The lending role in the housing crunch: How did it happen?

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The housing market slump has been fueled by the wave of foreclosures resulting from those “creative” mortgages in our recent past. Last week I talked with Jeff Aicken, a loan officer with Century Mortgage in Louisville, Kentucky to get a professional’s view in layman’s terms on what happened, how it happened, and what real estate agents can do now to make the situation better for their clients and for their own bottom line.

Before coming to work for Century, Jeff had worked for a company that handled loans in a way that didn’t mesh with Jeff’s own views. With this experience, he shares both sides of the “easy financing” coin with us.

Angela: Tell us about being a mortgage loan officer, Jeff.

Jeff: I started in the business in 2004 and immediately fell in love with it. I liked helping people and enjoyed the loan industry.

Angela: You don’t work for the same company now that you did, why did you change?

Jeff: I had some bad experiences with the type of company that gives lenders a bad name. I didn’t like working in the “close, close, close!” environment and I don’t think that “selling” a loan is as important as serving my clients and that wasn’t the best philosophy to have while working for my former company.

Of course I want to make money, but service should come first. The money follows the service.

Angela: I couldn’t agree more. How were the loans handled differently in the “bad” company?

Jeff: When I first started, the pick-a-payment option loans (Neg Am), Alt A and Sub-prime loans were being pushed. There were few loans that conformed to the traditional 20% down, 30-year fixed, full documentation loans that require good credit and an extensive qualification process.

Angela: I understand the negative amortization term, but can you explain “Alt A” and “Options” loans for me?

Jeff: Alt A means “alternate to A credit loans” and this is where there is a qualified buyer, but something is missing that prevents a traditional loan. For instance, they can’t prove income or they have a high loan-to-value ratio. There’s one piece missing.

Option ARM programs were the bulk of my business at the old company and these came in four flavors:

  1. Minimum Payment
  2. Interest-Only Payment
  3. 15-yearPayment
  4. 30-year Payment

These were popular and I found that I was being pressured to sell this product not because it was best for the client, but because it was most lucrative for the mortgage company. That’s one of the things that really discouraged me. It was so bad, in fact, I almost left this career.

There were also Sub-Prime loans. These were “really shouldn’t have a house” loans, but because the Fed was giving money away so cheap, these individuals could now get a loan.

Angela: So the Neg Am loans, SubPrime and Option ARM loans were all bad, or they were just being handled poorly?

Jeff: They aren’t all bad, they are perfect for some clients — like investment savvy folks. But, these loans caught many by surprise when they came due at the five year mark. This, coupled with the softening of the market and lower house values left many people with new, higher payments that were unmanageable. The interest rates adjusted to 5% higher or more and people who had been used to living at the old rate had difficulty making their payments.

These loans were readjusted monthly, that’s where the minimum payments came in. So, the individual who secured the loans was making a payment as if the interest rate was 1.25% when the actual interest rate during this period soared to as high as 7.5% and continued to rise.

This is where the negative amortization came in for the loan-owner. Although the homeowner could make higher than minimum payments in the first months of the mortgage, few did and once a year the minimum payment was adjusted up to 7.5%.

Angela: Can you run me an example scenario with actual numbers that shows the negative amortization and how that happens?

Jeff: Sure. Lets use a nice round figure. For a $200K loan, if the minimum payment was set at 1.25%, then the first year the payments were $666.50 per month. The second year, that could go up to $716.49, the third year could also go up an additional 7.5% and this would continue until the fifth year, when the minimum payment option was lost.

At this point, on that same loan, with the rate at 7.5%, the actual payment would soar to $1,398.43 per month (and even interest-only payments, were now at $1250.00!)

The difference between the two figures represents the negative amortization for the first five years, when the minimum payment didn’t meet the interest service for the loan and added more to the principal of the loan.

Angela: That’s quite a difference in monthly payments! Aside from the horrible impact on the individuals holding these loans, how does this impact the housing market as a whole and your industry in particular?

Jeff: The real estate market correction was needed. That, along with the adjustment in the way loans are being handled, has eliminated the “riff-raff” from the mortgage industry. Over 110 lenders have gone out of business this year, many of whom were pushing the riskier loan options. Companies like my own are doing quite well. In fact, September was the best month for Century in the past eleven years!

Angela: So this “correction” has removed individuals — and companies — from the loan industry in the same way it is cleaning out the real estate industry. What advice can you offer real estate agents currently working in this market?

Jeff: The best advice I can give a Realtor is to team up with a good lender. I know that sounds self-serving, but let me explain why…

A bad loan officer can make a good deal go sour. Right now, real estate agents and sellers can’t afford to lose a sale because a service provider didn’t dot all the i’s and cross all the t’s.

A good loan officer will make recommendations to help all parties. For instance, rather than dropping the price of a given home, they may suggest offering more seller’s concessions toward a new loan.

Angela: How and whom does that help?

Jeff: It helps everyone involved. For a $150K loan, for example, with no points at 6.5%, closing costs and title insurance may run $1880. If the seller will contribute $1830 to “buy down the rate” (i.e. have the seller pay the points and therefore reduce the overall interest rate) everyone will benefit.

This helps the buyer because the monthly payment is reduced. At 6.5%, the buyer’s monthly payment would be $948.10. At 6% interest that payment is $899.33, a savings of $48.77 per month every month of the loan.

If the seller had merely dropped the price of the house overall by that same amount, the buyer would only realize a benefit of $11.56 per month.

The real estate agent is paid based on the sales price, so he/she benefits from not dropping the sales price.

The seller and the agent benefit from a larger pool of potential buyers because more people can qualify for a lower monthly payment.

Even the lender benefits by building a relationship with both the buyer and the Realtor. Working together to help everyone involved builds long-term, mutually beneficial relationships. We can help to sell a house that might not otherwise be sold or work with a buyer that may not have otherwise qualified. It’s gratifying.

Angela: That makes sense. Thanks, Jeff, for taking the time to talk with me today. I appreciate your insight and I’m sure my readers will too.

Jeff: My pleasure, Angela.

(photos courtesy of gracey, cohdra, and ppdigital at