Loose Lending Practices

2007-06-18T21:02:00Z

Being in the real estate business people often ask me about market performance, future forecasts, and “buys” in the neighborhood. Recently I had a conversation with a neighbor of mine and the subject turned to the retraction of the sub-prime lending markets and the impacts locally. Interestingly the guy I was talking with was surprised by my objection to the statement that the difficulties was limited to a national theater. What a lot of people don’t realize is that foreign investment has been hot for mortgage backed securities. Historically they have been a safe-stable source for investment. However, the period of “loose lending” has put that all at risk. We may all be paying a much higher price for loose lending practices. Just as the borrower shows no respect for the loan obligation, the loan originator will further distance himself from the secondary market for which he sold the loan. I am sure that a number of those repurchase agreements will be greeted with a no forwarding address reply.

Back in the old days, credit meant something. Can you repay the obligation, do you have the ability to replay the obligation, have you paid your obligations in the past, and is there a reasonable chance that you will pay your obligations in the future? I don’t think mortgage brokers and bankers much cared about the answer to any of those questions as long as they could put something in the box to satisfy some far off underwriter and generate fee income. Just as Americans were getting drunk on real estate, the finance community was the bartender continuing to serve the drinks. Bad credit, no credit, stated income, adjustable rate, interest only, no doc loans, anyone with the ability to fog a mirror was approved for more money than they had the ability to repay. The finance industry’s response? Consumers were demanding it and if we didn’t supply it, funding would just come from somewhere else. Gosh, that seems responsible! To be fair, real estate brokers are not immune from criticism, but I can assure you that no one has asked me to finance their real estate deal.

It is going to take some time for this to all work out. Just like the RTC fiasco of the early 1980’s, this is going to take years and some serious reform. Beyond that, we are all going to pay more for money.

Curt Johnson, SIOR

Finance Markets

Loose Lending Practices