Why It’s So Hard To Get A Mortgage According To A Loan Officer

Dream KitchenI shared with you my most recent painful journey in qualifying for a mortgage. It’s not over yet as the underwriter now wants a signed copy from my CPA on his company letterhead of all my company’s financials. My CPA said he charges $3,800 for a thorough audit, so I told him to go jump in a lake. Instead, I sent off my company’s financials with my signature and told my bank to take it or leave it. I think they’ll take it because I’ve fulfilled every single item on their 21 point check list. We shall see.

My mortgage pain post was shared around the web and I ended up having a good dialogue with a loan officer. He shared with me some frank insights as to why it’s so hard to get a mortgage nowadays.

If you are easily offended, I suggest skipping this post. But if you can handle the truth, and if you want to gain some perspective from someone who controls millions of dollars in loans to satisfy property buyer’s wishes, then read on. 

WHY IT’S SO HARD TO GET A MORTGAGE NOWADAYS

I’ve paraphrased the mortgage officer’s feedback in order to make our dialogue a readable post.

1) The government is clamping down hard. Since 2009, the government has created enormous regulation for banks in order to not repeat the housing crisis again. For example, the CPA letterhead and signature requirement was introduced recently in Feb, 2014, and it’s causing massive headache for tons of small business owners in America. CPAs are charging usurious fees to audit because they can. Meanwhile, the government makes us send a new 7-10 page Good Faith Estimate every single time we change a single number.

The rules were created by the Consumer Finance Protection Bureau and were mandated under the Dodd-Frank Act to ban many of the loose practices during the housing bubble e.g. NINJA loans. To be considered a qualified mortgage, a loan amount cannot exceed a total debt-to-income ratio of 43%. In the past, plenty of borrowers were up to 70%+ . Average mortgage refinance or new mortgage lengths have doubled in the past four years as a result.

2) We don’t want to get burned again by liars. Borrowers signed a contract stating they’d pay their mortgages on time if we lent them the money and many didn’t. If everybody just paid their damn mortgage, this economic downturn wouldn’t have happened in the first place! Where I come from, if you don’t pay back your debts, you get beaten up, shamed, and thrown in jail. Only in America do people save so little, borrow so much, and have the audacity not to pay back a person or institution who lent them money in good faith.

Just think about the responsible homeowner who paid her mortgage every month during the downturn. Why should she suffer because her neighbor decided to welch on her promise? Good and honest people got screwed and they should be angry at their neighbors, not the banks who also got screwed. Borrowers who lied to us got bailed out with mortgage debt forgiveness programs by the government. Borrowers like to point out banks got bailed out too. But guess what? I’m a person, not a bank.

3) We hate ungrateful borrowers who don’t take responsibility. Nothing pisses loan officers off more than an ungrateful borrower who defaults on his mortgage and turns around and blames us for not paying his mortgage! We’re already getting blamed by our managers for approving bad creditors. Blaming loan officers for why you can’t pay your mortgage is like blaming your university for you not paying back your student loans. Imagine suing your company for letting you go because you no longer wanted to work. We’re infected with this entitlement mentality that must be squashed. Borrowers should own up to their financial mistakes and stop blaming others.

Borrowers who defaulted already punched us in the gut by causing mortgage departments to lose money. Loan officers were laid off in droves as a result. We have families to feed and bills to pay too. My income got cut in half, and I was let go in 2010 due to the downturn. It wasn’t until 2012 when I found a similar job again that paid 25% less. Thanks a lot.

4) We laugh at anybody who doesn’t have at least 20% down. The biggest joke is when borrowers start getting all pompous with us about why we should lend them money – as if it was our privilege. Then they tell us how they can only put down 5% and we laugh and laugh and laugh at the craziness. Borrowers who can’t put down at least 20% have no business buying a home. One job loss or economic downturn and they are finished. Go get a first time home loan from the government and milk them for all they are worth instead.

Paying private mortgage insurance (PMI) is stupid. They might as well borrow money from a friend to borrow more money from us and never take ownership of their financial lives. It’s as if nobody learned their financial lesson from the past five years. Most will turn out OK in the end, but there are enough people who can put over 20% down that we don’t bother with the rest. Save more money people.

5) Owning a home is not a right, but a privilege. I don’t know where people got it in their heads that owning a home is their birth right, but it’s not. The people who keep paying their mortgages through hell or high water are the ones who understand their privilege. They saved up, ran the numbers, and committed to a long term arrangement. They view their home as a home first and not as an investment. If everybody can view their home as a home first, there would be much less volatility in the housing market.

THE FUNDAMENTAL QUESTION FOR LENDER AND BORROWER

“If you lent someone money in good faith and they decided to NOT pay you back, and then they decided to tell everybody what a crook you are for lending them money in the first place, would you ever lend them money again?”

OF COURSE NOT!

We no longer want to lend money to the average Joe or Jane because the average Joe or Jane screwed us BIG TIME. Anybody who went through a short-sale or a foreclosure are permanently on our blacklist. We won’t tell them this out of courtesy, but that’s just the way things are now.

We’re only going to lend money to people who don’t need to borrow money. They’ve got plenty of liquid assets to pay cash and high incomes, but they don’t want to pay cash because they want to remain diversified and borrow money for cheap.

IMPLICATIONS FOR TIGHTER LENDING STANDARDS

If we only lend money to people who don’t need money, then we decrease our non-performing loans, decrease our chances of getting a pay cut, and decrease our chances of losing our jobs. Furthermore, we don’t have to listen to backlash from the public for why we caused people to default on their mortgages.

We think it’s a good thing to populate the housing market with people who can actually really afford their homes. The downturns will be less severe, and less people who’ve been paying their loans will be hurt by those who don’t.

I asked this one borrower why he decided not to pay his mortgage for a whole year since he had a steady six figure job. He said, “Because my home is under water, so why waste money?” He then turned around and said, “Banks are evil anyway.” I wanted to punch that guy in the face. Just because he lived in a non-recourse state doesn’t mean he should just walk away and screw everyone else in the process.

Maybe America will be at risk of being a nation of renters, as stated by Wells Fargo CEO, Richard Kovacevich. But is that so bad if the alternative is a nation of homeowners who are at high risk of defaulting on their loans and causing everybody massive financial pain? I would much rather have only responsible people borrow money, not entitled and irresponsible people who stretch to buy way more home than they can afford.

DON’T BLAME US FOR THE HOUSING CRISIS

We loan officers have empathy for people who lost their jobs or experienced extreme loss during the last downturn because we lost our jobs. If it’s between feeding your family and paying your mortgage, feed your family. Just don’t blame us for the housing crisis if you can’t pay your bills. Blame yourself and other people who promised to pay their bills and didn’t. We did the best we could with the information we had at the time to make your dreams of homeownership a reality.

You think just because you make this much money and have that much in assets that you deserve a loan? News flash. This is OUR money, not yours. If you want to borrow our money, then do what we ask. If you can’t, go somewhere else.

Readers, would you lend money to someone who didn’t pay you back and started blaming you for their money woes? Should we blame banks for making the loans, or the homeowners who decided not to pay their mortgages anymore for the housing crisis? Did borrowers not understand the contract? If they didn’t, why did they sign? Does constant debt forgiveness and bailouts lead to moral hazard?

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Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Brett says

    Couldn’t agree with this more. It’s all about personal responsibility people. Banks are having to tighten up because folks were unwilling or unable to meet their personal obligations. Could banks have turned down folks previously without being legislated to do so? Sure. It takes two to enter into the contract, but because it is banks who got burned and who had their money on the line, it is banks who are actually saying no. People who didn’t meet their obligations are angry with themselves and lashing out at the banks, but they won’t be a “lifetime renter” by choice or only buy their next home with 100% cash. They will go back and try to do the same thing unless the lenders say no. It’s one thing for lenders to be clear about their offerings, costs, etc. with lending to ensure that a potential client understands the product that they are receiving, but at some point the responsibility to understand and take ownership of the agreement that they have entered into comes into play. If you don’t understand what you are getting into DON’T sign.

    • No longer a reader but a commenter says

      This guy sounds like sour grapes to me, Elizabeth Warren shares a great story about Citi Bank (I think) asking her (pre bubble) how to reduce loan defaults and in a half day seminar, all the usual stuff, vet lenders better better documentation and like. well at the end of the day an old guy gets up, and the room goes quiet, obviously he’s important.

      His comment is very telling, those marginal borrows that your telling us to avoid are our most profitable customers, why would we want to get rid of them?

      if you want to understand why you’ll have to read her book, the two income trap (yes second time I mentioned this.

      rob

      • Financial Samurai says

        Can you do us a favor and summarize in several sentences why she thinks it’s not the borrowers fault but the lenders fault?

        Trust me, I can see why it’s appealing to stick it to the lender. But this post is some insights as to WHY it is hard for borrowers to get loans now, and it has to do with the lenders getting burned.

