Hello everybody and welcome to this week's edition of Your Mortgage Process.
I of course am your host Greg Wareham.
Thanks for joining the show today.
We're going to talk a little bit about 2008 and what happened during the crash.
And I think the best way to illustrate that for you is to talk to you about how everything
got built up to 2008, what happened, how the market got reestablished and then correlate
it back to what's going on in the market today in 2023.
So I'm going to give you a little bit of my background.
So I originally got into the mortgage industry in 1998 and I worked for a company, Champion
Mortgage, which is no longer in business.
Now when I was hired by Champion, what Champion did is they wrote what were considered nonconforming
subprime mortgages.
And it was really their niche in the marketplace.
And they were able to provide financing for people that didn't qualify for what would
be considered a conventional mortgage.
And it was a product that was important to the market at the time.
And as Champion was in it, household finance was in that business, and then slowly the
banking industry got into that business as well.
And what did the product line look like?
So we did home equity lines that typically had a higher interest rate than a bank would
have because the people didn't have a stronger credit.
And then the other thing that we wrote a lot of back then were what were called 228s.
Those are two year adjustable rate mortgages.
So you'd be fixed for the first two years.
And after that point in time, your interest rate would go up or could go up.
And it almost always went up.
And the market, I mean, that was such a big product at the time in the marketplace, not
for where I was working, but in the industry as a whole.
And it created some challenges when those mortgages started to adjust, right?
So if you had a mortgage at an interest rate of 6% and it was a $300,000 mortgage back
then, by year three, that interest rate could potentially be at 8% or 9% or even higher.
And it created a slightly significant hardship for people if they didn't refinance out of
the loan.
Now, the common term used at the time was a band aid loan, right?
So you had someone who had credit where they couldn't qualify for a conventional mortgage.
How do I put them in a situation where we can consolidate all their debt, pay off their
existing mortgage, and save them money monthly and rehabilitate their credit for the purpose
of refinancing them out into more of a conventional mortgage?
And that was kind of the thought process behind the scenes.
You know, unfortunately, a lot of these people that hopped into that program, they never
rehabilitated their credit.
So they weren't able to go into that conventional mortgage.
And then that adjustable rate really impacted them.
Most of the time, these weren't loans for people that were looking to refinance.
They were people that were looking to pay off 30, 40, $50,000 in credit card debt.
So what would happen is when you consolidated everything for them, they would be saving
on paper $1,000 a month, $1,500 a month.
So it was a good loan for the consumer.
Where the industry really fell short on it is two years wasn't long enough to rehabilitate
the credit.
And the borrowers that we were lending to weren't doing the right things to rehabilitate
their credit over the course of time.
So there's a lot of that going on.
So when we do these transactions for people, the goal would be to refinance their existing
mortgage, pay off 30, $40,000, $50,000 in credit card debt to save them more money on
an overall basis.
Because the reality is their credit scores were lower because they had too much revolving
debt, they had too much credit card debt.
So we consolidate everything for them and we put them in a position where we're saving
them about, let's call it $1,500 a month.
Sometimes you see a thousand, sometimes you see several thousand a month.
All right, so now you're in this mortgage transaction.
The role for the consumer then is to always pay on time.
After that two year timeframe or right before the interest rate adjust, we're going to go
into a conventional mortgage and kind of secure this thing for you long term because you've
been properly rehabilitated.
Well, unfortunately, part of the problem there is when you're doing mortgages for someone
that say has a 550 credit score in that example, a lot of times there's a reason why they have
that credit score to begin with.
So what we saw at some times when we would pay off all this debt, they'd rack up the
debt again.
And when you rack up the debt again, your credit doesn't rehabilitate.
Now your interest rate adjusts, your mortgage payment goes up and you're in far significantly
worse shape than you were when you took the loan out originally.
So that was certainly part of the challenge that was going on in the industry that eventually
led to 2008.
The other thing that was happening is even for conventional mortgages, for loans going
to Fannie Mae as an example, there was a period of time where you didn't verify any income.
So you would let her picture this for a second, right?
So you're behind your desk and you're completing an application for someone.
And someone tells you that they make $20,000 a month in income.
