Remember the old adage, “history repeats itself”? Well that phrase has never been more accurate than when referring to the cyclical nature of the real estate industry and the mortgages that support it.
Just think back 11 years to the demise of numerous banks and financial institutions and the practices that led up to that. Very few realized the far-reaching impact of the bad loans that were being made by a small segment of lenders. But for those who lost homes, dreams, credit and financial stability, the memory may take longer to fade.
After the 2008 crash, mortgage guidelines tightened up significantly! The federal government was responsible for massive industry changes, some good, some not so good, but all aimed at protecting the American consumer. The practices implemented were done so to ensure all prospective borrowers were treated with fairness and transparency. With the new regulations, mortgage lenders ended up creating new compliance departments which required more personnel to make sure that they were meeting the newly imposed federal regulations and for each person hired, the cost of doing business increased.
Fast forward to our current market, with a slight increase in interest rates and the reduction of inventory available to sell, you once again see panic setting in for lenders who are trying to grab as many loans from the small pool currently available. To increase the prospects in that pool, non-qualified mortgages (sub-prime) have returned with fewer restrictions on income, credit and assets. Whom does such a product serve? While it does help to inflate the volume for lenders choosing to offer such loans, and it may in the short term allow additional borrowers to buy, is it sustainable and what will the impact be for those borrowers over the long haul? Should values dip and loan terms change, might they too find themselves needing out of the mortgage and unable to do so as they are unable to manage the higher mortgage payment?
I see my primary job as a mortgage lender to be that of setting my borrowers up to succeed in home ownership which comes with a lot of education. Borrowers need to fully understand what they are signing themselves up for when they enter into a mortgage and they must consider their exit strategy upfront. They must have adequate income to make the mortgage payments, they must be able to demonstrate both the willingness and ability to manage their finances and be willing to have their own skin in the game. These key factors have been proven to lessen the risk of default which should be our primary focus when putting someone into a mortgage.
Our focus as a lender should be all about the borrower and not about ourselves, which means that we need to educate and advocate for their best interests and that may very well be to wait until they’ve set themselves up financially and credit wise, to succeed with a traditional mortgage. Providing a growth plan may be the best plan!