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Ifirstbegansellingmortgagesin1993.AtthattimetheriskiestmortgageavailablewasaloantopersonsinaChapter13bankruptcy,andthisformoffinancingtookplaceunderstandardFHAguidelines.InsomewaysIcouldhonestlysaythatIhaveneverseen,onbalance,ariskierlendingscenariothanmakingmortgagestopersonsinCh.13,andthatisoneloanthatnosubprimelenderIeversawwaswillingtomake.Ithrowthisinonlyforperspective.
In1998LehmanBrothersstartedtooffersomeloanproductsthattheindustryconsideredtobeunprecedented.Atthattimeallofthenewproductsrequireddownpayment/equityandallwereavailableonlytopersonswithwhatisconsideredtobe“A”credit.Wherethedeparturecamefromisthatdownpaymentrequirementswereloosenedatthesametimethatoptionsweremadeavailabletoqualifywithouthavingtodocumentincomeorassets.Therewasevenoneflavorthatpermittedaloanapplicationthatmadenomentionofemploymentor,reallyanythingbeyondidentifyinginformation,andtheratesforthisentiregroupofnicheloanswerenotmuchhigherthanforconventionalloans.
TheFHA,conventional,andLehmanBrothersmortgagesweremostly30yearfixed,andanythingelsewasanexception.Thereweresubprimeloansavailableasfarbackas1993,andtheyweretypicallydesignedtohaveapaymentsetfortwoorthreeyearsbeforechanging.Theseloansalsohadprepaymentpenaltiesimposedforbeingrepaidquickly,andthesepenaltieswereveryrareotherwise.Rateswerehigh,whichmadethemnotapopularoption,butthemainthingrestrictingusewasdownpayment/equityrequirementsofatleast20%.Howeverafewpeoplehadbothbadcreditandequitysothesubprimesegmenttechnicallydidexist.
FHAalwayshadextremelylowdownpaymentrequirements,andwaystobasicallygetaroundeventhose.InadditionFHAtookmoreofasecondchanceapproachtopeople,andworkedwithcreditpicturesthatweresubstantiallylowerthanstandardAcreditgrade.Inthatsense,FHAshowedtheway.Ontheotherhand,FHAhasalwaysbeenconservativeinareasofhousingconditionandvaluation,incomedocumentation,andemploymenttrackrecord.
The“AltA”lendingarea(Lehmanandfollowers),meanwhilewasenjoyingsuccessworkingwithborrowerswhoweresubstantiallyunderservedandstartedliberalizingguidelinesinseveralrespects.Creditratingwasloweredalittlebit(“Aminus”),andrateswereincreasedtopayfortheadditionalrisk.Likewisewithdownpaymentrequirements,atleasttosomeextentbecauseFHAhadbrokensomegroundintheareaofnocashoutofpocketfromtheborrower.Themajordeparture,though,wasforfolksbuyingrentalproperties,but,again,thisareawasliberalizedonlyforborrowersshowingexcellentcredithistory.
Inthissametimeperiod(1998to2002)softwarewasintroducedbybothFannieMaeandFreddieMac(quasigovernmentalentitiesthatactasintermediariesbetweenmortgagecompaniesandWallStreet)that“underwrites”loanfiles.Theyalsostartedtoutilizedatabasesofrealestateconditionandvalueinformation.Withinthispackageofinnovationsloanswereapprovedwithoutappraisalsbeingrequired,andborrowersreceivedlowornodownpaymentloansatstandardrateswithouthavingtoprovideemploymentorassetdocumentation.Softwarewasdesignedtomakethesethingshappenlargelybecausetheareaof“creditscoring”finallybecameaccepted.Significantly,thisbodyofloansdoesnotseemtohaveissueswithrepayment.
Attheheightof“subprimemania”,then,peoplewithbadcreditweregivenloanswithouthavingtoproveincome(andsometimesemployment),withouthavingtopaydownpaymentsorclosingcosts,and,insomecases,withoutevenhavingapropertylookedatbyanappraiser,andevenatastonishinglylowcreditscores.These,however,werebadloans,meaninghigherrates(thoughstillscaledtocreditgrade),paymentincreaseattwoorthreeyears,andsubstantialpenaltiesforrepayingtoosoon.Roomwasevenfoundwithinthisgeneralframeworkforpeoplebuying“investment”property.Andthewaythatthemortgageindustrygottothispointwasbygradualevolution,oneguidelinemodificationatatime.
Fromtheperspectiveoftheloanofficer,thesedealswerereallytwofers.Sure,theratesweregoingtoskyrocketbutnooneinvolvedbelievethatanyonewouldeverhavetofacemakingpaymentsatthoserates.Theborrowerswouldcleantheircredit,seasontheiremployment,haveatrackrecordonthatnewlyopenedcompany,and/oranyofanumberofotherthingsthatwouldallowthemtoqualifyforthegoldstandardofmortgages,aconventionalloan.Or,barringthat(becauseborrowersarehuman,afterall)thefolkswouldcomebackinintwoyearsandwe’dresetthemwithanewsubprime,therebykeepingpaymentsdowninthecomfortzone,andeveryonewouldbehappyandprosperous.
Asthenumbersofunqualifiedborrowersstartedtomount,sodidthedefaults.Defaultsflowtoforeclosuresandforeclosurestolosses,andlossestoacutoffoffreshmoneytosubprimelenders,andthemoneycutofftomoreforeclosuresbecausethelendingcycleendsandthepiperfinallymustbepaidfulldue.
Andintheend,there’sstillthecurrenteconomyto