Just a few years ago I purchased a beautiful condo in a very popular ski resort town new the Rocky Mountains. It was a really exciting moment for me when I signed my loan paperwork. I financed it through one of the largest Mortgage Companies of that time.
A month later, I started making my mortgage payments, and, after about 2 months, I found out that my mortgage was sold to some other company. That was quite a surprise to me. I did not know that they could do that. So, I started making payments to some Mortgage Company B.
A couple of years down the road, my mortgage was sold back and forth quite a few times that I lost count. Then I found out that it’s quite common for investment banks to buy loans in bulk and then sell them over and over again. Quite a few bad loans were slipped in with hundreds of good loans where the debtors have been making payments on time.
In the times of declining economy and massive government spending as well as job cuts and lack of incomes, even those people who have always worked hard and made timely payments, started to fall behind. Banks did not have much control over that. They would rather want you to find a good job and keep making mortgage payments, then foreclose on your house which is “upside down”, and deal with all that hustle-bustle of selling it when the real estate market is flooded with foreclosures.
So, what kind of lesson have we learnt from all this lending and borrowing chaos?
Responsible Lending is a Must
Some brokers used to get people approved for mortgages and charge an interest rate as high as 16-18% (believe it or not!). Just to make some money. Their underwriting department was neither very thorough nor strict, thus those transactions resulted in the issuance of quite many bad loans.
You could buy a $400,000 house with close to $0 money down and stated income which means no proof of income. I, personally, have a few friends in the area who lost their homes and filed bankruptcies, unfortunately.
Well, those times are far gone. In order to stabilize the housing market as well as the banking business, responsible lending standards are being applied to every transaction to ensure that both the bank and the borrower are successful throughout the entire life of a mortgage.
Responsible Borrowing is a New Standard
When it comes to bad loans and mortgages, it’s not entirely banks fault. They are in business to make money, and, at times, ignored responsible lending standards while the economy was booming.
The general public in their turn, did not do their homework. Most of us did not read our contracts, and we did not have a clue what we were signing for. We could not really tell what it meant to have a fixed rate or ARM, adjustable rate mortgage or balloon payments.
When real estate prices kept rising, we just wanted to grab a house to make some money on. Everyone wanted to become a big investor and make a lot of money on a housing boom. Guilty as charged!
Bottom Line: Responsible Lending is as Important as Responsible Borrowing
It’s obvious that banks should implement responsible lending practices based on solid underwriting processes with focus on credit and borrower’s capacity to avoid potential loan deficiencies. A lot of banks are demonstrating their commitment to quality control these days which is a great step towards responsible lending.
As far as us, consumers, whatever we do, we need to try to make an informative decision when applying for a loan. Do your homework, learn about various loan products, read the fine print and, then, when you are 100% sure you can afford it, seal it with your signature as a sign of approval.
Once you signed for it and you know you can afford it, manage a loan responsibly. Do the best you can to keep your job, pay down your existing debt, build up your emergency fund, do whatever it takes to manage your debt wisely.
What do you think about responsible lending and borrowing? Please share your thoughts with us!
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