Letter to the editor: Sub-prime truthsJoe AdamaitisSub-prime mortgages,fraud
Watching this unfold in your own industry is something akin to
watching a high-rise building being built with phony cinder blocks
for the foundation. After nearly 27 years of this, it was obvious,
not just to me, that this was a train wreck waiting to happen
similar to the "Big Dig," if you know what I mean.
The noise being made on a daily basis is certainly deserved;
however, let's keep in mind that before the work of a small portion
of mortgage wannabes who took advantage and used them to line their
pockets, sub-prime loans did have a place in the market. The
problems have all been fully dissected by the press and, of course,
those looking to grandstand in the political arena. However, I
would suggest that all these naysayers stop sidestepping some of
the more obvious problems associated with this type of lending and
with all lending.
If we look carefully at the problems linked to this meltdown, we
might begin at the root of all fiascos greed! Sure, the guidelines
were loose, but so are the laws that monitor mortgage marketing and
advertising to the consumer. Consumers are fed bait and switch ads
on a daily basis. Over and over, the TV and radio blare, "Rates as
low as XYZ." Doesn't anyone ask why the same rates every day?
Hello? Doesn't anyone know that rates change hourly? Do we really
expect the consumer to understand something as complex as how the
mortgage market works? Does the saying "When it sounds too good to
be true, it usually is" apply anywhere here? Of course it does, and
that's the problem.
In addition, can someone please tell me why it is so hard to
understand that if there are no closing costs to obtain a mortgage,
doesn't a bell go off that says, "Who pays them if I don't?" Are
these mortgage advertisers simply feeling good today, and
therefore, you get a free loan? Common sense should kick in here
somewhere, right? Obviously, my point is that marketing mortgage
products to today's homebuyers or those looking to refinance should
be scrutinized just as hard as anything else.
Next, let's examine the real dregs in our industry those who
train mortgage telemarketers to think that less than five points
does not cut it. Not to mention that it pushes down the
telemarketer's income! We all know the big name companies that have
gone out of business or are facing major lawsuits. Gouging 101 run
amok! Yet it keeps on happening.
As for the sub-prime guidelines and the damage they caused,
perhaps the politicians should forget about jumping onto the
regulation bandwagon and focus on ways to help loan officers and
brokers receive access to Federal Housing Administration (FHA)
loans. FHA, as we all know, is the loan program that helped people
with poor credit and lack of down payment before the sub-prime
market exploded. Politicians should review this program as it has
not done the job for borrowers hence why they turned to sub-prime
If FHA guidelines were eased to help the borrowers and to help
experienced people present the programs, perhaps this could have
been avoided. The guidelines need to shake out the
non-professionals who fed on this frenzy like craved wolves, and
create guidelines to allow the experienced loan representatives to
sell the product. High-cost audits and fees required to originate
FHA loans pushed many small brokers and lenders away from the
program and into selling sub-prime.
Further, the actual sub-prime guidelines can still work, given
some restructuring. While the statistics seem to point to a huge
disaster, many of these people will continue to pay on time. We
must come up with new guidelines that allow them to refinance and
remain homeowners. The real mistakes with sub-prime guidelines can
be attributed to incorporating the no-income documentation option.
A few changes can keep these programs safe and continue to allow
these borrowers an opportunity.
One other issue that can take blame is today's credit scoring
models. I will say that the credit industry has its own fair share
of blame, as the scoring formulas used to rate a borrower are
farther from accurate than one would like to believe. The
inaccuracy pushed many borrowers from possible conventional
financing to sub-prime. Trying to correct a credit score is
impossible and has now blossomed into an entire new business if
you're looking for the next sub-prime type fiasco, watch the number
of credit repair companies that pop up.
In closing, I can admit that we in the industry knew who the bad
guys were but were helpless, as we could not stop the huge machines
they used to outpace everyone with advertising, hiring and
training. I can also say that "it takes two to tango," and that not
all deals were the result of overzealous loan officers. In fact, I
can recall a number of borrowers who I personally advised not to
buy the home they were looking at. They could not afford it. The
result: they went down the street to a competitor.
In closing, if we're to change this landscape, we need stricter
guidelines for the marketing of loan products to consumers. In
addition, strict guidelines on who can offer these products are
necessary. We must continue to create strict guidelines for those
who want into the business for the fast buck, so as to stop the
next sub-prime fiasco.
Let's not forget that as long as the big lenders want to use
brokers and avoid the costs of brick and mortar, brokers will
obtain the majority of originations. Mortgage lenders and brokers
are the backbone of the industry and these two parties must
continue their efforts to police our industry. Sub-prime will take
a serious hit, and it should be a lesson learned. However, there
are thousands of people out there waiting to hear how they can get
out from under the mess they're in. Let's not forget them. This is
just my humble opinion.
Joe Adamaitis is president of Portsmouth, N.H.-based Direct
Mortgage. He may be reached at (603) 427-6083 or e-mail [email protected]