Movie ‘Big Short’ depicts now-extinct mortgage business
The financial crisis was eight years ago, but the trauma hasn’t faded. Painful memories linger of the housing market’s collapse and the suffering it caused homeowners, professionals and retirement-savers. Many have never fully recovered. This can make “The Big Short” an upsetting film to watch.
However, there is a silver lining in the catastrophe illuminated by the Oscar-nominated film: Reforms made since 2008 make it less likely that this national disaster could be repeated.
The film reminds us that the 2008 financial crisis had many owners. Wall Street, as opposed to mortgage brokers and borrowers on Main Street, was the primary culprit. Many parties were involved in this corruption, and some originators dishonestly originated loans for unqualified borrowers. There were also borrowers who applied for no-income verification mortgages who they knew would extend their budget beyond their own limits. Wall Street investment banks played a major role in leading the operation and creating the unethical loans that consumers and originators were able to utilize.
The mortgage-backed securities that first appeared in the 1970s were profitable, but only mortgages with a low risk of default were securitized. Later, investment banks created complex products (known as collateralized debt obligations, or CDOs), which often included subprime mortgages, taken out by borrowers with lower credit ratings, loan to values that exceeded appraised values, and a greater risk. The housing bubble was further inflated by agency ratings that gave AAA ratings to these CDOs.
A few wholesale mortgage providers, including our team at United Wholesale Mortgage, decided not to play along. Our clients are more valued than the fees that could be earned on a single transaction. When some lenders were forced to leave the market because they had offered subprime mortgages, the other firms that rejected the questionable business were able to help rebuild communities affected by the crisis, and worked hard to create more opportunities for honest originators who were out of work. Unfortunately, moviegoers didn’t see this.
Moviegoers also weren’t told about the controls enacted after 2008. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, has significantly strengthened mortgage origination rules. Present-day mortgage brokers are licensed professionals who pride themselves on obtaining the best possible loan for each borrower.
The Dodd-Frank Act instituted strict licensing and continuing education standards for mortgage brokers, and these new standards have had a substantial impact upon the industry
The regulations have put the types of loan originators featured in “The Big Short” out of business. However, extensive lobbying from Wall Street banks that helped pave the road to 2008 succeeded in exempting their own retail lending institutions from some Dodd-Frank provisions.
This unfortunate development reinforces the importance of consumer education and due diligence. Armed with this knowledge, borrowers can feel confident that they are making a wise decision to work with a mortgage broker who is licensed and follows Dodd-Frank rules for their next mortgage transaction.
“The Big Short” understandably evokes cynicism and anger from moviegoers. However, the public can take comfort in the fact that the mortgage-origination business is more transparent today than ever, and that homebuyers can rely upon local community-minded Main Street mortgage brokers instead of Wall Street retail lenders.
Mat Ishbia is president and CEO of United Wholesale Mortgage, a Troy-based provider of mortgages for independent brokers nationwide.