Secret #41 – Mortgages That Would Have Been Considered Predatory in Earlier Times Were Considered as Wholesome as Mom and Apple Pie in 2006
While researching my “Real Estate Bubble Explained” project, I found it was common for lenders to brag about their “affordable” mortgages. They were talking about their subprime and other non-prime mortgages.
In 2006, even FDIC said interest-only and neg-am mortgages increased “affordability” and they thought 40-year mortgages were good because, “The extended amortization period reduces monthly mortgage payments, thereby stretching a buyer’s purchasing power.”
Prime mortgages were all similar so the competition between prime mortgage lenders was fierce. But if you sold non-prime, er, I mean, “affordable” mortgages, you had a helluva lot less competition so for years you could sell more mortgages and, in addition, charge MUCH higher fees. During the boom, loan officers could make 2 to 3 times more money selling one subprime mortgage versus one prime mortgage!
It seems insane to me that loan officers would get paid more for selling the worst mortgages. Shouldn’t loan officers get paid more for selling the best, least risky mortgages? But the economics didn’t work that way. Sounds like market failure.
Sustainable mortgages help create more stable neighborhoods, especially in areas that are less economically stable to begin with.
Instead of letting the short-term profitability of mortgage companies shape our neighborhoods, we should let the long-term sustainability of our neighborhoods shape our mortgages and mortgage companies.
The current system is such that lenders and their loan officers look forward to the refi boom years. And that occurs on a fairly regular basis due to the ubiquitous 30 year fixed. If loan officers were paid a small share of each monthly payment, they would look to sell sustainable mortgages, not ones that are constantly refinanced. Unfortunately, the industry isn't set up for that.
I've always said that if loan officers were paid residually like insurance agents, it could have prevented the entire mortgage meltdown fiasco.