5 Misconceptions About the Mortgage Industry
Of all the industries that lost prestige over the past few years, few have suffered as much as mortgage brokers. It's for this reason that I asked a number of highly recommended brokers to share their thoughts on some of the biggest misconceptions about their industry. What follows are the five most common things they identified.
1. Mortgage brokers and lenders are jerks
If you're anything like me (and I hope for your sake that you aren't), then you've read a seemingly endless number of books on the financial crisis that point at least one finger at mortgage brokers for the role they played in the ordeal. And to a certain extent, their culpability can't be denied, as the country was teaming with unscrupulous lenders during the housing bull market.
But there are two things to keep in mind. First, there are unsavory characters in every profession. There are bad plumbers, mailmen, lawyers, doctors, and, dare I say, car mechanics. And second, as in these other professions, the bad apples generally represent the exception to the rule, as opposed to the rule itself.
"The credit crisis that occurred, although mortgages were the assets that caused the issue, it was more Wall Street's ability to present fancy and dangerous loan products that led to the collapse," said Gus Floropoulos of New York's Quontic Bank. "Realtors, appraisers, attorneys, and lenders played their part, but it seems like the mortgage industry got the black eye for investment bankers' gambling."
2. New regulations have made everything better
A typical response to an event like the financial crisis is a host of new rules and regulations that are passed to weed out the behavior that led to the crisis in the first place.
Over the past few years, we've seen the Consumer Financial Protection Bureau established to protect consumers from injurious financial products, banking regulators upping the amount of capital lenders must hold relative to their assets, and the housing authorities working to nail down rules on so-called "qualified mortgages."
On one hand, like the body of legislation that followed the Great Depression, there's no doubt that many of these represent important advances in terms of financial stability. But on the other, these very same rules and regulations present a unique set of challenges of their own. And nowhere is this more apparent than in the mortgage market -- ground zero, if you will, of the crisis.
"I would say that the biggest misconception about the mortgage industry is that all the new regulations have created a more transparent and consumer-friendly experience," James Adair of PDX Home Loan told me. "But as I see it, the opposite has happened."
He went on to explain that the "mortgage industry had fully self-regulated by 2009, eliminating stated income and no-income loans, and doing the same with zero-down financing. But the CFPB nevertheless came in and forced compensation reform, which ultimately made most mortgages more expensive. "
The point, according to Adair, is that "although the reform makes it more difficult to gouge borrowers for unreasonably high fees, the majority of lenders weren't doing that to begin with."
3. Underwriters revel in denial
The belief that mortgage underwriters want to deny mortgage applications is one that many of the brokers I spoke with identified as a common misconception. But nothing could be further from the truth.
"An underwriter's job is to evaluate risk -- that is, the possibility of future default," Matt Hodges of Presidential Mortgage Group in Charlottesville, Va., told me. Nothing more, nothing less. In addition, because lenders make money on mortgages, the reality, says Hodges, is that "underwriters actually prefer to approve applications."
The point being, lenders and mortgage companies "are in the business of closing loans," said Floropoulos, not denying them.
4. Credit isn't available
Another belief circulating throughout the media and public opinion is that credit is tight -- in other words, that banks aren't lending as freely as they used to.
Although that may be true given the lending standards that prevailed during the housing bubble, there are still plenty of banks that will lend money to worthy borrowers. For his part, Floropoulos has had "record years both in volume and personal income over the last three to four years."
The critical element is that the borrowers must be creditworthy. "For acceptable credit risk files, there is always Fannie and Freddie as well as portfolio sources for funding," Hodges said.
5. It's easy money
I suppose this belief isn't peculiar to the mortgage industry. But whatever the case may be, Bob Van Gilder of Finance One Mortgage summed up its error by saying simply: "Ha. There's no such thing as an easy loan anymore. Everyone gets put under the microscope these days."
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