With the news hitting us almost daily wherever we turn regarding foreclosures, an alarming trend keeps popping out: most of the foreclosures are due to ARM’s adjusting to levels beyond that of which homeowners can afford, loans categorized as Stated Income and No Doc and of course everyone’s scourge - the NegAm Option ARMS.
In April 2005, Alan Greenspan stated the following,
“"Innovation has brought about a multitude of new products, such as sub prime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s."
Wow. Do you think New Century,Fremont, Fieldstone, etc., would agree today that they were “able to quite efficiently judge the risk posed?”
"It was the Federal Reserve-engineered decline in rates that inflated the housing bubble … the most troublesome aspect of the price run-up is that many recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable-rate mortgages. That leaves them fully exposed to rising rates." —Business Week, July 19, 2004, Is A Housing Bubble About To Burst?
Let’s further review some of the most damaging past history:
In August 2004, Greenspan suggested that "the Fed will err on the side of sustainable growth for now, over inflation”. That still likely means a series of quarter point hikes through year-end, with a brief pause for national elections in November."
Feb 16, 2005 – semiannual monetary policy testimony before the Senate Banking Committee:
STILL ACCOMMODATIVE. Indeed, the Fed sage spelled it out accordingly: "The cumulative removal of policy accommodation to date has significantly raised measures of the real federal funds rate, but by most measures, it remains fairly low." In other words, policy still remains accommodative, and the process of normalization will continue until the Fed funds target rate, currently at 2.5%, likely enters a 3% to 5% range often regarded as neutral territory.
YIELD CURVE "CONUNDRUM." From the bond market's perspective, perhaps the testimony's most compelling portion was Greenspan's devotion of nearly a full page of the written report to addressing the "conundrum" of global yield curve flattening -- the shrinking spread between long- and short-term rates. He inferred that all else being equal, the flattening of the yield curve at a time of monetary policy tightening was defying "simple mathematics" in which longer-term rates typically adjust accordingly to changes in short-term rates.
It needs to be noted that a flattening and ultimately inverted yield curve is not normal and would not be sustained as a correction would be in order at some point in time. With this being the case, and the fact that at the time Greenspan was quite adamant that the Fed had a target rate of somewhere approaching 5%, wouldn’t the prudent person realize that future long-term rates had to go higher? If so, someone needs to explain the incredible and almost mind-boggling level of adjustable rate mortgages that closed during this period of time.
Our industry was putting our clients into 2 and 3 year ARMS, most with prepayment penalties and into NegAm Option ARMs. This is incredibly alarming that as licensed professionals our industry did not adopt conservative and prudent lending practices based on the most evident of facts concerning the movement of rates. I have nothing against ARM’s or the NegAm’s. When utilized properly, they are wonderful financial tools especially for those of us who extol the virtues of placing clients in mortgages that have the greatest impact on their overall debt management and wealth accumulation goals. They were NOT designed to put Mary and Joe Homebuyer into them only for the sake of “up selling”.
I am not suggesting that our industry be full of economic experts and soothsayers, but there is a point where we must demand of our professionals a certain minimal knowledge and understanding of the affects that the economy and monetary policy play in regard to loan programs. Our industry allowed too many painters, contractors, cashiers, etc., enter into our line of work during the boom times for the sake of “cashing in”.
However, I think they were only a small percentage of the problem. But nonetheless, it is alarming that our industry allows such an easy access to entry. Our industry is still wrought with individuals who do not understand the most basic economic and monetary policies and how they impact our daily decisions when sitting with a client and offering financing.
Realtors are required to pass two 40 hour classes before they can sit for their real estate exam. Why don’t we demand at least that of ourselves? Shouldn’t we, because of the financial consequences of what we do, be held to an even higher standard? We should not fear this - we should welcome it with open arms so that we can always hold our industry up to any level of oversight and be proud and beyond reproach. We allowed too many uneducated (mortgage-wise) and illiterate (financial-wise) individuals “sell” the false hope of the American. That house became a dream all right, it’s called a nightmare.
It is alarming that State and Federal government officials are now coming out of nowhere to extol the devilish loan products and are grandstanding with bellowed voices to throw out the water, the baby, the tub, brokers, and yield spread as a means of showing their constituency they will make this right and make people pay. A certain case of misguided guile, and if I may say, a lot too late.
It was never the loan products. It was the peddlers who offered those products and did so without the true purpose of the product or without the correct financial knowledge of how the product fit with that particular client or in some cases, just blatant profit-taking. Add to that the flawed underwriting, because obviously the lenders were not “able to efficiently judge the risk posed by individual applicants.” Eliminating the sub prime market and making it almost impossible for many borrowers who can actually handle a mortgage is not the answer. The answer lies in ensuring that the professionals who are allowed to work in our industry have a true understanding of the loan products under their command and adhere to a moral and ethical standard above all other levels.
Our industry has always talked about how the public needs to be educated about the mortgage process. This idea is well-intentioned and much needed. However, if the mortgage professionals themselves are not at the very least equally educated, then what chance does the borrower have?
The rapid changes seen in our industry over such a relatively short period of ten years would suggest that unless the internal education level had kept pace and the requirements of those participating in our industry kept pace, trouble would ensue at some point in time. We are dealing in a financial arena where for the most part the clientele is financially uneducated and so wide-eyed and bushy-tailed at the prospect of owning their first home, or that ultimate “dream home”, and they are at the mercy of someone equally as uneducated. It is here where the politicians and our own industry leaders need to stand up and state emphatically that “we will not take it anymore” and not bend to pressure about making sure anyone who wants to enter into our industry be tested and tested and tested some more. We can not leave anything to chance when the public is looking to us as the expert.
The marketing gurus in our industry have used a term for some time in suggesting how we should present ourselves to the public – as a “Trusted Advisor”. Isn’t it about time for us to stop using the term and actually become the term?
Michael J. Saldutti, CRMS, CMA. Owner and founder of Royal Bay Mortgage, Inc, the Wealth For Life University and Strategic Equity Management Group. Michael can be contacted at 215-352-3250 or at Michael@royalbaymortgage.com