        You don’t see lenders protesting in front of borrower’s homes for not paying their mortgages or writing scathing reviews etc.

  2. Kristy says

    Great post Sam! I totally agree with the lender…people need to start taking responsibility for their actions and stop blaming others when they fail. This post hits close to home for me (I’m a commercial real estate appraiser) since we were also blamed for “propping up numbers” during the boom.

  3. Stewart J says

    Great Article, and I totally agree with the points. Its good to see that loan officers have wised up, but lets not forget many of them, and many of the banks they worked for, were very complicit in the crash. When it doesn’t feel right, it normally isn’t, and yet they were writing ninja loans and giving out teaser rates. I’m sure many were tempted by the increased salaries and bonuses passed to them as banks market the profits upfront.

  4. Eric says

    Good article, but point #2 is an absolute joke and is very 1-sided. We (homeowner) enter into a contract with the lender, there are terms to it. If we make payments, we keep the house. If we stop making payments, the lender enforces the terms of the contract and takes the house. This isn’t a moral issue, this is simply a family/business financial decision.

    Companies break contracts everyday when it isn’t in their favor, individuals can’t do that without being shamed into making it a bigger personal responsibility issue?

    • Craig Farnell says

      THANK YOU. That’s the matter in a nutshell. Why can’t residential real estate decisions be based on sound business sense? Successful and ethical businesses don’t operate like that, so why should individuals? Financial organizations and individuals like the one whose opinions are expressed here force morality on people when it is convenient for them to do so.

      This matter of making a moral dilemma out of a sound business decision is a result of the continual poor financial education in America. I believe that part of the reason that this has not been addressed because large financial organizations have a vested interest in keeping the general populace somewhat financially uneducated. That’s why I visit this website in the first place – education and perspective.

      • mysticaltyger says

        The morality issue is a two way street. The media likes to paint the banks as immoral when they repossess homes and they too often paint irresponsible borrowers as hapless victims of circumstance who’ve had their homes taken away by the big bad banks.

      • JayCeezy says

        @Craig, a lending institution is expected to behave ethically, why shouldn’t the customer be held to that standard? The contract is a legal document, but the agreement it represents is an ethical one. A bank won’t promise one interest rate and then charge a higher one. A bank won’t get to the end of the application process and slap unexpected fees; there is a Good Faith Estimate telling the customer what to expect. Not sure what “successful and ethical businesses operate like that all the time”, can you clarify with specifics?

        • Alex says

          One of many examples of a successful and ethical business breaking their contract when it made business sense: At the worst of the recession Morgan Stanley strategically defaulted on a multi-billion dollar San Fransisco building. Quote: “This isn’t a default or foreclosure situation,” [MS rep] said. “We are going to give them the properties to get out of the loan obligation.”
          That’s what everyone should tell their loan officer when he gets upset about people not making their payments. “I’m not defaulting or foreclosing, I’m just giving you this house back to get out of my loan obligation.” :P Of course big financial institutions who paid too much for their offices get held to different standards than average people who paid too much for their home…
          Maybe I hang with the wrong crowd, but I don’t hear anyone that strategically defaulted complaining that they shouldn’t have to pay the consequences. Rather, they made a financial decision based on the cost benefit analysis of continuing to overpay vs taking a 7+ year credit hit. It seems perfectly rational to say that if banks can and do do it, why can’t the people banks lend to also do it?

          • Ken says

            Because you signed a contract stating you will make payments, ALL payments. But whatever helps you sleep at night.

          • JayCeezy says

            @Alex, despite the Morgan Stanley rep’s attempt to say that the act was not a default or foreclosure, that is exactly what it was. Exactly. 2009 wasn’t a year in which MS covered themselves in glory, either, with convictions for insider trading, unauthorized trading, fines from FSA for rogue trading and resulting $120 million loss and from FINRA for mishandling accounts for retirees. But whatever, you were trying for an example of a “successful and ethical business” and this is what you came up with.

            Now you’ve got me rethinking my position. If defaulting on the contractual obligation is not unethical, as you seem to argue, then the U.S. government would really do the entire country a favor by defaulting on bond obligations; only a small percentage of citizens hold Federal paper, and who cares about the international bondholders? But the 80% of non-bondholders vote, too. I also wonder if companies offering Reverse-Mortgage services might decide to end payouts if the property became worth less than originally appraised? If the retiree was unable to pay the property taxes, the Reverse-Mortgage company might be able to swoop in and pick up the property another way. Food for thought, this is the way business is done in S. America, Africa, China, and Russia; why shouldn’t the U.S. become more international in this regard? One man’s ethical lapse is another man’s corruption.

            • Ace says

              Hey Jay,

              It is not really technically possible for the US government to default. The US government owns and controls the dollar. And owns the US Federal Reserve banking system.

              The government can always print more money, so there is no intelligent reason to default on US treasuries. This is why they are considered a “risk free” investment.

              In fact, safer than an FDIC insured bank account.

    • Ravi says

      Good point. I think the difference is that when a company breaks a contract, the buyer/seller/whoever on the other end loses and has to deal.

      When an entire society takes out too much leverage and then it comes crashing down, the people who were responsible end up paying for it while the ones who defaulted come away clean (this includes both financial institutions making risky loans who got bailed out, the govt who came up with the genius idea to guarantee mortgages, and people who signed for loans they couldn’t afford).

      Personally, I love it when people default, because it forces lenders to think twice about lending. When times are good, everyone gets stupid.

    • JayCeezy says

      @Eric, what makes you react so emotionally to #2? You obviously don’t like being shamed, nobody does, but isn’t the trade-off of the “business decision” to avoid the consequences/costs of risk worth that emotion? If it truly isn’t wrong, why would you feel shame?

      • Eric says

        My reaction is coming from reading all of the “ethical/moral” stuff throughout the housing crisis. To be honest, I just laugh at that argument. To me, a contract is just that, nothing more. I sign up and there are terms listed that allow me to get out of the contract. In a mortgage, I can get out of the contract by giving up the house (and the subsequent credit hit/penalties). This is no different than all of the people who pay ETF to cell phone providers when they want to change. Is it not morally correct to cancel a cell phone contract and pay the agreed upon fee? A mortgage is no different, the payments stop and the bank takes the house, just like a cell phone company would collect on the ETF.

        Now, let’s clear this up, I am not talking about the idiots who got a mortgage for a house they clearly couldn’t afford. They, well, like many other people in this world have no financial sense.

        If someone was underwater and can find a better deal on a house elsewhere, why not? The great part of the “great walk” of 2008-2012 is that the states with non-recourse laws seriously helped many people break mortgages.

        Let’s face it, as a consumer, we get screwed everyday. Banks and companies are changing terms by the minute. Free checking accounts now require “hurdles” to be completed or fees added. Companies are taking away our power by adding forced arbitration in contracts, etc.

    • Loan Officer says

      One sided? The bank is not breaking contracts. It’s the borrower who broke their contract by not paying their mortgage and walking away.

      Banks weren’t the one’s suddenly charging higher interest rates beyond the scope of the contract. Furthermore, rates have been going down for the past 10 years, so if they did reset, they reset lower.

  5. MD says

    I agree with 99 percent of the comments from the loan officer. However, the financial institutions (most, not all) decreased their lending standards beginning around 04 to the point where there were no standards. Yes, at the end of the day the borrower is responsible. However, many of the institutions provided the gun that the borrower ultimately shot themselves with. They were greedy. The gov played a huge role as well. Both sides of the aisle.

    What really makes me sick is the person who could afford to pay but chose not to because they were under water. Many people have no morals whatsoever.

    The loan officer has it right. The standards should be tight. However, that is already beginning to change. Look at the new Head of Freddie and Fannie. It is like 08 never happened to this guy. In the end, the mistake, eventually, will he repeated.

  6. Eric Gati says

    This is a great post, because more than anything else, it’s honest. The fact of the matter is, people got in way over their heads, and failed to live to up to their obligations. Clearly, the borrowers are at fault.

    I think the common argument against the bank is: “Well, why did you lend these people money?”

    To me, this is a lot like blaming a police officer for someone who commits murder. “Why didn’t you stop it?” The cop will do everything in his or her power to help prevent or mitigate a crime, but police officers themselves aren’t the criminals (usually…). While they are in a position to help prevent crime, they shouldn’t be labeled criminals when crimes occur.

    Maybe it’s not a perfect analogy, but I think it fits well enough.

    It sucks that there was a group of people who “ruined it for the rest of us,” but isn’t this pretty much how every other facet of life works?

