Mortgage Lending 2008 - A Return to the Past?
There are a few (very few) advantages to age. The key is experience. As the old saying goes; you can have 1 year of experience for 10 years or 10 years of experience.
If you have the latter, you can remember when all mortgage lending was portfolio lending. While there is no question the growth of the secondary mortgage market led to some of the most positive economic outcomes of the past 20 years, there were certain advantages to the portfolio approach.
We often performed multiple analyses of income and expense to verify that the purchase of a home was in the best interest of both the purchasers/borrowers and the bank.
Certainly, everyone is aware of the shortcomings of the simple ratio analysis that became the model for secondary market lending. Portfolio lenders often coupled a net income analysis with the standard ratio analysis to show the potential borrowers exactly how much cash they would have to live on after the purchase of the home. They would also review the unanticipated but regular expenses that came with home ownership.
This often resulted in dealing with young borrowers with tears running down their faces as they were made aware that the purchase of their “dream” home really wasn’t in their best interest. It was certainly one of the more unpleasant aspects of lending, although it was good for the borrowers and the bank.
Also, loan officers had more responsibility. They were responsible for not only generating new business, but underwriting the loan and just as importantly, collecting the loan if it became delinquent. Of course, they generally were not compensated solely on volume, and did not receive the large compensation that originators received as functions were split.
Clearly some of the blame for the current mortgage lending mess is a direct result of the emphasis on volume over quality. But this is really more a function of the system itself, as the way it is structured, as long asyou can sell the loan, everyone is incented to close it, regardless of whether the borrowers can actually pay the loan.
Hopefully, no one would suggest a return to the days of portfolio lending with all the negatives this would entail. But perhaps a move backward a bit, where lenders take the borrowers interests into consideration and make difficult decisions, would movethe market back in a positive direction.
This entry was posted on 10. August 2008 at 10:36 and is filed under Capital Markets, Servicing Valuation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.