The recent rash of foreclosures has brought several theories to light about why borrowers cannot afford their mortgages. I am going to submit mine. New home sales have been soaring during the last few years. They have been fueled by low rates and plenty of new products that enable the borrower to purchase a home for little or no money. We all know these products and have used them. But when they are abused, the outcome is completely the opposite of what we wanted it to be.
The lenders designed products to allow more prospective homebuyers to buy homes. The new construction arena of the housing sector fully embraced these. Millions of new homes were sold and millions of loans were made to new homebuyers. The problem is that many homebuyers bought a home with a loan that the builder, along with its mortgage company, provided. You have seen the ads: "Buy this home and get $25,000 in upgrades and closings costs." Well, if you don't use their lender, the cost of the upgrades is higher and the house still must apprise at that time. It always does. But when the borrower, who was put into a 2/28 or a pay option adjustable-rate mortgage, wants to refinance because his rate went up, now the house does not apprise. No comparables to be found. In fact, the house is less than what he bought it for or owes on it. Now the crunch time comes for millions of families who are trying to make it. What does the builder do? He keeps on building. He keeps tearing down trees, putting up homes, ruining the countryside, so he can get his 20 percent profit from their mortgage operation. With neighborhoods in ruin, values are bleeding downward into untouched neighborhoods. What do the local town councils do? They approve more subdivisions "Hey, why not? Now we have five more neighborhoods to go under." Why? The cities need the taxes.
It is not a mortgage broker issue, it is an everyone issue. Borrowers need to take some responsibility, but so do the builders, town councils, appraisers and lenders. Building more homes than we have buyers does nothing for this economy. The cost of new homes is driving down the cost of existing homes. The inflated prices on the homes causes existing homes to be valued less; plus, when the new home is foreclosed, the house is sold and usually at a lower price, bringing unacceptable lower comparables into play.
Greed is a horrible business partner. Forcing the borrower into a home he cannot afford or not disclosing what will happen to his loans in the future is a bad way to do business. But statistics are showing that buyers are doing just that. Plus, the loans are presented to borrowers after they have handed over huge earnest money checks. The contracts read that they need to be approved for a loan no specifics, just a loan. Then the screws tighten. The borrower is told if he doesn't take this loan, he loses his earnest money. This is the practice that is causing the most heartburn in our country. It needs to be stopped. The National Association of Mortgage Brokers is not against affiliated business arrangements (ABAs) that are not done properly, but when consumers are losing their homes and builders are thumbing their noses at them and going against the rules, we have a problem. Tying incentives to the use of a particular use of a vendor is against the Real Estate Settlement Procedures Act (RESPA), yet it is occurring. Non-disclosure is a Truth in Lending issue. Borrowers need to know what they are signing. Telling them if there is a prepayment penalty or an adjustable-rate feature comes second nature to most loan officers, but to unlicensed loan officers who are not trained in anything but making the sale and making the borrower fit the house, you are asking for trouble.
We need this issue addressed very soon. Regulators and legislators keep focusing on us, but the biggest problem right now is the sub-prime borrower who was stuck in these new homes with inflated values and then can't refinance due to the house not appraising for what they, at least, bought them for.
The American dream of homeownership is a wonderful thing. We need to stop the predatory practices being applied by these ABAs. Steering is not illegal, but it is unethical. Tying is illegal and needs to be enforced. Refusal to sell is illegal and needs to be enforced. Intimidation and bullying is just bad business. Buying a home should be a pleasant event, not the rollercoaster ride from hell. Remember, if it is too good to be true ...