You put that in, you hit the button to see whether or not they're approved for the loan.
The system could literally come back to you and say, you're essentially cleared for closing
with no income verification required.
So it obviously seems absurd at this time.
But back then, if somebody said they made $20,000 a month and the system recognized
that, we wouldn't even ask for verification because it wasn't required.
Again, not because they're trying to put them in a bad situation.
It just wasn't required for the purposes of doing the loan and it became an industry standard.
So now you think about that, now you have people that were purchasing homes where income
was never verified.
And when you run into that situation where you've done loans for folks that have less
than perfect credit that are adjustable rate mortgages that are going to adjust, and you
couple that with all these conventional loans that you did where you never verified any
income, it creates a really, really bad situation.
The other thing that I would say is there were programs that were out there where you
could lend a very high percentage of the value of the property to someone looking to purchase
a home as an investment property.
Now picture this, right?
So you're purchasing an investment property.
You only have to put down 5%.
And what was happening is everyone could come up with 5% for the investment property.
In the market got so busy after like 2003, four, five, property values were going up
and up and up, some people would get into the practice of putting the least amount of
money possible they could put down for an investment property with really the hopes
that they're going to flip that property in a three month, six month timeframe and make
it easy 20, 30, 40, $50,000, which in an appreciating market where it's going up every month, all
right, there's some validity to that.
But what happens is when the market starts to come down, you can't sell the house, you
have no equity, and even worse, you have no skin in the game, right?
I mean, if you didn't put any real money into the transaction, if everything goes south,
well, you're going to walk away from that.
And that's another thing that we saw happening in the industry.
So I never felt as though what was going on in the industry was, no one felt that it was
going to result in what happened in 2008.
We thought we were following the rules, we were following the guidelines that were required
at that time and trying to give people the product that they wanted and trying to give
the market what it was demanding at that time.
So that's kind of what was going on behind the scenes in the industry.
Now I'm going to fast forward to 2008.
And actually, before I get there, I want to just go back to those adjustable rate mortgages
again.
So behind the scenes in the mortgage industry, you would take these big groups of loans,
so not a couple loans, you're talking hundreds of millions of dollars of loans, you would
get them rated by a rating agency, and then you'd be able to sell them to a third party,
to Wall Street, you could securitarize them.
You'd sell them somewhere else.
And the rating companies were evaluating some of these packages that were sold at times
as essentially AAA rated packages.
And I'm not blaming anybody or not blaming the rating agencies, but if you have people
that have a combined average credit score of a 650, is that really truly a AAA rated
security that you're trying to sell?
And it turned out really not to be, right?
Where it should have been maybe rated BBB or whatever the rating should have been.
So the investors in the marketplace that is buying all of these, they're looking at the
rating on these portfolios and they're thinking it's a pretty low risk.
And that compounded the problem from a financial market standpoint when things started to fall
apart.
All right, so now we're into 2008.
2008, what happened?
Construction is still was just winding down.
We had all these new homes that were built.
As the market started to deteriorate, all the buyers went away.
So what we found ourselves in was a situation where we had all of this inventory and all
of this construction because there was such a huge amount of demand.
When that started to falter and the buyers went away, we were left with a ridiculous
amount of inventory.
And anyone that has some sort of basic, you ever been in a basic economics class, supply
and demand.
So if you have this huge supply of properties and your demand was matching it and at times
exceeding it and now there's no demand, what happens to the price or the price drops?
And the analogy that I like to use with that, if you ever walk into Costco and you see tuna
fish is on sale, I love tuna fish, I eat it every day.
And you go, oh, hey, this is $5 a box off.
Well, they're not doing it to do you any favors as a consumer.
The reality is they have too much supply.
They ordered too much tuna fish.
All right, we got to get rid of this tuna fish.
So what are we going to do?
We're going to drop the price to move it out the door.
And that basic logic really transfers over to real estate.
You have too much supply with no demand, prices start to plummet.
And we saw in some markets that properties went down 20, 30, 40%.
There's parts of the country where they went down 50%.
And one thing I want to clarify with the builders.
So behind the scenes, you have a bank lending to the builder to build these projects.