  7. Kathy says

    Absolutely a brilliant post. No bank went out into their parking lot, dragged a customer into the bank and forced them to sign a mortgage agreement. If they overpaid for a house, it is not the bank’s fault. However, we have the government to thank for the housing debacle because it encouraged the no down payment and liars loans so more people could buy a house. And in spite of Dodd-Frank, every day I hear a government official complaining that the banks aren’t lending out more money. Duh, they were put under those stress tests because of their prior lending practices and now the government wants to force them to do the exact same thing. I hope in a couple of years, when it is time for us to look at a new mortgage, the fact that we have over 50% down will go in our favor. Kind of hard to plan very far into the future when the government keeps changing the rules of the game.

  8. Shaun says

    Your loan officer sounds super angry haha.

    I can’t say I completely agree with his assessment. Personal responsibility is great but once you get to the scale of a nationwide epidemic it’s tough to blame individuals.

    There is risk inherent with loaning people money, the institution loaning the money needs to account for that risk. If you go on prosper and loan somebody 100 bucks you adjust the interest rates appropriately based on how likely you think you are to get paid back. If you’re a smart lender you don’t assume you’re always going to get paid back and adjust the interest rate accordingly. You don’t loan somebody with no credit money at the rate of somebody with an 800 credit score and then scold him about personal responsibility when he doesn’t pay you back.

    This problem was created because the banks failed to appropriately assess risk in a booming housing market (or ignored the risk for short term gain). The banks weren’t all that concerned about somebody defaulting because they could turn around and sell the house for a profit in a booming housing market. Many banks also weren’t concerned because they took the risky mortgages they made, bundled them up into securities and sold them to other institutions as low risk investments. If anything I’d blame the rating agencies of these securities the most for the crisis. Had they rated these securities appropriately the banks wouldn’t have been able to give out as many risky mortgages and the housing boom likely wouldn’t have happened as much as it did.

    I’m not entirely sure why loan officers are scoffing at their patrons or getting blamed by their managers. This is probably offensive but as far as I can tell for most standard home loans they’re trained monkeys. If a person can check all the boxes the bank gives the person to fill out they get the loan. Not much thoughtfulness goes into that process, tough to assign credit or blame to somebody who checks a box.

    • Aaron says

      This is the best comment I have seen. It has been well documented that there where loan officers who outright lied to people to get them to take out loans they could not afford because the got paid for originating a loan and had no responsibility for it’s long term risk. And sure it’s great to say everyone should be responsible for themselves but many people look at loan officers as “experts” who could help them navigate the complex affordability issues including cost, risk and tax implications.

      As far as the whole moral thing that is just something the banks make up to try and get people to make payments when they should walk away. Banks did not do their part to manage that risk by ensure loans were not given in excess of realistic home values and that they were not give to people who could not afford them.

    • Christine Wilson says

      Agreed! This is the best comment so far :)

      As to those that decided to not pay an underwater mortgage.. I agree that’s not the right thing to do. However the banks created a situation where homeowners get screwed over and some homeowners then decide not to pay. It spirals and makes the situation worse. But why did the banks create a sinking ship in the first place!?! Let’s stop these things from happening in the first place so we don’t need to discuss all the chaos that ensued afterwards. Seems common sense to me.

      • Stewart J says

        Totally agree with this thread. Banks relaxed the lending rules to such an extent that property prices were way overvalued in most areas post 2004/05. This meant anyone who brought after this time was paying over the odds and when the crash came most were under water. Let’s not forget, most people who buy property just want a house to live in. Many don’t understand about investing and speculation and probably didn’t realize the market was in a bubble. We have the same issue here in England, London especially. The prices just keep going up, and many people get suckered in as they fear prices will never stop rising. The lenders keep helping the buy to let junkies, and the savers lose out because we need super low interest rates to bail out the over leveraged, again!

    • Ravi says

      Great points. In my opinion, there were 4 main boneheads in the whole debacle:

      1) Lenders – Just dumb lending practices.
      2) Borrowers – Enabled by the lenders. Joe Nobody clearly doesn’t understand what it means to pay a $200k mortgage on a $60k salary, and has no backup when he loses his job or pay gets cut.
      3) Rating agencies – Lenders securitized mortgages and the agencies improperly rated them. Period.
      4) Govt – Fannie should have never been created. Once it was, it should have NEVER guaranteed a loan with <20% down.

      So far:
      - Lenders got screwed with huge losses and a litany of regulations.
      - Borrowers lost their homes, jobs, and now have to rebuild the right way
      - Rating agencies seem to have gotten a slap on the wrist and spank on their bottom, but nothing serious, yet…
      - Govt can do no wrong. There seems to be no plan to get them out of govt guarantee. I would spin them off into independent companies so they have to underwrite the mortgages they guarantee independent of politicians wanting to be seen as pro-home ownership. It's a 2nd eye to the rating agencies, who are just providing risk "opinions".

    • swensodts says

      Great point here, the loan officer is taking an awfully “micro” view from his personal experience and offering a “macro” solution, then saying but “Don’t take it personally”. When in fact the whole crisis was created by this guy’s employers and the investment banks who “created” and traded in mortgage backed securities and the underlying insurance polices, it was systemic, not because we loaned money to deadbeats but b/c wall street created “tranches” of bad mortgages to buy and sell, ratings agencies didn’t understand them and insurers insured them, even though they were fraught with risk and they traded in those polices as well. He forgets one thing also- He wouldn’t have a job if everyone could pay cash, his entire business is loaning money to people who need it, then bashing the people who pay his salary. He wouldn’t exist without borrowers.

    • Loan Officer says

      So you are saying if everybody does it, then it’s not a big deal if you welch on your loan too? That doesn’t make sense.

      Borrowers need to own up that they were the one’s who screwed the nation and themselves. Serves them right for losing their homes or selling at the bottom of the market.

      • Shaun says

        We installed seatbelts in cars when large percentages of people were dying in car accidents rather than blame bad drivers and do nothing. And death rates plummeted. Were bad drivers mostly at fault? Probably, but who cares? It was a systemic problem that was easily made better by car manufacturers putting in seatbelts. And just like most people don’t want to die in a car accident, most people don’t want to lose their home or see their investment go underwater. The bank has some responsibility for being able to protect itself from defaults which because they were just offloading the risky assets most didn’t do very well at before the crisis.

        I don’t understand how someone can say it’s irresponsible for a homeowner to put 0 down and not say it’s irresponsible for a bank to offer a 0 down loan. How exactly is that OK for one institution and not the other?

        • Financial Samurai says

          I donno Shaun. If I didn’t want to die, I would probably drive less or not drive if I knew there were a large percentage of people dying in car accidents.

          I guess there is some truth to be had with government regulation of things like how big of a soda one can drink and so forth to save ourselves from ourselves.

          But unless someone can’t read the contract (in which case they shouldn’t be taking out a loan or buying), the onus is on the borrower to understand what they are getting themselves into. The banks do far more due diligence than borrowers, hence even in the worst downturns, the default rates are less than 10% as a whole.

          • No longer a reader but a commenter says

            i hate when people say that, just stupid. I’m just curious, did you read and understand all 100 (or what ever it was) pages of heavy legalise that you had to sign in order to get a mortgage, what about a car rental or CC, they are written to be extremely difficult to understand and more importantly to favour the lender.

            For example how many of your CC or bank/brokerage accounts force you into arbitration?

            While I do sound like a whiney liberal at times I really am in agreement with most of your points, it just upsets me to see people passing off fiction as fact

            rob

            • Financial Samurai says

              I wouldn’t sign anything I didn’t understand, especially if it’s as something as important as a house with a mortgage. In fact, after I read the document I list out a series of questions and Scenarios for the mortgage officer/banker to tell me what would happen if so and so happened just so I full understand what is going on.

              Why WOULDN’T anybody want to thoroughly understand a contract if they are taking out hundreds of thousands if not millions in debt?

    • Financial Samurai says

      I don’t think anybody could have imagined the ferociousness of the correction in 2008-2010.

      The loan officer won’t publicly scoff at borrowers for personal responsibility breaches. What he’s sharing is the reason why it’s so hard to get a mortgage now from his inside perspective.

      I read every single page of a mortgage document and make the loan officer explain to me what I do not understand. Only until I understand the document will I initial and sign. I should hope everybody does the same and understands If and Then scenarios too with such a huge debt take on.

  9. Dee @ Color Me Frugal says

    This post has me bummin’ hard because I was hoping one day maybe a few years down the road that all the craziness would end and it wouldn’t be so painful to get a mortgage anymore (we’ve gotten two mortgages since the real estate bubble burst, and both times the banks put us through the ringer in order to get it, even though we have great jobs, awesome credit, and a lot of assets). What I’m hearing is that going through paperwork hell in order to get a mortgage is the new normal. Ugh!!!

