Oh, No, Subprime Mortgage Brokers are Coming Back

 

 

 

 

 

 

 

 

New Orleans   Please, just move the soapbox over here a little closer, because I’m going to jump and shout yet again, and sadly, not for the last time about the little named co-conspirator and enabler of the Great Recession real estate meltdown: mortgage brokers. They are under regulated, lightly trained, totally unsupervised, largely sales people too often paid little more than commissions on mortgage closings achieved often by hook or crook. They beat the bushes to create the paper stream of deals that are then packaged and picked up by banks and, increasingly, nonbanks, who have even more of the mortgage action than they did a decade ago.

A thinly disguised job announcement in the “B” section of The Wall Street Journal headlined “Subprime Brokers Back in Demand” is a warning to the rest of us that big trouble is on the way, especially in lower income communities. The reporter wrote that Southern California was once again on the “cusp of efforts to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis.” Call me, “some,” because that’s exactly what I’m saying. Further she notes, that “some brokers faked loan applications and steered people into debt they couldn’t afford.” Oh, yes, many, many of them did, and subprime companies ate these loans like candy.

Here’s what’s really scary. The demand for brokers is coming largely from nonbank lenders and smaller lenders, both of which are lightly or hardly regulated, by states not the feds, and in the case of nonbank lenders, they are not even required to follow the Community Reinvestment Act or provide their data through the Home Mortgage Disclosure Act. The market includes families with lower credit scores, and, god knows, there is a huge market, especially now in the wake of the recession, and these families want and need loans, and many of them deserve mortgages, especially as the Home Savers Campaign has found, since too many are finding no alternative outside of land installment contracts and various rent-to-own schemes. Additionally, workers and families with difficult to verify income sources from cash payments in the gig economy or tipped employment, need so-called stated income loans, where their money is verified without company provided W-2s. We absolutely believe there needs to be a set of subprime products and stated income loans. Where we separate is over the issue of who and what is going to protect families from abuse. One of the reforms of the last decade has been an increasing reliance on affordability, meaning a family’s ability to pay the loan. Who and what is going to assure that that benchmark remains prominent?

Brokers are just in sales-and-promotion. They push the responsibility to financial institutions, and since they are the middle-men, they can venue shop until they find some place willing to take paper and issue the loan. They then get paid. Period. The consequences downstream mean nothing to them.

Meanwhile nonbank lenders have almost half of the total mortgage market now. In the increased scrutiny since the recession, only $6 billion nonprime loans have been issued in the first quarter of this year and only $22 billion in all of 2016, compared to $1 trillion in such loans in 2005 according to Inside Mortgage Finance, cited by the Journal.

If regulators don’t make the effort to separate the baby from the bathwater this time around, millions of families and thousands of neighborhoods will drown in it again.

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