The Mortgage Mess

As someone who is celebrating (yeah right) his 20th anniversary in the mortgage business this year I would like to give a briefer on what I think has caused this problem. Like most problems we face in the good old USA when government get's involved in business with all of good intentions things go to the extremes. I certainly do not blame all of this on government but they are the impetus that started us down this slippery slope.

Back in the 1990's the government set goals for the banking system on investing in minority communities. With zero predjudice but just experience speaking these communities just do not educate them selves on strong credit and good financial management. This set the financial system in a quandry as they are highly regulated institutions they needed to find a way to meet the goals set for them.

With this was born the subprime industry. With full disclosure there has been for a number of years this industry for the credit challenged borrower but with substantial down payments. Unfortunately the targeted borrower did not have the down payment so we started with removing down payments little by little until we ended up with no down payment.

Then the next issue arose how do we qualify these borrowers at 100% loans. There was a simple answer we don't. We called these limited doc or no doc loans. Well as you can imagine subprime started taking over the world.

What were Fannie and Freddie to do? It was easy start competing. They started offering A- loans which cost a little more but they were taking borrowers in their portfolio that did not meet the guidelines of subprime. Many of you have heard the term GSE and what this means is that Fannie and Freddie are Government Sponsored Enterprises. This means they are private but at the whims of politicians demands.

For example, a number of years ago I was at a Fannie Mae symposium and the unmentioned individual from Fannie told the crowd of the very poor performance of manufactured homes. Regardless of that she told us that congress has told them to purchase more of these for their portfolio. Readers, manufactured homes are cars with the wheels removed. What happens to your car value after you purchase it - the value goes down. No difference here!

So as you can see the downward spiral was evident. So what are we to do now. Unfortunately we are in a quandry. The government must step in to save the sector of the economy that produces tw0-thirds of the economic growth of this country. The big question after this is will the government do the right thing. After we get through this mess and stabilization sets in we should privitize Fannie and Freddie and then break them up much like the AT&T breakup of the 1980's.

What we do not need to do is what many of the politicians of both parties are clamoring for is more regulation. There so called regulation is what started this in the beginning.