And when the builder now is stuck with this inventory, the value is obviously dropping.
Well, who holds the note on these properties?
The bank still.
So the banks were getting hit from a couple of different directions.
Your money you had out there in the street with the builders, you're financing these
projects.
And now you have people as we entered into a recession, they can't pay their mortgage.
And they're also having default rates as a result of that.
I just want to walk through with you a personal story with how bad, how quickly the market
changed.
So I purchased a house at the top of the market.
I bought a house in March of 2008.
When I had to sell that house because I was relocating, years later, four years later,
I sold that house, I had to sell that property for 30% under what I paid for it.
Actually about 35% under what I had to pay for it.
And that shows you as that market started to deteriorate in 2009, 2010, values kept
going down.
The only way to get out of a property was to sell it for less than you paid.
Now in retrospect, would it have made more sense to have rented the property out?
You know, hindsight's 2020.
I'm older, I'm more seasoned.
I probably would have retained the property, but I had to sell that property at the time
and take a pretty big loss on it.
Now the positive side of that is I bought another house.
And when I purchased that house, I probably got that house for 35% less than what it would
have cost had I purchased it in 2008.
So in a lot of ways, the money kind of washed out on everything.
You know, we had something when I was at the time, I was still selling subprime mortgages
were part of what I was selling.
And there was a site that was out there was called the implodometer.
And it was built for mortgages.
And what it did is every day it would update the list of mortgage companies that went out
of business.
And it would literally be hundreds would go out of business day after day.
And I worked for a really big bank at that at that time, one of the biggest banks in
the country.
And we were still hanging on where all these other companies were going out of business.
And one day, it happened.
One day they eliminated my division virtually overnight.
And a business channel that I was very successful at went away.
And I find my found myself in a position where I really had to reinvent myself in trying
to attack other markets and do new things to have the same level of success.
Now to kind of quantify that for you, in 2008, I took a 70% pay cut.
Now I was just having this conversation today with someone on the team, because as this
market is starting to change and income starts to drop a little bit, like you're prepared
in the sales world to take a 25% hit, maybe a 30% hit.
But I don't think there's anybody out there that's prepared to take a 70% hit to your
income.
And that's what happened.
And I use myself as an example, but it happened to everybody.
And if you didn't plan accordingly, which thank God we had planned accordingly, maybe
it's just by dumb luck, I don't know, but we were able to withstand all of that.
But what you saw then is everybody leaving the mortgage industry and a lot of people
leaving the real estate industry.
The joyride was over.
The bubble, the proverbial bubble had burst and the mortgage industry just started to
hemorrhage people.
Everybody was leaving it, and most of which never came back into the industry.
And some of these people were in the industry that I knew had been in it for 15 years.
And they just didn't recover from it and kind of moved on, got more of a traditional type
of job.
So I want to talk a little bit about between 2008 and 2009, what was going on.
As I mentioned, everyone took a severe pay cut.
The inventory was, I mean, it's such a surplus.
You would drive, I can remember driving by builder sites and they were literally builder
sites that had been abandoned.
Now these were big sites where people were building a bunch of single family homes.
They were there.
They were still the backhoes on the property.
Sometimes there was already curbs and different things put into the community.
Gone, ghost town.
They just shut down and a lot of them went bankrupt at the time.
And that lasted for quite some time.
And I really look at it from the middle of 2008 until the end of 2009.
I mean, it was between the recession that we had going on in this country, led by the
real estate, the mortgage market.
They were really tough times for us in this industry and any of you that were working
at that time.
Now the other thing that we saw going on behind the scenes were then the bailouts for the
banks.
The banks were so heavily entrenched in mortgage type products, different products and different
hedges they had going on behind the scenes within the mortgage industry.
And I'll title it a real estate as well, that as you know, the government started bailing
out banks.
And what a lot of people do not know is once the government started to bail out any of
the big banks, they made all the banks get a bailout.
So even if you were a bank that didn't feel as though you needed it, everybody got the
money.
And I think that was really to not create a panic in the marketplace as to, oh my gosh,
this bank I've been banking with forever just took all this money from the government and
this bank over there didn't.
