Editor’s note: Inman News will hold a contest each week asking readers to submit articles to the InmanWiki focused on a particular topic. The best entries will be featured the following week in Inman News.
Last week’s winner was Michael Hoskinson, a Realtor with Foundation Realty in Huntington Beach, Calif. The following article was his submission to the topic, “What do you think the ultimate result in your local market will be from the fallout in the subprime mortgage market?”
As a real estate broker with over 20 years of experience, I wanted to weigh in on the current subprime debacle.
In this last housing boom, lenders created loan products to meet consumer’s hearty desires; they created a huge amount of equity but missed a vital point: they allowed consumers to buy a payment, not a house. Items like “stated income” and “hybrid ARMs” made an egregious amount of money for banks, and brokers but put people in places they should never have been allowed to go. The sad part is that the public will end up paying for the lenders’ mistakes.
One of the biggest problems is how the market defines “subprime” — they label it as 640 FICO or less. One 30-day-late payment can unjustly bring you to that level; to use that against borrowers is criminal. Banks have been manipulating borrowers with excellent credit so that they can put them into lousy loans that make the bank a ton of money but place the borrower into a larger payment that is built to fail sooner or later. If the credit-scoring mechanisms (FICO) were realistic and banks rated a borrower’s credit correctly, allowing for mistakes and some unavoidable items, it would result in borrowers being put into the proper loans. Banks would have made a bit less money but not bankrupted their customers. It is a system in which the borrower has very little leverage; you play on the bank’s field or you go home … if you have one.
Of vital need for change is the way loan brokers are compensated. The YSP, or “Yield Spread Premium,” is nothing more than the bank’s kickback to the broker for doing the loan. The worse the loan, in terms of interest rate, that the broker gets the borrower to agree to, the higher the YSP dollars go to the broker. What exactly, other than honesty, is the broker’s motivation for helping a borrower get the best available deal? Combine greed, low barrier to entry and minimal mandated disclosures, and you have a recipe for a lending disaster at the borrower level. Until there are mandated disclosures that spell out in 14-point type and plain language what exactly a borrower is encumbering themselves to in total and how the broker or bank is compensated, this system will continue to fail the public.
I have personally seen lenders and brokers lie to consumers about their credit-worthiness and play bait-and-switch games to get them into appalling loans. The residential industry is rife with such tactics and their bill is coming due for it. They killed their own Golden Goose; we’re going to get stuck with the feathers.
–Michael Hoskinson, Foundation Realty