One of the proximate causes of the 2008 mortgage meltdown and resulting near collapse of the financial industry can be related to the Wall Street Wizards and their need to create additional mortgage products for sale in the secondary marketplace.
Essentially there came a time when the pool of the well-qualified borrowers was satisfied and new originations stagnated. The mortgage industry, in conjunction with key politicians, decided the answer was to loosen the underwriting criteria used for new mortgage applications and refinancing opportunities.
Thus the alt-a marketplace was encouraged until that market stagnated.
Enter the subprime era of the so-called NINJA-loan (No Income, No Job, and no Assets) were required for underwriting. Including zero-down payment schemes or deferrals of fully-amortized “teaser” loans.
The sales pitch was simple, in a rising real estate market, nothing could go wrong and that an increase in home equity could be used to pay off credit cards, take a vacation, or simply let the rise in equity pay-off your loan when you were ready to sell and move on to another property.
And the pattern seems to be repeating itself…
One look at previous blog posts and you can see a number of financial firms downsizing and laying off employees. Part of this is due to increasing automation and self-serving web sites, part due to increasing interest rates, and part due to rising property values and the lack of refinancing activity.
So it should come as no surprise that the industry has responded again with relaxed underwriting criteria, low credit score, little or no down payments, interest rates a little below market, but with the added twist of “borrower education.” Especially community-based organizations who offer the lead generation and educational component while securing funds from tie-ups with major financial institutions.
Consider the programs being offered by NACA, the nonprofit, Boston-based brokerage Neighborhood Assistance Corporation of America, whose educational programs may be back-ended with low-credit score loans, relaxed documentation, and zero-down subprime mortgages that might be just below the advertised (and inflated) market rate.
And ask yourself, how am I prepared if the unthinkable happens again and there is a significant downturn in the economy? Are you depending on the pundits to explain why this time it is different?
Are you wondering, Am I Next?