And what's going on with our financial system to the credit of the government, they just
made it uniform across the board, all of which have money's long since been paid back.
But they were scary times.
We saw our stock market crashing.
We saw a lot of challenges in the economy as a whole.
Where I was going in 2009, at the end of 2009, the decision was made by the Federal Reserve
to start to cut rates, interest rates dropped significantly.
And they dropped, I even remember where I was.
Like the market was so bad.
I was in Atlantic City at a meeting and I got the phone call that interest rates had
dropped significantly.
I was like, oh my gosh, I got to get back up and get back to work, get back to my desk.
And it really, it breathes some life back into the mortgage industry and it breathed
life back into the economy because what it did is it helped the consumer as well refinance
their mortgage into a lower rate.
And with some government programs, they have programs like HARP that allowed you to refinance
that mortgage even if you were in an upside equity position on the property.
And the goal really is how do we get people's payments down to put them in a situation to
survive the storm?
And things started to change then to get everything under control.
Now another thing I would say about at least my industry and the real estate industry is
as everybody left the business, man, it took a long time for this business to recuperate.
So there was always a farming system in our industry.
There's new people coming in at all times that you're coaching, you're developing, and
that you're trying to show them how to or lead them down the path of success in the
business.
After 2008, 2009, nobody came into the business.
And they literally did not come in the business again in like 2013 and 2014.
And it was the darkest time in the industry from that standpoint.
I would say from an overall business standpoint, as the interest rates stayed low, it certainly
helped the American consumer to refinance their mortgage and get their payments down.
And it also did a lot to support the mortgage industry to keep that churning in conjunction
with the real estate industry because low rates just increases the demand again for
properties.
You know, one other thing that I would mention is because people were starting to default
on their mortgages, foreclosures were starting to hit the marketplace.
Now there's always been a certain level of foreclosures that you anticipate from a lending
standpoint, right?
You know, not everyone in the country is going to always be able to pay their mortgage.
There is some default rate.
But you build that into algorithms as to what you're prepared for.
And what we saw in that 2008, 9, 10 marketplace, the banks weren't prepared for it.
They had never seen this type of onslaught of people not paying their mortgage.
And a new term really came into the industry.
It was an old term, but it was something that resurfaced.
And it was the concept of short sale.
How do I sell my house for less money than it's worth and have the bank forgive the difference?
And there were no real processes in place for this, right?
So the banks never they had a like this convoluted, let me pull it out of the filing cabinet process,
but they weren't prepared for the thousands and thousands of phone calls that were going
to come in for people that were in this situation.
And you saw people short selling their properties to try to get out from under.
Now one thing that was also going on in the industry is if you were short selling your
property for more than a certain dollar amount than what it was worth, that loss, like that
$50,000 loss that the bank was taken, that was looked as income in a lot of situations
for people as well.
So it was kind of claimable income at the end of the tax year.
Now I'm not a tax expert.
It was just my understanding of what was going on.
But you can see why everything got so dire at that time.
The other shift that I saw in the industry then is back in the late 90s and even early
2000s, about 80% of this business was really driven by the lender and then 20% was direct
to the bank.
And let me kind of clarify that.
So if you're a lender, you might be selling these mortgages over to the bank, but the
retail person that's taking that transaction, they don't work directly for the bank.
They work for a third party company, big lender, small lender, broker, a lot of different things.
After the market changed, it completely inverted.
And it really became the time of the big bank because so many of these companies went out
of business.
And then it became 80% plus of the market became direct to the bank with much smaller
amounts of that business coming from the lenders.
Well, why?
The banks wouldn't buy it anymore.
So if you're a bank and now you're trying to preserve what you have going on and you
have a line of credit, let's say with a third party company lender for $100 million, well,
maybe you're not in...
They call that correspondent lending.
Maybe you have to look at that and say, maybe we shouldn't correspond lend anymore because
we can't control the quality.
We have to maintain our customer base.
We've got to focus internally.
And you saw a lot of that going on.
So this business got really, really tight.
So the guidelines to be approved for a mortgage changed significantly overnight.
They went from giving money out to everybody, tighten up.
Man, you have got to fit into that box and it's got to be very specific for someone to
qualify for a mortgage.
