During my recent “Real Estate Bubble Explained” project, I found it was common for lenders to brag about their affordable mortgages. They were talking about their subprime mortgages.
Anything that let more people buy homes back then was considered to be a good thing. Mortgages that would have been branded as predatory in earlier times were now as wholesome as mom and apple pie.
For example, I LOVE the title of this graph from the FDIC in 2006. Interest-only mortgages, and Option ARMs, “Help Homebuyers Bridge the Affordability Gap.”
And here they justify 40-year mortgages.
“The extended amortization period reduces monthly mortgage payments, thereby stretching a buyer’s purchasing power.”
FDIC doesn’t even sell mortgages. They’re a bit above the fray but the conventional wisdom in 2006 was simply the more affordable the mortgage, the better – even interest-only, option ARMs and 40-year loans.
The reason the number of affordable/subprime mortgages skyrocketed during the boom was because lower lending standards mean more people can get mortgages and that means mortgage companies can sell more mortgages.
There was a race to the bottom.
Prime mortgages were all similar so the competition between lenders was fierce. But if you sold subprime, er, I mean, affordable mortgages, you had a helluva lot less competition so for years you could sell more mortgages and, in addition, charge 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 mortgages?
But the economics didn’t work that way. If everyone is selling prime mortgages, there’s more money in selling something more unique like affordable/subprime mortgages.
Many mortgage companies weren’t happy selling sustainable, competitive, prime mortgages even though sustainable mortgages help create more stable neighborhoods, especially in less stable areas.
It seems some lenders will always push to have more affordable mortgages to sell.
They’re looking for an edge, something unique to sell, something outside the super competitive prime mortgage market.
And looking at what they said during the boom, lenders will always justify their affordable/subprime mortgages by saying they’re just trying to help;
- Low and moderate income families,
- Underserved and minority communities,
- Spread the American Dream of homeownership
Affordable/subprime mortgages are, of course, never sold for what they really are, a way for mortgage companies to make more money.
Sustainable mortgages may not be as profitable to mortgage companies but they lead to;
- Smaller booms,
- Smaller busts,
- More neighborhood stability,
- Creation of more household wealth, especially in low income neighborhoods, and
- More economic growth nationwide.
Nothing since the Great Depression has destroyed more household wealth in low and moderate income, underserved and minority neighborhoods than the affordable/subprime mortgages sold during the Great Real Estate Boom.
Instead of focusing on the short-term affordability of mortgages, we should focus on the long-term sustainability of our neighborhoods.
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.
# # #
4 Responses to Affordable Mortgages vs. Sustainable Mortgages
Those were crazy times! I can remember, when we were negotiating to buy my son’s home (2004, God help us!), some Realtor or mortgage vendor suggesting we consider an interest-only loan — with a straight face. I thought, Are you crazy? As it was, they talked us into a 30/15 arrangement, which soon is going to drop a balloon payment on us. Have tried repeatedly to get my son to refinance, since we’re no longer underwater on the house, but he’s having none of it…doesn’t want to pay the wad of dough that it will cost us to swing it.
Unless the mortgage broker made 2 to 3 times the commission on interest-only loans in which case it would have been very rational for him to try to steer him into an interest-only.
I have been reading some of your articles and I am wondering if you think real estate agents will be gone in a few years as Uber founder with hause, redfin, open door and other startups go after commission’s.
Mike, I think as soon as sellers can find a way they can sell with moderate success without paying the buyer’s agent a 3% commission that buyer’s agents will go the way of newspapers, they’ll eventually tank over a period of ~5 years. They’ll still exist but, like newspapers, at a far smaller scale because buyers will have to pay for their own agents.
Seller’s agents will continue… I think.
Comments are closed.