Mortgage Products Inappropriate for Some People

I read an interesting quote today; “Some people got put in mortgages they never should have been in,” said Donald Marron, who works for the White House Council of Economic Advisers. That is an understated and belated acknowledgement if ever I saw one. It is also ambiguous and says nothing. The problems are not explained or clarified.

In the course of following the subprime story, I wonder just who “some people” are. Let me see if you recognize any from the following list:

Some people were speculators and investors. They relied on the trend of houses maintaining the upward spiral of prices in order to flip their property and sell at a profit.

Some people were directed to and granted the so called “liar loans”. Low or no documentation was required. Being able to streamline the mortgage application process also increased their fees and raised point spread premiums for brokers. Underwriters were rubberstamping the applications at an alarming rate.

Some people qualified for lower interest rates than the mortgages they received. If they were Black or Hispanic, their interest rate would be higher than their FICO justified. Broker fees and origination fees would be higher.

Some people took dual mortgages or piggy-backed with first and second mortgages to save mortgage insurance premiums.

Some people were lent the first mortgage, the down payment (second) mortgage, and received equity lines of credit, when there was no equity.

Some people were buying homes in inner city.

Some people were upwardly mobile professionals buying MacMansions in the suburbs.

Some people made choices based on false assurances that after proving themselves for a year or two, they could refinance to a lower rate.

Some people had prepayment penalties that made refinance to a mortgage with better terms unrealistically expensive.

Some people were repeatedly refinancing and equity stripping.

Some people were surprised by interest rate resets.

Some people were in over their heads before the first payment came due.

The second part of Donald Marron’s statement “There’s an opportunity for us in Washington to make some changes to policy so that problems like this no longer occur.”

I sincerely believe that Washington overlooked the existing regulations and reports to let the subprime blow up in their collective faces. The brokers, lenders, mortgage products, underwriters, appraisers, and borrowers were overlooked. No scrutiny was given and no enforcement of regulations or consumer protection took place. Local governments (cities and counties) were seeing the signs and reporting to their states’ attorney generals. Not until the carousel ground to a halt and investors and insurers were hit the hardest did Washington get involved.

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