So there was certainly, again, there was certainly the dark times of the industry.
And in retrospect on it, there were a lot of things that we could have done as an industry,
as organizationally educating the consumer and all of that.
But sometimes you just don't know until you go through something like that.
And I'll give you an example.
When you look at credit, there was no such thing as one of these credit monitoring companies
back then.
Nobody knew.
So you knew maybe you weren't paying your bills on time, but you really didn't get any
real time evaluation as to what was going on in your credit world.
That came after the recession and after that crash where people looked at it and said,
you know what, there's really an opportunity here for people to become more educated in
the field of credit and how can they have access to real time credit updates so they
can stay on top of those things.
But prior to that, I mean, there was nothing that existed like that.
Prior to that, the concept of a foreclosure or a short sale was like super taboo, right?
Foreclosed on, oh my gosh.
And when we're going through that time, it became almost commonplace.
And it was, again, these were times that you learn from and they're times that you grow
from.
So I'm going to fast forward a little bit and start to tie this in into today's market,
but I'm going to look at the timeframe from 2014 to 2019.
So what was going on there?
All right, people are coming back into the industry, right?
So you got mortgage people saying, all right, maybe it's a good career path for me.
You have more real estate agents coming back in the industry.
And it started to become a slightly more balanced market again.
And you started to see the stabilization and even the slight appreciation of homes again,
where you saw such a significant dip prior to that.
And it was really it was a healthy time in the marketplace for everyone to be able to
build and grow normalization of interest rates, right?
So interest rates weren't at 3%.
They weren't at 10%.
They were in that healthy, you know, five, six percent range, which is going to that's
more of a balanced market.
And you're starting to equal out that supply and that demand.
The other thing that happened in the industry is there was a bill passed in 2010 called
the Dodd-Frank Act.
And that started to regulate the mortgage industry.
So prior to that act being released, there was in the mortgage industry, there were some
lenders that would pay their employees based on how much they were charging the buyer or
the borrower.
And I'm not going to qualify it one way or the other.
You know, they're salespeople and that spread on that loan could make you more money.
You sell a higher rate, you're making more money on it.
I never worked for an organization that allowed that.
So I can't relate to it directly.
I just know what was going on in the industry at the time.
And when this act was passed, it basically said, you can't do that.
So you can no longer pay a mortgage person based on the product that they're selling,
based on interest rate, premium that they may be selling, the type of loan that they
may be selling.
And that's good for the consumer and that's good for the marketplace.
So it's now a very even playing field.
So there's no incentive in my industry if the interest rate is at six percent to sell
you six and a half percent because there's no financial incentive for the loan officer,
the salesperson that's involved with it.
You go back 20 years ago, that was the case.
So that should be reassuring to the to the consumer.
So there was also a lot of different there was a an organization put in place called
the Consumer Protection Finance Bureau that governs more than just the mortgage industry.
But it's really just a consumer, a federal consumer watchdog to try and help and regulate
everything.
So all of these things are good for the industry and they still promote healthy competition
between lenders.
But it also provides significantly more clarity to the consumer, which is important because
when you go back to the late 90s or the earlier 2000s, it's that clarity didn't necessarily
exist.
And even if you try to explain something to the consumer to the best of your ability,
were they still really clear about it?
Right.
Did they really understand what would happen in an adjustable rate when that rate does
adjust if they can't refinance?
So all of these things are good for our industry.
Now I'm going to fast forward to 2020.
What happened in 2020?
Well, you get covid.
If the business shut down.
I mean, as all of our businesses did, so did the real estate market.
And when they started to pull back in March of 2020, the industry shut down essentially
for for a couple of months.
And what sent everybody a lifeline on that, at least in the real estate and mortgage industry,
was a significant reduction to interest rates.
Right.
We had cut interest rates so low and that wasn't a United States thing.
That was a world thing.
Everyone cut the interest rates and that created opportunity.
Another opportunity for people that may be purchased between 2013 and 2020 and were in
an interest rate of five, six, seven percent gave the afforded them the ability to refinance
and save money monthly.
The other thing that it did is it stimulated the housing economy.
So when interest rates dropped to three percent in some stages, even under that.
