George Santayana, a famous philosopher from the 20th century, once said, “If you don’t learn from history, you are doomed to repeat it.”
One of the most destructive events in the mortgage industry—the housing crisis—should be at the top of everyone’s list to avoid repeating.
Subprime Lending Before the Mortgage Crisis
In the early 2000’s, private investors began showing an appetite for subprime loans.
Lending constraints loosened and demand for alternative loans on the secondary market increased. Default swaps were used to shift the risk and traditional underwriting criteria was thrown out the window. All of these factors ultimately led to a ramp up in foreclosures and private money exiting the secondary market in droves. The idea, the foundation of what the investments were made on, became invalid. Once this became known, money left, people stopped making payments and more foreclosures came onto the market, which further devalued the properties.
The housing crisis exploded in 2008 and the rest, as they say, is history. The pendulum of the market swung into overcorrection: restricted lending became the norm and underwriting standards tightened to the point where it became increasingly difficult to get a loan.
Subprime Lending Now
Now, seven years after the housing crisis, underwriting criteria is loosening up again. However, loan originations are still low. The 2015 volume is estimated to be at $1 trillion. To really recover from the crisis, private money has to come back to the secondary market.
Why is this? There are plenty of people who want to buy houses. Zillow predicted that Millennials would overtake Generation X as the largest group of homebuyers. So what’s the hold up?
Mortgage Qualification Requirements
The number of people that still don’t qualify is large, and many of them come from the age group that traditionally would be buying. Millennials in their upper twenties are beginning to shop around, but many of them aren’t eligible because of their high student loan debt coupled with their low income.
Mortgage Supply Chain Transparency
Many investors are not willing to take the risk of buying subprime, or nonprime, loans in the secondary market. And can we really blame them for being cautious after what happened in 2008? They need proof that the right people have made the right decisions.
For the housing market to get back on its feet, investors need to be willing to take on more risk. If the investors aren’t confident enough to buy, the $1 trillion estimate for this year will drop even lower. And to muddy the water even more, the new banking and mortgage regulations coming this October could make closing loans even more difficult.
Investors need evidence that sound underwriting has been completed for each loan, especially subprime. Many industry professionals actually don’t use the term subprime; they use “nonprime” because the qualifications behind these types of loans have changed, and for good reason. There needs to be differences. Whatever descriptor is given to these loans going forward, they will have to be done differently.
Closer scrutiny needs to be paid to each loan at an individual level. Mortgage participants need to update old processes, modernize their systems, adopt new technology solutions like ATS Secured and they need to provide that evidence and scrutiny for every new loan written.
Lenders have a greater obligation today to make sure that investors know exactly what they are buying. Unlike past years, technology can add transparency to the entire mortgage process and can help prove that sound underwriting procedures have been used.
How the ATS Secured Network Can Prove Supply Chain Transparency
The ATS Secured Network was designed to modernize the mortgage process as a way to help prove that sound underwriting has taken place at each level, from application to loan purchase. The result is better granular details for each pool, less buyback risk, full audit trails and a policy underwritten by Lloyd’s of London. The return of subprime loans doesn’t have to have negative consequences.
We are not tied to repeat the past, as long as we can learn from it.
Want to make your mortgage process easier and more accurate? Contact ATS Secured today.