  10. Christine Wilson says

    Good article.. I generally agree that people should take their responsibilities seriously. However coming from a country that has never known an under water housing market (Canada), I still look at the whole housing bubble fiasco as a broken system put in place by greedy banks, without a government to take a look at the laws and regulations of the system until it was too late. Now people in the United States may be annoyed with all the new regulations. That too seems somewhat understandable. Looks like a lot of change to go through.

    Banks are very aware that not all people applying for loans are qualified. Its why they have regulations on loaning money in the first place. When you remove all standards… expect a big tumble. Why blame the people when you knew the people would do this in the first place? Are you going to get rid of all police and blame a rise in crime on the people too? We already know our society and people aren’t perfect.. that’s why we have rules and regulations built into everything we do.

      • Christine Wilson says

        Yep.. its ready for a correction soon… I think it already is.. but sometimes it goes down and then goes back up! It will stop soon though. Many think the housing market will just slow for a long while. We have a low default rate (average of 0.5%) on our mortgages even in tough times. One big reason is probably because our mortgages are recourse loans. We can’t just drop our house and walk away. The bank can go after our other assets and wages. Also our banking regulations are fairly strict. I don’t think we ever gave out NINJA loans.

        A fairly short article that analyzes our housing slump and why most of us don’t believe it will turn into a fire sale:
        http://www.macleans.ca/economy/business/a-very-canadian-housing-slump/

  11. Tom says

    Perhaps this loan officer was one of the good guys who did things the right way during the boom times of real estate. But while I am a firm believer that ultimately you have no one to blame but yourself for your problems, I find it very hard to believe this “woe is me, the poor banker who was scammed by the public” attitude.

    There were stories abound of predatory lending practices when the market crashed. Why were people who were unemployed being handed out mortgages as if they were balloons at a carnival? This idea that the banks are the victims is complete nonsense. With all of the resources they have at their disposal you mean to tell me they couldn’t figure out giving a $300,000 loan to a person making $30,000 a year with no money to put down was a bad decision? I could tell you that is bad lending practice with just those 3 pieces of information, I didn’t need a 70-point checklist of items to figure that out. Sometimes in business red tape and forms completely silence logic.

    They are either mental midgets or, more likely, they just assumed it would be okay to give the loan out because even if the idiot consumer couldn’t afford the payments after the interest rate on their mortgage ballooned in 5 years, they could sell the house at a profit because at the time prices were doing nothing but going up. Once the bottom fell out everyone was caught with their pants down – borrowers and lenders alike.

    As I said, maybe this particular loan officer did things in a proper manner, but he has plenty of colleagues that didn’t, got to greedy and gave out loans that they knew the lender could never truly afford. All because they had numbers to hit and their own bank accounts to fatten.

    • Financial Samurai says

      He doesn’t have a “woe is me” attitude. He is simply providing an explanation why it’s so hard for many people to get loans now. Burn me once, shame on you… Burn me twice, shame on me.

    • Rebecca @ Stapler Confessions says

      I agree with Tom — there was a lot of predatory lending going on pre-2008. I have spoken with homeowners whose loan officers changed the information on their applications so they would qualify and I know an attorney who used to close sub-prime loans and knew that the homeowner had zero idea about the consequences of what he was doing.

      I’ve never applied for a mortgage, so I don’t know exactly how difficult it is, but I suspect that banks are finally doing the due diligence that they should have done before the housing crash.

      But this loan officer really sounds like he takes it personally. It’s not personal — it’s business. The bank made a calculated risk assessment of whether or not to loan someone money. In the end, they have their contractual remedies if the homeowner breaches.

      • JayCeezy says

        But this loan officer really sounds like he takes it personally. It’s not personal — it’s business.

        Firstly, ALL business is personal. Secondly, whenever someone has said those words to me or to anyone, it is right after they have done something really crummy and they don’t want to own it. They aren’t saying it to save my feelings, they are saying it to save their feelings.

        • Curtis@PayOffMyRentals says

          Ha! Ha!.. True on both counts.

          All sides need to take responsibility for the housing crisis and stop trying to shift the blame to others. Those commissions meant money…lot’s of it. And transactions of large amounts of money are often always accompanied by greed and dishonesty.

          While we’re at it, let’s not let the appraisers off the hook here either. They inflated the values to get the loans pushed through. They did not want to lose their customers (the lending institutions) by sinking a loan (commission). They buckled under pressure to work the numbers or they weren’t called to appraise anymore properties.

          As a real-estate investor who bought nearly 10 houses and carried up to 5 mortgages at one time while never missing or even being late on a single mortgage payment…ever, Back in 2008, 2009, 2010 I was disgusted and appalled with the rationalizations and justifications for “strategic defaults” and “walking away from the loans” because they supposedly got “screwed by the banks”, etc. I read on the boards at that time. I still see some of that thinking here. However, I’m encouraged my many of the comments showing some rationale thinking and a functioning moral compass. Nice!

          There’s no one side is right and the other wrong here. All shared in what amounted to one of the most serious financial disasters this country has ever seen. We are simply left to play by the shifting sands of regulation and documentation requirements to get what was not long ago given freely to anyone who could breathe.

          • Financial Samurai says

            I’ve written about my experience with a real estate appraiser before. It seemed kinda sketchy where of course the appraisal comes back at a value exactly what you paid for it, no matter what you paid for it. But I’ve since made my peace, that paying the $810 appraisal fee for a drive by appraisal, and the corresponding appraisal report is part of the system.

            Nice job picking up so many properties in the downturn! I wonder what those sellers are thinking to themselves now. Like selling Apple Computer at $390 perhaps. Where did you end up buying?

    • Austin says

      When I was in college I used to work with real estate agents to build websites that could capture leads for them. I tried to replicate the process with a loan officer once and he emphasized that he didn’t just care about any lead, he needed sub-prime leads. He said prime loans weren’t worth anything to him.

      The loan officer wasn’t the problem. The larger system was providing incentives for those particular loans.

      • Financial Samurai says

        Sub-prime = higher interest rates. But one can view this as a positive for helping the poor, or people who screwed up in the past and are trying to make due. But again, the largest responsibility still should be shouldered on the borrower.

  12. The First Million is the Hardest says

    Sounds exactly what I’d expect a loan officer to say. He makes excellent points about the faults of many borrowers but seems to ignore any role the financial institutions may have had in causing the housing crash. I don’t fault (and actually applaud) banks for making mortgages tougher to get these days, but to blame all the problems on deadbeat borrowers who decided not to pay back their loans is very one sided.

    • Financial Samurai says

      I shared this post because all we seem to hear is the perspective of the vote-seeking politician, the underwater homeowner who decides to no longer pay the mortgage, and protestors against banks.

      It’s good to see another point of view, which is probably unpopular because it is from the minority camp.

    • Tom says

      Completely agree – I’m happy to see lending standards become much more strict. If we’re lucky it will stay this way so that there will not be a housing bubble in the future and only people who can actually afford a home, buys one.

      I’m sure the process involved for approving a buyer could get better, but in the mean time I rather hear about how difficult it is to buy than about how everyone is snatching up homes again.

  13. Ken says

    Debt forgiveness and bailouts pisses me off to no end. Why should irresponsible people be rewarded for failure when I get nothing for success?

  14. J says

    I agree some people were stupid and greedy to take out loans they couldn’t afford. Others used their homes as piggy banks thinking real estate would go up up up and never down. A man who sits in his expensive house with his nice salary and doesn’t pay his mortgage just because his home is underwater should have his wages garnished. (Or something!) But the real crisis was created by predatory lending- giving loans to people who did not qualify for them so that lenders could make a quick buck on the fees and then bundle the loans (toxic) and sell them as good investments to pensioners. Come on. The banks knew what they were doing. Let’s not forget Countrywide.

    • Loan Officer says

      Predatory lending is an oxymoron. It’s not like a shark comes to your doorstep and threatens to eat you if you don’t borrow money from him. It’s so silly.

      It’s homeowners greed that got them and the nation in trouble.

  15. Ravi says

    Interesting perspective. First, everyone blames the banks for making the loans to risky borrowers improperly (i.e. at rates that weren’t commensurate to the risk), and now everyone wants to blame the banks for being too strict?

    If I were a bank, I wouldn’t be upset about that. It’s just dumb people being dumb.

    When it comes to the economy, there just is no such thing as a free lunch.

    As a taxpayer and homeowner, I personally hope that borrowing remains strict (maybe a little ease from what it is today, but I would hate to be anywhere close to where we’ve been before). It’s a huge moral hazard to give people access to credit who don’t really understand it. This goes beyond mortgages and into credit cards, student loans, and almost any other type of debt.

    Government guarantees? Everyone’s happy until it comes crashing down.

  16. G says

    Love the post Sam – truth is reality hurts and when it hurts only the smart ones do something about it – the rest just find someone/something to blame. Grow up people, face reality!