Well, that creates a lot of opportunity because it makes it much more appealing from a home
buyer standpoint to purchase the house.
Right.
It keeps your payment really, really low.
And as we all know, the I don't want to say the downside of that, but the result of that
is what do you see happen to values?
More people want to buy kind of going back to our supply and demand.
There's a limited amount of houses that can be sold in that increases the pricing.
Right.
More people want it increases the pricing when there's not enough supply for it.
And we saw that happen.
Now, a lot of things that or something that I hear from people is look at how much the
market value has went up.
And that is true when you look at the three year window of what's happened with property
values.
You know, they've went up significantly.
Double digit returns.
But the bigger picture on that is how much did they go down by?
Right.
There were some markets that it took until 2020 for them to recover what they lost, even
in 2021 for them to recover the value that they lost from 2008, nine and 10.
So when you look at the overall 10 year time frame, the values haven't skyrocketed at the
level that it feels over the course of the past couple few years.
Another question I get a lot is I'm going to wait.
Right.
I'm going to wait until this market crashes and you know, then I'm going to capitalize
on an opportunity from a real estate standpoint.
The challenge is it's a completely different market.
And when we look at 2008, that's 15 years ago.
And as I had said before, what happened there is you got all this supply and you got no
demand and that crashes the pricing.
What we see now in this market, even with interest rates going up, there's no supply.
So now you still have all these these people looking to buy.
In a lot of ways, we have more people looking to buy today than we did two years ago because
those people weren't able to purchase a house over the course of the past couple of years
and you still have limited supply.
So what happens?
That keeps the prices stable.
In some markets, you can even see prices continue to increase.
So you see people that are waiting for an opportunity for prices to go down.
And the simple reality of the matter is there's no supply.
Right.
And as supply stays here and demand continues to go up on everything, you're not going to
see prices plummet.
Unlike the 2008 where prices plummeted because there was too much supply and not enough demand.
The other thing that's happened is we have a pent up demand of people looking to buy
homes from the first time home buyer market.
And the reason for that, the past three years, they couldn't touch a house.
Those people who organically would have purchased a home in their early 30s weren't able to
compete with people that are maybe selling their existing home and purchasing a new home.
They were termed out of the market.
Right.
They didn't have huge money to put down.
So they weren't able to get into a home.
So now you got three years of pent up demand from first time home buyers that are carrying
forward into 2023, which should maintain the stability in the pricing.
The other thing I would mention is when you look at things nationally, depending on what
you read or who you listen to, the housing shortage in this country is about four million
units, four million units.
It's going to take a decade to try to start to match that demand.
So point being, I don't think we're going to see any type of a crash moving forward.
So I just want to land the plane on this a little bit and talk about 2008 in this current
market.
2008 was an anomaly.
It was an anomaly with a housing market, with a lending market, all of which was backed
by the banking in the stock market.
It just caused this massive collapse that we all saw.
And there's been so many provisions put into place since then to make sure that that type
of significant event doesn't happen moving forward.
And then you couple that with the fact that we have this continued limited supply, which
we all know about if we're trying to buy a house right now.
You just don't see the property value shifting that much and certainly not going to see any
type of crash in the immediate future.
Interest rates are going to be what they're going to be.
They've returned to something that's a little bit more normal historically.
And we'll see some ebbs and flows associated with it.
If you're sitting around waiting for interest rates to drop into the threes, you might be
waiting a really long time, maybe decades, maybe forever, because that was the one time
that I've ever seen something like that in the 25 years that I've been doing it.
It's the only time I've ever even heard of something like that.
So with that all being said, if you have any questions at all about it, you can feel free
to reach out to me directly.
Greg at your mortgage process dot com.
I obviously I like talking about this stuff.
So anything you need or anything I can do to help just reach out to me.
And I appreciate everyone listening to the show again.
Greg Wareham at your mortgage process.
I'll catch up with you soon.
Bye guys.
Thank you for tuning in to this week's edition of your mortgage process hosted by Greg Wareham
produced by Greg Wareham and Nick Pavese at the social rift and executively produced by
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Thank you again for tuning in and we look forward to catching up with you next week.