The nonprime mortgage business
is in a mess because during the boom years, hardly anyone had an incentive to
The people who take applications, the companies
that lend the money, the appraisers who check property values, the investment
banks that sell mortgages to investors and the investors themselves -- all had
millions of reasons to keep mortgages flowing to borrowers who couldn't afford
them. Each reason had a dollar sign attached to it. As long as each participant
kept saying yes to risky borrowers, everyone made money.
like we were originating willy-nilly, with abandon, and the consequences be damned,"
says Christopher Cruise, who trains brokers and loan officers. "As Americans,
we're accustomed to not being told no. ... If we want to have a mortgage loan
and we want it now, we don't want to hear about the potential consequences down
That goes for borrowers and also for the players
throughout the mortgage industry. The siren song of bountiful paychecks drowned
out the murmurings of conscience.
"Are there individuals
and folks in the supply chain here and there that don't care, or don't necessarily
have the borrower's best interest at heart?" asks Jim Svinth, chief economist
for LendingTree.com. "Yes. But that can be said about just about any industry
where people are paid on commission."
the deal, dump the risk
Much ink has been spilled on the meltdown
going on in subprime
mortgages, which are home loans for people with flawed credit histories.
Analysts believe problems will show up in Alt-A mortgages, which go to borrowers
who have so-so or even good credit, but who don't document their income or assets.
A lot of interest-only loans can be lumped into the Alt-A category, too. Together,
subprime and Alt-A are known as nonprime.
The mortgage industry
is set up in such a way that the participants chase after profits while dumping
the risks onto someone else. The chain of buck-grabbing and buck-passing starts
with mortgage brokers and loan officers -- the men and women who work face-to-face
Brokers and loan officers make their livings
by persuading people to get mortgages. There's no profit in telling an applicant
that he has no business buying a house. Except in cases of flagrant fraud, brokers
and loan officers don't suffer consequences if their customers later fall behind
on their house payments.
'We don't really
"For us, as frontline originators, there isn't a direct
correlation between loan performance and compensation, so we're disconnected from
these failures so long as there's no fraud. In a way, we really don't care that
much," Cruise says.