  17. S says

    A few points:

    1. About his only true statement is point #1.

    2. “Borrowers signed a contract stating they’d pay their mortgages on time if we lent them the money and many didn’t.” And banks always understood the risk if someone didn’t pay it back. In some states, that contract basically gave owners the contractual right to walk away with nothing but the home as security. In all others, the banks knew that individuals could walk away and they would be left with not much. The contractual arrangement was made by both parties. {This is simply a legal point only, not whether the borrower had the moral obligation to pay back the loan.}

    3. “Borrowers who lied to us got bailed out with mortgage debt forgiveness programs by the government. Borrowers like to point out banks got bailed out too. But guess what? I’m a person, not a bank.” The banks got and continue to get huge bailouts. Hard to feel sorry for the banks. But I do have sympathy for me and all other folks who paid and continue to pay their mortgages.

    4. Borrowers should own up to their financial mistakes and stop blaming others.” Why do blanks not deserve some of the blame for entering into bad contracts with people. See my point #2, the banks knew the contractual risks involved.

    5. “Borrowers who can’t put down at least 20% have no business buying a home.” Says who. I could just as easily say borrowers who can’t put down 40% have no business buying a home. This is an arbitrary number, which I admit has some rationality behind it. But a lot of people who did not put 20% down paid and continue to pay their mortage. And many who did put down 20% or more were foreclosed upon.

    6. “Owning a home is not a right, but a privilege.” I’m not sure he understands what either term means. I think what he wants to say is you do not have a right to be loaned money from a bank, it is a privilege. That isn’t correct either. It is a contract. Who knows the contract better. The banks or the individuals.

    7. “We’re only going to lend money to people who don’t need to borrow money.” If this is the case, most banks will go out of business. Like the previous point, I suspect this guy doesn’t know what he is talking about.

    8. “I would much rather have only responsible people borrow money, not entitled and irresponsible people who stretch to buy way more home than they can afford.” Then why did the banks loan money to those people?

    9. “Just don’t blame us for the housing crisis if you can’t pay your bills. Blame yourself and other people who promised to pay their bills and didn’t.” Thank you but I’ll blame both the lenders and the borrowers. These were not one sided transactions. Both deserve some blame.

    10. We did the best we could with the information we had at the time to make your dreams of homeownership a reality.” Actually, no you didn’t. You did the minimum you could do because you along with everyone else thought home values would increase forever, or you rightly understood, the government would offer a bailout. Banks could have easily done more, as is shown by the fact that the government is forcing them to do more.

    11. “You think just because you make this much money and have that much in assets that you deserve a loan? News flash. This is OUR money, not yours. If you want to borrow our money, then do what we ask.” Wow, actually Mr. Loan Officer, it is not your money at all. And I don’t think people think they deserve a loan, but they do request one. And banks like to grant loans because that is how banks make money – well that is how they used to make money before the government started bailing them out. Finally, those borrowers who did not pay, guess what, they did what the banks asked, but I guess the banks failed to read their own fine print or to otherwise be adequately secured. Boo hoo.

    This guy sounds like a fun guy to be around at a dinner party. Seems like a small man wearing a uniform. In this case, his uniform is a suit. He doesn’t quite understand that mortgages are nothing more than contracts, that banks loan money to make money, and that banks make mistakes.

    Who do I blame? Both parties, but this guy is doing his best to make me want to blame him. I suspect that he authorized a lot of loans that most people with any common sense would have recognized were bad risks.

  18. Neil says

    A few years ago, mortgage bank lending guidelines were written in a manner to entice buyers into purchasing homes they couldn’t afford. The lending guidelines were lax, borrowers needed little (to no) money down, they were given good rates, and they didn’t need high credit scores to qualify. Loan officers were ENCOURAGING borrowers to buy more than they could afford by telling them that their homes would increase in value and they’d be able to refi at a lower rate, or simply do a cashout refi. Banks were offering products such as SISA (stated income/stated assets aka “liars loan) plus negative amortization loans (aka “pick a payment” loans). Homes were increasing in value, and EVERYBODY who was at the party was getting rich from the banks and their employees, borrowers, loan officers, appraisers, et al.. ..at least until the music stopped. And now that the punch bowl has been taken away and the band has packed up and left the building, we’re all crying because these banks are now putting borrowers via the ringer (esp. self employed borrowers) when they ask them for jumbo loans? And to hear this loan officer crying about having to take a 25% pay cut?

    Pa-leaZZZe.

    25% pay cut from what? (All of the free money they were probably making as a result of poor lending reg’s?) Remember how tight the guidelines were back in the 70′s? Banks used to stop by your place of employment to make sure you had a real job. Is it a surprise that there were less defaults back in the 70′s as a result of their due diligence? Before the mortgage crisis, I worked as a mortgage wholesale executive and I never met one loan officer who wouldn’t turn down a deal if they could find a way to get it done. I had buddies in wholesale who were pushing alt-a and subprime loans (via Lehman) and made anywhere between 30k-100k per month doing so. While in the biz, an underwriter friend of mine over at New Century told me about a time when they rented out Disneyland for a company party! I’m really not surprised that the entire industry imploded overnight and has these tighter regulations. In fact, we used to check http://www.mortgageimplode.com WEEKLY to see which banks were failing!

  19. Austin says

    I am little surprised to see that the loan officer feels so threatened by their perception of public opinion. These lending standards really were not loan officers or real estate agents faults.

    In an ideal world people would know better than to out-borrow their financial abilities. But, let’s also remember that a lot of defaults were born out of people losing their jobs (and portfolios) to the larger downturn.

    The problem with lending standards has its roots in the Community Reinvestment Act and subsequently gained momentum from other political initiatives from every side of the political aisle. It was in the interest of the government, Fannie and Freddie, banks and the larger economy to keep the charade alive. Still, the fallout wouldn’t have been that bad if it wasn’t for the derivative liabilities which created severe counter-party risk. If people care to put themselves at risk that’s one thing but when you rehypothecate that debt into leveraged instruments it becomes a financial weapon of mass destruction.

  20. mysticaltyger says

    I do think to say that the banks are completely absolved or responsibility for the housing crisis is wrong and unfair. But I DO think it’s more the citizens’ fault than the banks. It’s OUR job to be realistic about our financial situations, not someone else’s. And it’s OUR job as citizens to police the government and big business (or at least to not participate in insane behavior like taking out huge mortgages with no down payment). If we wait around for some magical “other” to fix everything for us, nothing will ever be fixed, and we will end up a banana republic dictatorship, which is where we are headed.

  21. John says

    “I asked this one borrower why he decided not to pay his mortgage for a whole year since he had a steady six figure job. He said, ‘Because my home is under water, so why waste money?’ ”

    I think this is one of the most irksome comments in this post (and that’s saying a lot since it’s filled with bank propaganda).

    The idea that what this person is doing is somehow “immoral” is a gross misunderstanding of mortgages, contracts, mathematics, and morality in general.

    If an investment is loosing money, it makes perfect sense to dump it (i.e., walk away from the mortgage). It may not be everyone’s choice, but it certainly is a valid option based on the stipulations of the mortgage. In doing this, the borrower looses all rights to whatever equity he/she has in the property and the lender gets to foreclose the property in return.

    In general, this is a good deal for the bank because they’ll generally get to sell the asset at a greater value than what they put into it (remember, the bank doesn’t “owe” the rest of the mortgage, that’s their money they paid to the seller, so they’re just out interest and fees they didn’t get between the stopping of payment and the sale of the property).

    I don’t even want to address the rest of the propaganda that the loan officer is spewing because it’s generally just self-indulgent whining. But from a morality point of view, there is no such thing as immorality in paying or not paying a mortgage… the terms of what happens are very clear, and you can guarantee that banks come out ahead of the deal when someone stops paying their mortgage. (even if it’s millions of homes… banks get to sit on that equity on their balance sheets until the house is sold)

    The only time the bank looses (again, this is the banks’ gamble, not the homeowners because they demand the property value assessment) is when the property is overvalued between the original loan amount and a lower assessment value at the time of sale. Generally, this is offset by the equity that the borrower walked away from, and banks have been very reluctant to accept short sales where they loose money.

    • Ace says

      Bingo! Great comment!

      The banks are not in the business of loosing money. When you have overpriced real estate with lack of W-2 income; the bank isn’t going to take the risk.

      We just went through this nonsense a few years ago.

    • Jay says

      Entering into a contract (i.e. mortgage) in which you agree to pay someone for something they give you and then not follow through with YOUR commitment – um, yeah, how is that not a lack of integrity, morals, etc? Imagine a world in which everyone breaks promises – just how well would society function? There is ALWAYS a benefit to receiving something and not paying someone back – hence, why there is collateral, down payment requirements, etc. Just because YOU choose to break YOUR COMMITMENT, doesn’t mean it’s morally right. It might be right FINANCIALLY, and PERSONALLY, but you are still not someone I would ever want to do business with ever again.

