Well, we finally did it to ourselves. Our profession refused to police itself, much less exercise prudent lending practices; now the government (state and soon federal) will do it for us … plus …
FBI Suspicious Activities Reports have tripled in the last couple of years, from 10,000 to 35,000. That is an indication that fraud is blooming in the business. One statistic from the FBI is that 80% of all known fraud cases involve somebody internal in the industry. Frequently people see the other guy, cutting corners and the like, all in the name of commissions commissions commission! I don't think it's strictly "I want to maintain these good times for my own income." There is a little element of "I'm making the American dream come true for somebody. I've got this person who has a perfect house and if I can just inch their income up by just $10K …" These aren't industry experts, they're loan officers (industry entry-level personnel), so they don't necessarily understand that the raging good times always have resulted in a significant downturn, as the cycle swings in reverse for a similar length of time.
It's also a large problem from the origination base to when they go into loan pools and are bought and sold on Wall St. as bonds, these bonds are underperforming as well, it's becoming a major problem in the past couple months. These loan pools are getting downgraded every day. Usually this was due to prepayments ('churning' by originators also hurt a great deal here). Now you have to look into the escalating Early Payment Defaults (EPDs) as well, because it was normally factored in as a fixed, half-percent, but now we're seeing a lot of times it's rising into a whopping 6% and 7% factor! When these bonds are bought and sold to investors that try to sell them for fixed-income and aren't getting results, their reputations are getting hammered in a big way.
The reason it took several years to finally explode, is that underwriting used to be what we call the three C's: Character (credit history), Capacity, and Collateral - somehow credit and capacity fell by the wayside for the most part and everybody seemed to start focusing on the Collateral part. If a lender had a decent AVM along with the added plus of warp-speed appreciation of 15%-25% per market, you could not do a bad loan.
As rates have finally stopped falling like a stone, and property values nationally are sinking back onto a more realistic plateau (from values soaring up and up year after year), everybody needs to re-assess their new role as career industry professionals (those who don’t see this as a career or as professionals need to exit the industry immediately for everybody's good) since they are not a positive force for those of you who love the biz – and I know there are many of you out there that feel that same way as I still do.
I myself learned this ‘brother’s keeper’ lesson early in my career; it has done me well ever since I was a 'twenty-something' newbie. Everyone needs to look-out for the other guy. When you see things being done that are inappropriate, it is your duty as a good industry citizen to speak up and help all of us out. Lately you have all seen where when one sector is injured, it goes around full circle and bites YOU and me on the butt … every time … so I guess you could say in addition to being Ethical, you are protecting yourself by doing your best to influence others to stand up and do the right thing