Who is to Blame for the High Rate of Mortgage Loan Foreclosures?

Sheryl Landrum
LoanBiz Columnist

Article Rating , 4 out of 5 based on 1 votes

By now we all are aware of the increase in mortgage loan foreclosures. But is it just the homeowners who are to blame or did they have some help along the way? Find out how lenders and investors share in the upsurge of home foreclosures.

When a homeowner puts a mortgage loan on a home, the lender funds the loan and then the mortgage is often quickly sold on the secondary market to investors who collect the principle and interest on the mortgage, usually through a loan servicer.  In the past few years, investors relaxed their underwriting guidelines and encouraged lenders to sell these high income-producing sub-prime mortgage loans. Lenders in turn were quick to encourage loan officers to generate these high income-producing mortgages, and borrowers were excited to have them regardless of the high prepayment penalties, negative amortization, and interest rate jumps. So why has this seemingly win/win situation gone bad?

Early mortgage payment defaults have caused the lending industry to re-think sub-prime lending. When a borrower misses his first, second, or third mortgage payment, investors who have purchased the home loan on the secondary market demand that the lender buy back the loan. Since mid December, over twenty sub-prime lenders have filed bankruptcy and/or closed their doors, unable to re-purchase the sub-prime mortgage loans they sold. Loan officers have been asked to return their commissions or rebates on the mortgages, and homeowners are losing their homes. The win/win situation can become a lose/lose for everyone. Will this new trend continue?

Investors are looking harder at purchasing sub-prime mortgages, which has encouraged stricter underwriting guidelines from lenders. With more oversight on loan information given for the borrower, and more scrutiny of lenders and loan officers who make sub-prime loans, hopefully the home foreclosure trend will end.

About the Author
Sheryl Landrum is a Senior Loan Officer with First Capital Mortgage in San Diego and Prudential Realty in Bonsall, California.

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