      • Ace says

        I’m not religious…. It’s pretty straight forward. You enter into a contract with the lender. You fail to meet your obligation. The lender takes possession of the collateral (at some point).

        That’s the way it works. You break the contract…. They now own the property.

        You stop making your car payments…. They haul your auto away.

        The risk is obviously on the lender to vet you thoroughly, so they don’t get stuck with property which they cannot unload. That’s life!

    • mysticaltyger says

      Like I said in my previous post, John’s post above is the perfect example of attitudes & behaviors that lead to a banana republic.

    • John says

      Many people are willfully ignoring the full text of the mortgage and only interpreting it as a contract that demands that you repay the loan. That is not what most mortgages say (caveat: many newer mortgages have been reworded to prevent buyers from walking away from them, but that is not always the case).

      If the terms of the mortgage contract state what happens when you don’t pay, then it is neither moral or immoral, or shows any lack of integrity to go for the non-payment option. It’s merely taking the contractually stipulated options that are available in the mortgage terms.

      Many of the other examples given (e.g., government bonds) have very different agreement structures.

      The problem with attaching “morality” or “integrity” to this particular argument is that you’re essentially trying to shame people for exercising perfectly legal options available to them. There are plenty of things that are legal that are not widely considered “moral”, and there are plenty of things that are “moral” that have nothing to do with being legal. Conflating these concepts is attaching an emotion to something because you can’t come up with a better way to attack the issue.

  22. Bill says

    The people who took out mortgages they couldn’t afford are to blame. The loan officer who gave them the loan are to blame. The loan officers bosses who securitized and sold these loans (CDO’s) are to blame. The rating agencies who rated these POS loans are to blame. Alan Greenspan, who believed everybody has a right to own a home is to blame. The politicians who relaxed the lending standards are to blame. The people who voted said politicians into office are to blame. The owners of 401k plans that have ownership in these financial institutions are to blame. Reality TV “Flip This House” and shows like that are to blame. Speculators are to blame

    That being said, Who has taken responsibility?

  23. JayCeezy says

    Laws are a minimum standard of conduct.
    Ethics are a maximum standard of conduct.
    Moral Hazard is the concept of behavior producing benefits/profits, where the consequences/costs of risk can be placed on another party.

    A number of commenters appear to be conflating all three of these different constraints. And a number of commenters appear to be using invalid rhetorical devices in forensic support of their positions (i.e. “businesses do it all the time” “the bank knew the risks” “it is good business sense” “the cause is lack of financial education” “banks are greedy and liars”).

    Bottom line, when you sign a contract for a loan, you are agreeing to repay the loan. The lender is bound to determine the ability and willingness to repay. There is nothing in the loan documents that state if the property goes underwater then the loan does not have to be repaid, just as there is no sharing of profit when a property doubles in value in three years (yay DC, NY and SF!). Sorry to hurt some feelings, but it is one thing to be unable to repay a loan. Quite another to refuse to repay, and refusing to pay is a character issue. If those refusing to pay truly believe it to be “a business decision” then please accept a lender’s refusal to make a loan based on history, credit score, and character as “a business decision.”

    If the lender has made a loan at an interest rate that no longer makes sense, as happened in the ’80s, and ’90s, the lender does not have the option to simply call the loan due. If you read the fine print, the lending institution actually does have the legal right to do so, but it would be unethical. The institution has a reputation based on behavior, and an obligation to the society in which it operates to behave ethically. So do I, and so do you.

  24. Bryan says

    Just to share my personal anecdote. I just purchased a new construction home in Lake Forest, CA using BBVA Compass as my lender. My wife just graduated residency and our parents gave us the money to put 5% down on a $1M home. Should we be putting more money down? Probably. Should I put 20% down on a loan at 4% or should I pay off my wife’s student loans at 6.8%? I’d take that 2.8% rate difference as would anyone else. Could we have waited another couple of years after we’ve saved more money? Probably. Given my wife’s (as well as my) stable job, I don’t see a point in putting 20% down on a loan. There are better uses for my money. If I can easily afford a $5k a month mortgage, I don’t see a problem with this. As a side note, the lender is waiving PMI so that is not a factor. I guess in some cases lending standards have not tightened.

      • Bryan says

        I don’t feel bad taking the money from them. It was entrusted to them by my grandmother who explicitly told them to give it to us (grandchildren) to buy a house. My grandmother also paid for my college, but don’t start feeling too happy for me since my wife’s family paid for nothing, and she’s graduating with $275k in student loans (undergrad and medical school) so it balanced us out.

        I’ve been saving money in an IRA since I was 16 so it’s not like I lack fiscal discipline.

        I’m not so sure the lender was lenient – the pre-tax and post-tax mortgage payment as a percentage of our income are 21% and 33% respectively.

        Also, the tax benefits to owning a home are astronomical. I’ve calculated $81k in itemized deductions ($49k mortgage interest, $11k property taxes, $21k state taxes) vs. the measly standard deduction. And oh yes I’ve factored in getting hit with the AMT :(

        • Financial Samurai says

          Gotcha. Hopefully your wife have a long and successful career! Oe of my best friend’s is a cardiologist who finally got a job after his fellowship (35 years old).

          Is your interest rate at 5.15% for a 30-year fixed given the $49,000 interest on a $950,000 mortgage? If so, I would suggest shopping around for a mortgage online or calling other banks because I’m being quoted at around 4.15% for a 30-year and 2.5%-2.65% for a 5/1 JUMBO ARM.

          • Bryan says

            I was quoted a rate of 4.25% about a month ago, but since then the avg. interest rate as fallen. Also, BBVA Compass will knock off 0.25% in interest by opening a bank account with them (which I plan on doing to separate out long-term savings from our operating expenses), so I’m hoping to get a rate of around 4% right now. That’s not too bad considering how little we are putting down on the home.

  25. Untemplater says

    I’m glad I don’t have that guy’s job. Sounds rather brutal, especially with customers blaming him and his bank for their own mistakes. It sounds brutal to get a loan these days, but I can see why banks increased their standards and qualifications. Lots of hoops to jump through.

  26. Jay says

    There are 3 root cause of or the market crashed during the 07.
    1) Credit cards given out, there are so many banks and credit card company gives out 0% interest for 6-12 months with no guidelines at all and free balance transfer. Their intentions is to have people racks up so much credit card debt that eventually they can’t pay the amount owed just the interest (this is where credit card companies makes their real money).Then all the department stores, electronic stores etc giving out no interest installments.

    2) Auto loans – How many times we heard, as long as you got a job you will get a loan

    3) very relaxed rule or no rule at all for giving out housing loans, true that everybody should knows about their personal finances on what they can afford, but the banks got greedy as well. I remember all those advertisements that they give load with no money down and I remember some even get 105% loan. They advertised that it’s the american dream to own a house

    When you dangle a large carrot in front of the rabbit, the rabbit will bite. Sure, like the lender said, it’s the responsibility of the borrower to make the payment, but behind all the greed, a large chunk of their profits comes from late payments, penalty, additional interest charged on the late payments. They almost welcome the irresponsible borrowers.

    When all the interests kicks in, the ‘irresponsible’ borrows will have to default on their loans, credit cards etc.

    Your lender can blame the irresponsible borrowers, and he mentioned that he lost his job and has to take paycut later, but he forgets that the reason he got such high pay that time because of how many loans he gave out to those irresponsible borrowers. He got pay cut because with the new rule, he won’t be able to get the same amount of traffics as before, you get what you work for. To me, he sounds like a bitter and angry loan officer that got bitten hard during the hard times when he lost his job and have to take paycut. If he would save 50% of his ‘high’ pay (like you suggested to all your reader), he may not be as bitter and angry like he sounds now. He sounds like one of those ‘irresponsible’ borrower himself.
    If he did not work as a loan officer and as an accountant who lost his job, he might switch to the other side and blame the banks.

    It’s easy to blame the other party, because it’s all talks.

  27. Little House says

    Ultimately it’s the borrower who is at fault for borrowing too much in the first place. Living in Southern California, I remember the peak of the housing boom. House prices were out of control and there was a buying frenzy – a kind of “if I don’t buy a house now, I’ll never get one!” Since banks were so loose with their lending practices, just about anyone with a heart beat could own a home. I didn’t take the plunge back then because I couldn’t get the numbers to line up, how could I afford a $600,000 starter home when I only brought home $80,000 annually? It didn’t make sense to me. I’m glad lending practices have reverted to stricter rules, even if that means I won’t qualify for a loan for a couple of years. It is definitely a privilege and not a right.

  28. krantcents says

    The pendulum has swung to the other side! I see no reason to have audited statements, but you should be able to use your tax returns (signed, of course). After all, you are breaking federal law lying to a bank and falsifying tax returns. A CPA audit must go through a laundry list of steps to validate financial information according to GAAP, it is expensive. If you are using the same bank you have CD’s I would keep pressing that leverage and your long term relationship.

