Since I was a graduate student back in 2001ish, I've managed to buy six houses, and probably could have bought a few more. I've had a bit of experience with the mortgage industry, and I thought that I'd take time to give an opinion on some of what I've seen.
Generally, I learned that there is a lot more "shady" dealings in the mortgage broker industry than there is dealing directly with banks. In case you don't know, mortgage brokers help you fill out the loan paperwork, and then, they submit the paperwork to banks/mortgage companies who then approve and finance the loan. In return, they get a kickback, usually 1% of loan amount or some bare minimum fee, whichever is greater, and they tack on a few other fees if they can too. So, if you buy a house for $100,000, the mortgage broker will get a "loan origination fee" of $1,000 plus some other expenses. -Don't get me wrong, lots of loans come with loan origination fees, even student loans, so I'm not bashing mortage brokers for trying to make money.
Now, I could ramble on about mortage brokers and "how it works" for a while, but I'm going to sidestep the rest of that conversation and just say that rather than banks or mortgage companies, I would say that the mortgage broker industry has gotten out of control. In my area, there have been lots of mortgage broker start ups over the last few years, and from my experience dealing with them, most of them are more than willing to "do whatever it takes" to get you a loan.
Basically, they want the up-front origination fee and whatever other expenses they can tack on. The mortgage company and/or banks, for the most part, trust the research and paperwork submitted by the broker, who basically functions as the middleman between the lender and the buyer. From my experience, the brokers aren't so much actually concerned about whether or not you can actually make your mortgage payments, so much as they're concerned with getting the loan approved and making a quick buck. If you deal directly with the lender, they are *usually* (but not always) a lot more uptight about giving you a loan. In other words, if you work at a bank and you write a bad loan without properly verifying the applicant's data, you might get fired. If you work at a mortgage broker and get an applicant a loan, even though he/she might not be completely qualified for the loan, you still get your origination fees and other expenses, and you don't have to worry about repercussions if the applicant defaults on the mortgage - after all, you are not loaning the money. For a brokerage, the profit motivation there is to make the loan at all costs, even if it means turning a blind eye to certain "iffy" loan applicant information.
As one example, there are three major credit bureaus in the country. If a brokerage runs a credit report request, they almost always use the highest credit score reported. Even if the other two credit reports have some bad credit that hasn't yet made it to the higher scoring credit report, they'll take it anyway because it will let the applicant get the loan, and help the brokerage make money. --It doesn't matter that the other two credit reports might have more up-to-date info, they're going to go with the one that gets the loan. Of course, this works out well for the broker and the buyer, but could come back to haunt the bank. I could give more...er.."interesting" examples, but this sort of "turning a blind eye" goes on at mortgage brokers all the time.
Anyways, a lot of these bad loans came through mortgage brokers who were more concerned with making a quick buck than writing a good loan. I'm not sure that greater bank regulation is going to help a lot when you've got mortgage brokers out there trying their best to ram-rod through every loan then can. If you ask me, it's the mortgage brokerage industry that needs a lot more regulation. The banks themselves, or mortgage brokerages owned by banks, were always a lot more uptight about verifying employment, making clear the terms of the loan, checking credit history, etc. The mortgage brokers were usually more focused on getting the loan through and making a quick buck than watching out for the buyer's or lender's interest. --To be clear, when I bought that first house or two, I had trouble getting loans going directly through a bank (who wants to loan money to a 21 year old with no credit history and very little work experience?), while mortgage brokers were more than willing to help.
I mean, I'm glad they did help me out. But, the same lending practices that helped me get my loans are probably the same ones that are hurting the banking industry now.
