countrywide, Angelo Mozilo. I have read articles recently blaming the Mortgage Broker on Main Street USA, others blaming loose underwriting guidelines, and others still placing the blame on the American Consumer. The MSN article went on to explain that the truth of who to blame may never be known because the Credit Crisis is so complicated and so difficult to understand that we may never know exactly who or what caused it.
The crisis isn’t difficult to understand, and it’s not that complicated, it’s actually fairly simple. The entire meltdown was created by greed. Every day, ordinary, run of the mill, Greed.
Remember the Dot Com explosion of the late 90’s and the collapse in 2000? That was greed. We want so badly to believe it is possible to make a quick buck that we will force ourselves to believe anything. In the Dot Com debacle, companies named XYZ.com with a questionable business plan and even a more questionable product or service were suddenly worth a billion dollars! And many of these companies hadn’t yet even built a marketable product. Their stock was trading at astronomical values simply because somebody thought it was worth $1.00 per share so it certainly must be worth $2.00 per share on speculation. Suddenly the stock is at $40.00 per share, based solely on speculation because remember, this company hadn’t earned a dime of revenue yet. Soon everybody jumped in to a quickly growing stock and because of simple supply and demand, it shot to $200.00 per share.
The current mortgage problem was nothing more than greed. Over a period of four or five years Wall Street experienced increasingly fewer losses from risky loans. The big investment banks became bolder, and why not. Property values were increasing, the economy was good, and if they repossessed a property they could easily sell it for enough to cover their loan. As the good times continued Wall Street figured out that the bolder the guidelines the higher the interest rate they could demand so guidelines got even riskier. A borrower with poor credit, somebody who clearly had demonstrated that paying their bills (including their housing payment) on time had never been important or possible, could suddenly purchase a home without proving their income or that they had even a penny in the bank to cover contingencies. With good credit the sky was the limit. Borrowers could buy multiple rental properties along with a home for themselves they couldn’t afford if there was a single hiccup in the future. And nobody, the borrower, the loan officer, or the investor cared a bit because the housing values continued to rise.
As guidelines for mortgages eased, the demand for housing increased. More and more people started to believe they could become wealthy through real estate. The building industry took on a life of its own. In some markets, Las Vegas and Phoenix for instance, a huge percentage (25-35%) of the work force was involved in the building industry. The building of homes was creating its own economy.
Then came late 2006, the economy slowed down and mortgage guidelines got a bit more stringent. Some of the smart investors decided they were happy with their profits and sold their rental homes. As more and more homes went on the market, more builders found themselves suddenly with inventory and in a very short period of time. Prices began to fall and homeowners who had purchased their homes with 100% financing suddenly found themselves upside down. For the first time in years sellers couldn’t sell their home for a profit and often for what they owed. Foreclosures began to rise.
With a sudden spike in foreclosures in late 2006, investment bankers started to lose confidence in their mortgage cash cow. When Own-It ran into problems in November of 2006, Merrill Lynch cut their losses and pulled the rug out from under them. Others began to follow suit and the industry rushed to tighten underwriting guidelines for new loans. As foreclosures rose even more in early 2007, Wall Street backed even further away from their golden child.
Initially this was called a liquidity crisis. Mortgage Bankers needed more money to fund loans and handle buybacks but the stream of cash had dried up. Business was down and expenses were still up so layoffs were inevitable.
The mainstream media, always happy to find bad news to report jumped all over the crisis and the public perception worsened which served to make the mortgage and real estate market even tighter.
So here we find ourselves in the winter of 2008. In terms of business it is a cold and bitter winter for many. But have you noticed that some Loan Officers in your market are busy? Have you noticed that some Mortgage shops are hiring while others are going out of business?
Motion creates Emotion. It’s time to get off our tails and get moving. That funny looking silent box on your desk with the handset and the curly cord is called a phone. It is a two way device that, when not ringing, can also be used to dial your customers. I guarantee you that if you pick up the phone and start calling, you will find loans. Call everybody you know, those who you did loans for in the past two years, call people you know that you didn’t do loans for. Say this, “I am calling everybody I know. In light of the mortgage problems in our country, I am calling to make sure the loan you have on your home now is the right loan for your current situation”. Find out what type of loan they have, how many loans they have against their home. Can you put them in a better situation? If not, remind them that you live from referrals. Do they know anybody looking to buy or sell their home?
Motion creates Emotion. If you get started, you will succeed, and not just once. Once you began to make a few calls and do a little marketing, things will start to happen. Soon your entire outlook will change as things start moving in your pipeline again. The trick is to get started. Don’t even wait to finish this article, make a phone call right now. When was the last time you engaged your past clients and sphere of influence?
Here’s the good news. In the late 1990’s and even the early 2000’s, subprime was nearly non-existent. The only 100% loan available was VA, if you weren’t a Veteran the best deal going was FHA’s 97% loan. And there was no such thing as Stated Income or Stated Asset loans. It was full doc or nothing.
I don’t want to sound like the old guy who walked to school in the snow, uphill both ways, but we need to remember that a lot of us made great money in the 1990’s and before. This market will improve but until it does let’s work smarter, not harder. Make some calls, your past clients will be happy to hear from you. Set up a database marketing system, there are several good ones available. Get your nose out of the media and get back to work.
Prosperity is just around the corner!
Dan Sullivan is the VP of Sales and a Managing Director for Velma.com, a Virtual Marketing Assistant for Mortgage Loan Officers. He entered the industry in 1987 and has been a successful originator, a wholesale Account Executive for Countrywide, and previously led a marketing company. Dan has served on the Board of Directors for the Idaho Mortgage Lending Association and is a current board member of the Idaho Mortgage Brokers Association. You can contact Dan at 208-854-7905 or email him at dsullivan@velma.com
Topics: Mortgage |
6 Responses to “The Mortgage Meltdown explained in plain English”
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February 8th, 2008 at 3:34 pm
I couldn’t understand some parts of this article The Mortgage Meltdown explained in plain English, but I guess I just need to check some more resources regarding this, because it sounds interesting.
February 10th, 2008 at 7:13 pm
The Mortgage Meltdown explained in plain English is a quite interesting post but quite difficult to understand for me -
March 23rd, 2008 at 12:38 am
Fha Lending Guidelines…
Thanks for creating this blog. I thought it was a very interesting read. It is so interesting reading other peoples personal take on a subject….
March 24th, 2008 at 5:26 am
Repossessed Property Sales…
I don’t mean to be too in your face, but I’m not sure I agree with this. Anyhow, thanks for sharing and I think I’ll come to this blog more often….
March 24th, 2008 at 3:13 pm
countrywide mortgage wholesale…
I found your post comments while searching Google. Very relevant especially as this is not an issue which a lot of peaople are conversant with….
June 19th, 2009 at 4:55 am
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