    • Dave says

      Valid points, that I disagree with the author on. To perform an audit, a large amount of resources need to be used, from time documenting the systems, performing and documenting all of the work done, to time assisting in the preparation the financial statements (for about 99% of small business owners). That means man hours, not even taking into account overhead. While most CPAs aren’t cheap, they aren’t hugely expensive either (compared to lawyers or wall street financiers).

      On the flip side, like krantcents points out, an actual audit is probably overkill for the situation. As well as a lot of people don’t understand what the purpose of an audit is and that there are other levels of assurance that CPAs can attest to.

  29. Free To Pursue says

    Banks are not your friend. They are there to make money. That’s it.

    That being said, what the loan officer is not acknowledging is the number of subprime mortgages that were extended with terms the borrower did not understand. The reason these were approved at the time was greed. Bank profits were increasing and the pressure to keep performance in line with the rest of the industry made lending standards increasingly lax over time.

    Don’t trust banks. Only trust yourself. If you need to borrow, borrow the very least you can and pay it off early. Banks are in essence another self-serving “boss” you need to answer to. Avoid them whenever possible.

    • Financial Samurai says

      I told myself “F*ck this crap, I’m just gonna pay cash” so many times during my mortgage approval process. Cash really is king…. but then again, a 2.5% interest rate is hard to beat.

  30. Travis @debtchronicles says

    I would love, love, LOVE to have a frank discussion with a loan officer at my bank about their “one size fits all” lending rules. Quite frankly they can bend over and shove them you know where. I get that things got ugly with the housing collapse…but….here’s my story.

    We built our current house in 2004 at the tail end of the housing bubble. We had LOADS of debt and it only got worse (by 2009 we had over $100K in credit card debt) – but our lender approved us for our mortgage. We built, we moved in, and we made our payments.

    in 2009 we enrolled in a debt management plan – the payments ate up a HUGE amount of our monthly income. In fact, our mortgage plus our DMP payment accounted for over 60% of our take home income. But we continued to make our payments. I told my wife that no matter what, we would NOT lose our house. It was our fortress against everything else going on in our lives. Maybe not the best decision……it would have made things much easier to downsize – but it was our foothold and finger in the air against our debt. I did mystery shopping, we scraped and saved and everything in our power to keep making those payments.

    Once we finished our DMP, we went in to our bank to refinance. We had to jump through HUGE hoops to refinance…and because of our recent past with credit counseling we had a hell of a time convincing the bank that we qualified to refinance.

    Yes, that’s right…we were trying to refinance to take advantage of lower interest rates, lower our payment and make it easier to make that mortgage payment each month. Easier than the payments that we have made on time, every month for 10 years.

    I understand the need for good rules and regulations. I also assert there’s a need for common sense. Mortgage lenders have NEITHER.

    • Financial Samurai says

      Travis,

      To be clear, you paid your mortgage all throughout the downturn and you are still living in your house correct? If so, then all is good as you’ve paid down your credit card debt and didn’t default, hurting your neighbor’s home values in the process. If this is the case, I’m not sure what’s the problem here. The loan officer isn’t angry at people like you who fulfilled their contract promise.

      Can you explain further?

      thx

      • Travis @debtchronicles says

        A snapshot of my credit report would show accounts with the text “handled by credit counseling.” They would also show a balance of zero, and a status of closed. Further investigation would show that over 55 months, my wife and I reduced our credit card debt by $109,000. Every mortgage payment (as well as every other payment on my credit report) was made on time.

        Yet the words “handled by credit counseling” got us flat out denied by one lender, and excluded us from several other options at the lender we did end up going with (which is the lender we had our original mortgage with).

        Yes, we had been unwise with our money – but our track record over the last 5 years, along with never being late on a mortgage payment, you would think that at that point common sense would kick in and tell them “hey, these guys have their act together.” Apparently not. The rules say “credit counseling on credit report = bad” (said in robotic voice) so, we were put in the penalty box.

        • Financial Samurai says

          Ah, gotcha. I understand where you are coming from now.

          From the point of view of the loan officer, because he is already inundated with people who want to borrow money and think they deserve to borrow money who don’t have “handled by credit counseling” on their resume, he can be very picky.

          Of course he won’t be as open to a prospect’s face. But that’s where a post like this comes in.

  31. Mike says

    This is a complete overreaction that has targeted the wrong people. A friend of mine has the retirement paycheck of a senior retired military officer, has a job as a pilot for one of the major air carriers, and his wife is a successful and very senior nurse. Despite all of this, they still were treated like freeloaders when it came time for a new home purchase. His description to me of the process was appalling.

    Maybe this is a large part of why my home’s value continues to tank. All the more reason for us to grow our net worth so I can bypass these fools when it comes time to buy our next home.

    • Financial Samurai says

      I definitely felt like a criminal going through the mortgage application process. It is very unpleasant, but I’m just going to bear it and write/speak about my experience. It’s their money after all… so, if I want their money then I have to play by their rules. Kinda like Google for those of us who have businesses online.

  32. Jestep says

    I don’t at all let people off the hook for signing a mortgage they cannot afford, but this is some of the most hypocritical garbage I’ve read in a long time. I guess it’s easy to look down from your horse after you were chasing ambulances for 10 years, because that’s about what the lending amounted to. The mortgage practices during the late 90′s to mid 00′s were some of the most unethical and damaging financial policies I’ve ever seen and they were perpetuated from top to bottom. I don’t really care if the government allowed it, it’s unbelievably disingenuous for someone in the business to write an unempathetic article like this as their hands are as dirty as anyone, and it’s very likely they benefited from the lax underwriting requirements during that time. Sorry but you can’t just wash your hands and take the higher road just because regulations came down hard on your own paycheck and now you’re bitter about it.

  33. Matthew Kime says

    frankly, i’m not sure if you know what happened with the housing market bubble.

    lenders are responsible for maintaining high standards. they failed to do this because they were making money hand over fist due to the mortgage securitization industry. THEY CHOSE TO LOWER THEIR STANDARDS.

    futher, mortgage lenders are financially literate! the sad fact of the matter is that a very large percentage of consumers simply are not. they rely on lenders to maintain high standards. we can shake our finger at them for not being financially literate but it won’t help. we need to change the system to accommodate vulnerable borrowers.

    read this – http://www.amazon.com/All-Devils-Are-Here-Financial/dp/1591843634

    • Financial Samurai says

      Should a financially illiterate person take out huge debt to buy a house then?

      This post shows WHY loan officers are so stringent with borrowers. It is a counter-point to all the anger and frustration people have been demonstrating against banks.

      The way I’m changing things is to provide more perspective and teach people how to better analyze property. I think the 30/3 rule for home buying is very important too. We can all pitch in. We don’t have to write the articles to help, but if you don’t, please help spread the word.

        • JayCeezy says

          Matthew, you seem to think lending institutions did this all in lockstep, on their own initiative. I did see your link, am aware of the writers and the book in your link, and I ask you to simply google “clinton bush ownership society” You will be treated to numerous articles blaming both Clinton and Bush for “going too far” in attempting to encourage home ownership.

          Nobody has mentioned this in the thread so far, largely because there is nothing left to say about it. But the idea of “home ownership” has always been encouraged, because of the “stake in society” that homeowners have. They have obligations to vote, pay taxes, have ties to the community and work at jobs; all good things for a society to flourish. Having HUD, Fannie and Freddie on board to help those on the cusp of eligibility was a noble experiment, and NOBODY was saying home ownership was a bad idea in the 1990s and 2000s. It was also a way to attempt to bring racial minorities into the “ownership society” and an attempt to give many on the cusp the opportunity to join the larger society instead of being excluded from the obligations and benefits. Unfortunately, not everybody, especially those on the financial cusp, was able or willing to follow through with the commitment a 30 year mortgage (let alone all the responsibilities of home ownership) require.

          • Ace says

            The “Ownership Society” is a George W. Bush administration term (and an extensive philosophy). And the basic concept is good.

            Fannie and Freddie were also victims. They are in the business of purchasing mortgages and mortgage backed securities from the banks. In other words: buying off the risk.

          • Matthew Kime says

            the lending institutions did lower their standards (pretty much) in lockstep – because there was a competitive advantage to doing so. default risk was simply pushed down the line to whomever was holding securitized mortgages.

            it was a great system until it stopped, the major players almost universally went bankrupt, and owners of securitized mortgages were left holding the bag.

            • JayCeezy says

              @Matthew, the point is that the banks did not do this on their own initiative. The ‘lockstep’ is a descriptor, not the subject. In any case, your claim that “THEY CHOSE TO LOWER THEIR STANDARDS” is incorrect; all choices are market-driven for the Fed, for Fannie and Freddie, for borrowers and lenders. You don’t have a right to a credit card or a house. Think about that next time you need more money than you have, for something you want but can’t pay for.

