Where did all the money go? Throughout the 1990s and early part of the new millennium, mortgage companies, great and small made a ton of money. So why is everyone clamoring for bailouts? Why can't they just live off of their savings and weather the storm? The answer is boring, but it is also the harsh reality faced by those who make money by loaning money. .
Competitive lending practices of the last 15 years have kept interest rates at bay. In the 1980s home owners were faced with interest rates on their mortgages that were double digits as a standard. Nowadays, those sorts of rates would be considered Usury. Mortgage rates in some cases have been 3 percent with a national average that has hovered around 5 percent. Lower interest rates are the double edged sword of mortgage brokering. On one hand, it takes more loan sales to make a profit. On the other hand, when interest rates are low loan sales are more plentiful. With larger loan sales come greater risks, but less surety. In other words, the cap on interest rates imposed by both law and competition keep mortgage companies from charging enough interest to offset those who default on their mortgage loans. The result is that the number of mortgages that can default before sending a mortgage broker into bankruptcy goes down dramatically when interest rates on existing loans are low. .
For the past 15 years, mortgage companies have had a reinvestment heyday. They have had more requests for loans than money available to loan. As such, profits have been eaten up by offering more loans. That's been okay because home ownership was at an all time high and the economy was stable. People were paying their bills and everyone was making money. When the housing bubble burst, it didn't take very many homes to foreclose in order to send a shock wave of loss through the mortgage industry. .
When foreclosures shot up, Instead of grossing $93,000, for example on a 100,000 loan over the life of the 30 year loan mortgage companies were finding themselves immediately on the hook for the full balance owed, meaning that the foreclosure of one loan resulted in wiping out the profits on 30 loans.
