The mortgage meltdown explained in plain English and how to turn it around!Dan Sullivancredit crisis, mortgage problem, mortgage guidelines, the building industry
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 Federal Reserve,
Alan Greenspan, to the head of Countrywide, Angelo Mozilo. I have
read articles recently blaming the Mortgage Broker on Main Street
USA, blaming loose underwriting guidelines or placing the blame on
the American consumer. The MSN article went on to explain that the
truth of whom 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--everyday, ordinary, run-of-the-mill greed.
Do you remember the dot com explosion of the late 1990s 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 with
questionable business plans and even more questionable products or
services were suddenly worth a billion dollars! And, many of these
companies hadn't yet even built a marketable product. Their stocks
were trading at astronomical values simply because somebody thought
they were worth $1 per share, so they certainly must have been
worth $2 per share on speculation. Suddenly, the stocks were at $40
per share based solely on speculation, because, remember, those
companies hadn't yet earned a dime of revenue. Soon, everybody
jumped into quickly growing stocks, and because of simple supply
and demand, they shot to $200 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
were, the higher the interest rates they could demand were, so
guidelines got even riskier. A borrower with poor credit--somebody
who clearly had demonstrated that paying his bills (including his
housing payment) on time had never been important or
possible--could suddenly purchase a home without proving his income
or that he 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 homes 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, Nev. and Phoenix, for
instance), a huge percentage (25-35 percent) of the workforce 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 in a very short period of
time. Prices began to fall, and homeowners who had purchased their
homes with 100-percent financing suddenly found themselves upside
down. For the first time in years, sellers couldn't sell their
homes for a profit or, often, what they owed. Foreclosures began to
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 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
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 markets even
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, including those whom you
did loans for in the past two years and people you know that you
didnt 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 and 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 his home?
Motion creates emotion. If you get started, you will succeed, and
not just once. Once you begin 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 1990s and even the early 2000s,
sub-prime was nearly non-existent. The only 100-percent loan
available was from the U.S. Department
of Veterans Affairs. If you weren't a veteran, the best deal
going was the Federal Housing
Administration's 97-percent loan. And, there was no such thing
as stated-income or stated-asset loans. It was full-doc or
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 1990s and before. This market will improve,
but until it does, let's work smarter and 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 vice president of sales and a managing