The mortgage industry has struggled to redeem its reputation since the catastrophic 2008 financial crisis. While a degree of skepticism is perhaps warranted, the truth is that the factors that led to the 2008 economic collapse were far more complex and nuanced than most understand. While particular individuals and companies were instrumental in instigating the crisis, it was not the fault of the entire industry.
All industries, banking or otherwise, must endure difficult periods and damaging characters. The home loan industry is no exception. The best loan officers are able to create and successfully cultivate relationships, and the bad seeds are quickly found out and ejected. While a loan officer might be able to play the part of an honest or considerate individual, if in reality he isn’t, his true colors are eventually revealed – as evidenced in the 2008 financial crisis. A mirage can only be maintained for so long.
In order to better understand the crisis, lending industry terminology and roles must be properly understood. Only then can blame be apportioned to a particular group or person.
A mortgage broker facilitates the relationship between the borrower and the lending institution – a bank, trust company, credit union or a mortgage corporation. Direct lenders can be banks, mortgage banks and non-bank entities. Employees who work for a direct lender are responsible for reviewing your application and make the decision on whether to lend you money.
In 2008, at the outbreak of the crisis, the media specifically targeted subprime lenders and “irresponsible borrowers” for the financial crisis. However, according to a recent Fortune magazine article, placing the blame solely on lenders is starting to appear misguided. Fortune reported that Wharton economists Fernando Ferreira and Joseph Gyourko compiled a working paper to investigate the idea that it was subprime lending that triggered the crisis. The resulting data showed that even with strict limits on borrowing – requiring, say, every borrower to put 20% down in all circumstances – wouldn’t have prevented the worst of the foreclosure crisis. “It’s really hard for certain regulations to stop the process [of a bubble forming],” Ferreira concluded.
Essentially, Ferreira and Gyourko concluded that the foreclosure crisis was inevitable, even if risky lending had never occurred. When understanding the crisis, it’s necessary to accept that there were indeed corrupt individuals and corporations that helped trigger the economic crisis of 2008. But this aspect was only part of the reason for the extent of the financial calamity.
Next time you meet a lender or consider working with one, it may be beneficial to think beyond some of the stereotypes that have floated around since the financial crisis. There’s usually more to the story than what trendy slogans indicate or some “expert” pundits discuss.