Mortgage Crisis Anecdotes

As I wrote earlier, the Rochester area did not experience a housing bubble.  Yesterday, I had a conversation with a former mortgage broker turned loan officer, and it's pretty clear that this area didn't escape the sub-prime financing boom, and that our market will be feeling the impact of the sub-prime bust.   Here's some of what this person experienced:

  • The bulk of recent mortgage business handled by this broker was sub-prime, meaning that the house was financed 100% by the bank.  These loans were more lucrative for the banks because of the extra fees and interest the bank could charge for no-collateral mortgages.
  • Many loans were "stated income" loans, which means the borrower stated their current income and did not provide any income verification.  Industry slang for these loans is "liars loans".
  • Some home equity line of credit companies employed appraisers who routinely inflated home values.  In practice, this means that homeowners are unable to refinance their homes to escape the high interest of their second mortgage, because the true appraised value of their home is less than what they owe on their first and second mortgages.
  • There have been a good number of "short sales", where the bank allows the borrower to settle their mortgage for the price of their house, even if that house price is less than the mortgage balance. 
With 20-20 hindsight, banks are clamping down, hard.  Liars loans are a thing of the past, income must be verified, and mortgage companies have completely disconnected appraisers from brokers to reduce fraud.

The end result is that loans are harder to get, and those with any credit or income issues are immediately shunted to the FHA.  In Rochester, this means fewer buyers, and also that marginal property (poorly maintained, bad location) is selling for far less than it did a short time ago.  In addition, the market is further depressed by short sales, because the bank and borrower are motivated to sell the house quickly and for less than previous market values.

Though this conversation is a sample of one, it's certainly consistent with what I've read is happening with financing in bubble areas.  Mortgage companies were offering more credit that their customers could handle.  As I noted earlier, government can't really fix that unless they continue the questionable lending practices that got us into this mess in the first place.  We're going to have to ride this one out.