4/9/12: Bill and Bob Discuss Moral Hazard

Posted on Apr 9, 2012

Over the last few years, you may have gotten the impression that every player in the mortgage business is either a vulture or a victim. Buyers’ and sellers’ behavior varies whether the market is up or down. When the housing market is up, Bob Dorsey explains in today’s Morning View, sellers strive for the highest price possible. When the market is down, sellers will do anything to make a trade occur. Even if that means dropping a price.

Loan officers are paid when the deal happens, Bill Rayburn adds, but the bank’s risk, and the investor’s risk, is spread over the term of the mortgage. “If I’m a loan officer,” he says, “I just want a deal to occur. I want to get everything I can through processing and underwriting, and then I’m good to go.”

This close-the-deal urgency spread in banks during the housing boom. “Everyone wanted to get more volume through, and the (volume) incentives for the bank were probably not what we would want,” Bob says. “There’s a moral hazard there. If the person making the lending decisions has incentives that differ from the institution’s incentives, you might get some problems.”

Watch today’s call here for more Bill and Bob.