I have voluntarily stopped watching news. Seriously.
What can CNN, FOX News, or even your local news tell us that we haven’t seen, or better yet, experienced first hand in this wild real estate market the past year or so?
Absolutely nothing!
If I wanted negativity, I would ask my Uncle Frank how his prostate is holding up.
All we hear is Foreclosure this, Subprime and Predatory Lending that, and geez if I hear the word “Recession” 
one more time, I’m going to stop what I’m doing, catch the first canoe out, and start a fruitful career as a monk in the West Indies.
Who’s to blame? A LOT of different people in different places.
The main point of this article is to show you why we didn’t even NEED Subprime loans to begin with, and how we could have altogether avoided a good chunk of the mess we’re digging ourselves out of now by having more skilled, licensed, and knowledgeable mortgage professionals well versed with an FHA loan.
Read closely. I write “skilled, licensed, and knowledgeable.”
Millions of borrowers signed on the dotted line for a Subprime loan when in fact it wasn’t even necessary to qualify in the first place.
Here’s why.
Subprime loans were designed to qualify buyers who didn’t “traditionally” meet the standard criteria to qualify for a mortgage. Usually the ideal candidate had credit that was dinged, late pays on accounts, not a lot of money in the bank, etc.
The main one, in my opinion, was credit score. Believe it or not, I remember you could get a house if you had a 500 score, and the kicker was, you didn’t even need to PROVE income! How ridiculous is that?
So the best way to understand this is put yourself in the shoes of a Realtor, a Loan Officer, the Broker, the Banker, the Appraiser, the Title Company, Wall Street, Investors, Surveyors, Inspectors, so forth and so on.
As you can see, it’s not just a few people that were profiting from these types of loan. Why would somebody mess up a good thing? Everyone was making money!
So my next question is:
If I told you that I had $100 in one hand, but I can hand you $75 right now, what would you tell me?
“Buddy, I’m right here. Fork it over!”
Now if I told you I had $100 in the other hand, but I would agree to give you $10 a month for the next 10 months, what would you tell me then?
“Um, I’ll take option 1… and now please!”
Think about that one.
Anyone can argue that the supply/demand curve in that type of market would not sustain my 2 questions above. It’s just like poker. “Push all in when you have the best hand.”
But that is what got us in trouble.
This brings me to FHA Financing. (This isn’t NEW by the way)
We, as “mortgage professionals”, could of easily taken hand #2, slow and steady, giving our clients BETTER RATES, getting paid MORE COMMISSION, and not giving an Oak tree a $750,000 Stated Mortgage Loan.
Most took hand #1. Most of those folks are now broke, and working at a retail banking center making 20% of what they WERE making back then. Their bills are still the same.
The Federal Housing Administration (FHA) was created by Congress in 1934 when the housing industry was hurting- kind of like how it is now. The main purpose of it was to fuel the “American Dream” as back then, the US was mostly a nation of renters.
So why is it that all these mortgage brokers and bankers were originating Subprime loans this whole time when FHA was available? Was it greed or ignorance?
The answer is BOTH, but mostly IGNORANCE.
During the Subprime days, any Joe Shmoe could graduate from Jack in the Box University (nothing against Jack- I love him), easily get their loan officer’s license, get BEGGED by a mortgage company to start (if you could leave fog residue on a mirror by breathing on it, you were HIRED!), and begin originating loans with absolutely NO experience or training.
The problem was that most of these mortgage brokers weren’t any smarter either!
All the brokers knew was Subprime.
They were letting these people ADVISE CLIENTS ON THEIR BIGGEST DEBT OF THEIR LIFE!!!! Can you believe that?
They sold easy stated income loans that required less work and never did their homework on educating the clients. It was easy money and it was FAST money.
Now, I think if these guys were not ignorant to begin with, their greed would have actually BENEFITED the real estate industry.
How you ask?
Super simple.
Well during the dark age of Subprime lending, a typical Subprime loan would either be on a 30 year fixed or Adjustable Rate Mortgage (ARM) with interest rates ranging from 7.5% to 12%. Of course the higher the rate, the more commission the lender pays to the loan officer. On average, loan officers would make between 1%-2% in commission, but give rates that sucked! An FHA loan on the other hand can pay a mortgage broker/mortgage banker the same if not double what a Subprime loan would pay, except that the rate would be in the 5%-6.25% back then!
Lower payments, less foreclosures, DOCUMENTED income, etc. It wouldn’t SOLVE the crisis, but would have definitely cushioned the real estate fall.
So why didn’t mortgage brokers and bankers originate FHA loans?
1. Because they didn’t know about FHA or didn’t know how to originate them
2. Because most loan officers were self employed contract employees and FHA only allows for W2 employees, or
3. Because their mortgage broker or banker was not licensed to originate FHA loans.
Today’s FHA mortgages are yesterday’s Subprime mortgage. Or is it today’s FHA mortgages SHOULD have been yesterday’s FHA mortgage? With fewer options left these days, people are running in droves to FHA financing, but be careful. LEARN FROM PAST MISTAKES. The exact same can happen with FHA if not regulated properly.
The lesson learned (what I preach): Knowledge goes a long way in this industry.
For buyers reading this article, please make sure that your mortgage representative knows this business! Make sure they are not just another Joe Shmoe trying to make an extra quick buck without truly earning it.
