There's been a price to pay for toxic mortgages. You're paying in the form of lower home values, fewer jobs, falling stock prices, massive deficits and a government that is printing money at an unprecedented rate -- a rate that could result in substantial levels of inflation if we're not careful.
The situation is even more severe if you want to finance or refinance real estate. Here again you'll pay, even if you have terrific credit and a mound of bullion in the basement. Why is it that good people with good credit and cash in their pocket are having so much trouble getting home loans? There are five key reasons which explain why the credit crunch is crunching even the best of us.
1. It's Not You
I recently got a letter from a loan officer who was fairly steamed. She had a borrower with a credit score well above 800 and a down payment equal to more than half the purchase price of a home he's trying to buy. Despite such facts, the lender still wanted the borrower to fully document his loan application.
The loan officer argues that her client was being treated unfairly, that he represents no risk to any lender and that he should be able to complete a short and sweet stated-income loan application. Truth is, on a one-to-one basis, she's right. The problem is that the world is not operating on a one-to-one basis. Instead, there's a vast system in place to originate loans and to then sell them. The money made from selling mortgages is used by lenders to create new loans with lenders getting fees, charges and interest along the way.
The people who buy loans, investors, are none too pleased with the U.S. mortgage system right now and who can blame them? The result is that the only way investors are going to buy U.S. mortgages and mortgage-backed securities is if loan applications are fully documented and verified. All loan applications, even from terrific borrowers with lots of equity and great credit.
2. Where's My Security?
As much as lenders want borrowers with solid credit and documented income and employment, they also want something else: Strong security for their loans. The logic is that if the borrower can't pay, the lender gets the property to settle the debt so the property has to be worth a certain amount.
This system worked well when home values were rising, but now many homes are worth less than the debt they secure. If you bought with little or nothing down or if you have an "affordability" loan that allows for negative amortization (meaning the principal amount can grow because those low monthly payments are not even covering interest costs), when it comes time to refinance you're asking lenders to give you a loan that is worth more than the house. No prudent lender would do that and with good reason: If the property is foreclosed, it will not generate enough revenue to pay off the loan.
3. The Flight to Credit Quality
The Federal Reserve reports that banks have been tightening their credit standards during the past quarter. This, of course, is in addition to previous efforts to raise credit standards. The result is that a large number of people who would like to finance and refinance can't take advantage of today's low mortgage rates. Like Moses at Mount Nebo, borrowers can see the Promised Land of less interest and better loans but they'll never get there because of today's credit extremism.
4. Where the Money Went
Despite hundreds of billions of dollars given to banks in late 2008 and early 2009, they're plainly not lending as much as they could. Instead, much of the money has gone to build up capital, acquire other companies and make sure that no executive misses a fat paycheck for the leadership efforts that created the mortgage meltdown in the first place.
Money from the U.S. government that was plainly intended to restore the lending process has instead been diverted into lender vaults and executive accounts. Having been spent for other purposes, that money is simply unavailable to mortgage borrowers, regardless of their credit standing or the value of their homes.
5. A Contract Is a Contract
During the past five years millions of so-called "affordability" mortgage products have been originated. Such loans are routinely distinguished by low monthly payments up front as well as growing loan balances. The result is that once "start" periods end after two, three or five years, the borrower owes more than the original loan balance and faces vastly larger monthly payments.
A savvy borrower, of course, would refinance the loan before higher monthly costs kick in, but now such changes are impossible for most borrowers. Why? Three reasons: First, while the mortgage balance has been growing in many cases the underlying value of the home has been declining. Second, higher monthly costs have resulted in late payments and no payments, meaning substantial credit issues have arisen. Third, toxic loans routinely include substantial prepayment penalties.
