HUD Identifies Source of Increased Foreclosures and Delinquencies

28 Sep HUD Identifies Source of Increased Foreclosures and Delinquencies

In HUD’s Interim Report to Congress on the root causes of the foreclosure crisis, the conclusions reached by the panel are a searing indictment of the mortgage and investment banking industries:

… [I]t seems clear … that the sharp rise in mortgage delinquencies and foreclosures is fundamentally the result of rapid growth in loans with a high risk of default—due both to the terms of these loans and to loosening underwriting controls and standards. Mortgage industry participants appear to have been drawn to encourage borrowers to take on these riskier loans due to the high profits associated with originating these loans and packaging them for sale to investors. [Internal citations omitted.]

Borrowers, or at least some of them, come in for their share of the blame, too:

While systematic information on borrowers’ motivations in obtaining these loans is not available, existing evidence suggests that some borrowers did not understand the true costs and risks of these loans, while others were willing to take on these risks to tap accumulated home equity or to obtain larger homes.

Whether studies such as these and other expert analysis will lead to any substantial change in the way mortgages are originated in the future remains to be seen, current industry practices seem to have reverted to the traditional underwriting of mortgage loans that existed prior to the invention and proliferation of mortgage-backed securities. For now, at least, if you are looking to borrow to refinance your home or to purchase a new one, expect the process to be detailed, invasive, and a whole lot more trouble than your more recent no-doc or low-doc mortgage experience. If you are going to get a loan closed today, you can expect to have to put forth more effort, and probably a lot more money, than over the last few years.

I’ve heard from a number of clients over the years, who have come to me with mortgage payments that they clearly can’t make, that they just didn’t expect that the lender would give them a mortgage that they couldn’t afford. Experience has given the lie to that assumption, and it is not wise to depend on any lender to look after your best interest. But for the short term, it may be that your lender will be looking at those questions a bit more carefully, which could end up being a good thing. I just don’t know whether to expect it to last.

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