              @Ace, appreciate the links and want to clarify that this is not exclusive to GWB. The entire U.S. tax code was/is written for social policy (not financial policy), and to encourage behavior that benefits U.S. society. Here is Clinton’s “Homeownership Strategy” directed through HUD in 1995. http://www.globalurban.org/National_Homeownership_Strategy.pdf I can remember a Civics class from the 1970s, explaining why homeownership was a good thing for any society; young men settle down, marry, have children, build a financial and social future. If you do not have this, then you have a problem that is occurring today in Asia and the Middle East, where millions of men without education or skills have no real opportunity to marry or build a financial future. There are millions of men in China today that will never marry, and not by choice; the male/female birth rate is 1.2. http://www.forbes.com/sites/china/2011/05/13/chinas-growing-problem-of-too-many-single-men/ In the United Arab Emirates, there are 2.74 men for every 1 woman between 15-64, and this trend extends throughout the Middle East. If we could get these dudes some c00chie, they would probably calm the f*ck down, shave their beards, and stop blowing themselves up.

            • Matthew Kime says

              the banks most certainly did lower their standards on their own initiative – riskier mortgages were seen as more profitable. further, they didn’t hold the loans but sold them so they didn’t hold on to the risk.

              the initiatives to expand home ownership were minor and largely ineffective in the whole system although they were used as justification for not putting the brakes on an out of control system.

            • Ace says

              I certainly agree…. One of the worst offenders was Countrywide (BOA bought them).

              Many lending institutions were simply in the loan issuing business. The risk seemed low because mortgages were sold to someone else, then repackaged into CDOs and sold to other parties. The risk models seem to indicate that a bond consisting of say one thousand mortgages was low because only a few homeowners would likely default. The payment streams would supposedly remain intact.

              This is fine in my opinion, as long as there is good government oversight. Which there was not.

              The larger issue is the “bubble” mentality which prevailed. The fact that houses kept going up in value provided a positive (negative) reinforcement feedback loop, inspiring overconfidence in all parties involved: lenders, buyers, government, investment banks, pension funds, Fannie & Freddie, etc.

              There seemed to be (and still is) an attitude that it’s ok to purchase as long the buyer qualifies at a teaser rate. The thought process seems to be to constantly refinance every few years at the new current teaser rate. This is not the norm where I live.

              My observations and thoughts are far more in depth and complex than this; and far too long for this forum. But geography, culture, community, and tax policy all played into this issue (and still do).

            • JayCeezy says

              @Matthew, it appears that you are unfamiliar with the fact that Fannie Mae and Freddie Mac guarantee almost half the mortgages in the U.S. and especially subprimes And that HUD was appointed in the 1990s to oversee those institutions, with the specific mission to increase the rate of homeownership using subprimes. And that the Glass Steagall Act, which prevented the combination of investment and commercial banking, was repealed in 1999. Over 500 banks failed in the 2007-8-9 crisis, including some of the very biggest. For future reference, asserting something (i.e. “it had a minor effect” “they chose to lower standards”) without any facts or backup isn’t something that is persuasive or gives credibility to what you say. It is one thing to feel strongly about an issue, but that is not the same thing as having a factual grasp of the issue. Who do you think bought those bundled subprimes? It always helps to ask just one more question, before making up your mind so firmly.

              @Ace, your noting of government oversight problems, and disincentive for banks to qualify these loans as if they would be held to 30 year term, is appreciated. That disincentive for the banks to ‘hot-potato’ these loans is a perfect example of the “moral hazard” I noted previously, where the benefit does not correspond to the risk. I often wonder what, exactly, the outcome would have been if there were no bailouts (which removed the moral hazard consequence). Maybe the pain would have been over by 2014, instead we are still on that journey with an uncertain destination.

            • Matthew kime says

              @JayCezzy I’m familiar with the changes that happened in the 1990s but the consequences were indirect in regards to the bubble. Fanny and Freddie lost market share during the housing bubble because they were late to the subprime game. They simply weren’t a major player in creating the bubble – countrywide was.

            • JayCeezy says

              @Matthew, your post indicates you are “familiar with the changes” but your posts do not indicate it. Do you understand that Countrywide, at its peak, had 17% of the market share? Do you understand that Fanny(sic) and Freddie don’t make loans? That they buy them from lenders and package them into bonds? That Countrywide committed fraud, went out of business, and its succeeding entity BofA was liable for that fraud? Who do you think Fanny(sic) and Freddie “lost” market share to? Would it be a good thing to compete for market share against companies that engage in fraud? How old are you?

            • Ace says

              Hey Guys,

              Countrywide was exceptionally bad!

              A buddy of mine has run an appraisal business for several decades. He use to get nasty phone calls (the way he put it) if he filed appraisals which were too low.

              The small local banks which he did business with: a completely different attitude.
              He sometimes received e-mails suggesting that he may have overvalued a property.

              Anyway…. That’s my anecdote (which on the Internet is worthless). But it certainly provided me some insight.

            • JayCeezy says

              @Ace, not worthless. I went to school with a guy, who was a longtime friend for 30 years. He was a SVP with Countrywide, then BofA. He killed himself last year, leaving behind two teenagers and his college sweetheart wife. The damage is up and down the social and economic systems, and that doesn’t excuse a ‘bumper sticker’ understanding of the problem. This thread reminds me of a great quote (not directed at you, Ace)…

              “You are not entitled to ‘your opinion.’ You are entitled to ‘your informed opinion.’”

              The joke (at the time) was, Q: “What is ‘Countrywide’ spelled sideways?” A: “Really Wide C***!”

            • JayCeezy says

              Another joke from the time…

              “Countrywide is offering a new loan product. Three years at two points below prime, then it adjusts to a Foreclosure.”

  34. Janiece says

    “We no longer want to lend money to the average Joe or Jane because the average Joe or Jane screwed us BIG TIME.” Who approved these mortgages for the average Joe or Jane?

  35. Joebof says

    This can’t be right. The *loan amount* cannot exceed 43%??

    “To be considered a qualified mortgage, a loan amount cannot exceed a total debt-to-income ratio of 43%.”

  36. Gern Blandersong says

    I agree with the mortgage loan officers tighter lending standards. However, the fault and responsibility for the 08 loan crisis is mostly on the banks and lending institutions. They got too loose with their standards and lent money out with a high risk of it not getting paid back. It is the banks responsibility first to assess the risk correctly. For example, my sister works for a mid-size bank in the midwest that made it through the loan crisis without any major problems and no bailouts because they kept their lending standards high. Her bank doesn’t even give out RV and boat loans, they are conservative in the lending.

    This pattern will repeat itself again because the banks will start to ignore their own risk officers advice and get rid of them and try to make a quick buck again on loan commissions. We will never see the end of banks being stupid with their money and high risk.

  37. Pete says

    I agree with every word–so refreshing! I was raised to believe your word is your bond and promises are not to be broken. It disgusts me when people don’t take responsibility, leaving those of us who are responsible holding the bag. I plan to raise my son with the same values, but we have a definite issue these days with folks thinking they can welch because “it’s just a faceless corporation.” Guess what: corporations are made up of human beings! Thanks for a great post!

  38. Sarah says

    I’ve scanned all the comments to see if anyone mentioned loss of jobs and income as a reason for not paying mortgages? It’s not like all defaults on loans were due to “not wanting” to pay them back. We have been job hunting since we had to give up our home in 2009, and have found jobs at Target and the local grocery store at minimum wage. Both of us are professionals with Masters degrees. At present there are simply no jobs where we live.

    • Ken says

      That is very unfortunate, and I assume others are also in your situation. Did both of you lose your jobs 5 years ago and get part time work quickly? Or have you guys been getting unemployment or other benefits? Do the benefits help at all or are they pretty worthless? What about relocating, is that a possibility?

      • Sarah says

        Hi, Ken,

        Yes, we were small business owners and lost the biz. No, we didn’t draw unemployment or seek financial help.

        We got seasonal work as cashiers at Target. Two of our former customers have saved our rears: one offered for us to come rent his coffee shack and to pay part of the rent in groundskeeping. We are doing that. The other offered for us to manage her store, and then two years ago decided to lease the biz to us so she could get her life back. We are doing that. It’s been hand-to-mouth so far, with ends not quite meeting. We live on an island, which is both expensive and prohibitive for moving costs. I am actually looking at how we might just up and move ourselves and start completely over.

        The Samurai website gave me some insights: I’ve been licking my wounds from a hard fall and staying down too long. Time to get back up and play. And, while there are explanations (to some commenters above they may sound like excuses), I am simply afraid to try again. So, the crux is: am I willing to be afraid and to try again anyway?! Yes.

        Let the games resume.

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