The Home Mortgage Loan Perfect Storm..And The Federal Government Plans To Bail Us Out?

December 19, 2007
By: Keith S. Donald



In matters of home mortgage loan financing, you would have to be from another planet to not have heard about the current challenges in real estate financing. What started as a sub prime mortgage problem has quickly evolved into a full fledged industry crisis.

Thousands of jobs have been lost in the mortgage industry at all levels from corporate CEO's to mortgage brokers. There are ongoing investigations that may result in criminal charges, and of course criminal convictions if guilt is determined.

A lot of media exposure has been focused on one side of the story; the so-called predatory lenders. These are the people that knowingly, without concern or consideration, encouraged borrowers to make loan commitments on properties that among other things, had inflated home appraisals.

The results were properties that were over financed. That means the borrowers went into the mortgage committed to pay more for the property than the property was worth.

That raises a question. Were the home appraisals inflated as a result of incompetence, fraud, or simple mistakes? The consequences of that one consistent action, inflated appraisals, has created a literal house of cards. It has nothing to do with the federal government.

In lender office suites the top down pressure was so great to turn over the loans as quickly as possible, many underwriters found it almost impossible to correctly do their jobs. They are responsible for making sure the company placed a good quality mortgage loan.

The idea of unacceptable mortgage loan packages meant someone did not get paid. The euphoria of profit consumed the industry. Many of the lender actions were driven by selfishness and greed. It had nothing to do with the federal government.

If borrowers could as the saying goes, "fog a mirror", they could get a mortgage loan. The terms were so varied and appealing there was something for everyone.

Low down payments and no down payments. Low interest rate loans and interest only loans. Full documentation loans took a back seat to No Documentation loans.

On the other side of the table, borrowers were eager to fudge their numbers to qualify for mortgage loans they knew they could not afford, and the lenders were anxious for them to apply. What started as a once proud tradition of home value creation evolved into a bad case of "liars poker".

Everybody was telling everything but the truth to one another, and nobody seemed to care. It had nothing to do with the federal government.

In the mortgage lending industry when lenders become driven by money volume instead of asset value, it can create stormy conditions. When the borrowers are allowed to get away with weak to non-existent qualification criteria and mortgage lenders are motivated by money volume it creates a mortgage lending "perfect storm". The results of a mortgage perfect storm are conditions exactly like the ones we face today.

Many homes are over-financed. Home sale prices are consistently dropping. Time on the market is getting longer and longer. Housing inventories are growing larger by the day. Even though interest rates are still relatively low, the qualification criteria are much stricter than ever. The mortgage qualification pendulum has swung one hundred eighty degrees.

In the meantime values in hedge funds, mutual funds, REITs, pension funds, IRAs, and other financial instruments have been drastically reduced as a result of the mounting foreclosures, bankruptcies, suspended operations, and changes in the secondary market investment criteria.

The real key here is all of this mortgage loan activity was done in the private sector. It was done without federal government involvement. Even though the consequences of these actions will be felt by many Americans and a lot of other global investors, the solutions should not be expected to come from the federal government. As you have seen, none of the problems were the responsibility of the federal government.

Proposed solutions like HR 3915 address the needs of a few people, but not nearly enough to provide the impact they hope for. Regardless, tax payers should not be expected to pay for this solution.

The solutions should come from the people that are directly responsible for creating the problems, the mortgage companies and the borrowers that were so motivated by selfishness and greed. Choices have consequences.

Industry regulators should be expected to investigate what has happened, and how and why it was allowed to happen. Their investigations should reveal the kinds of oversight that should be imposed to make sure circumstances like these do not happen again. It will also determine if current laws have been violated and who should be prosecuted.

One of many possible solutions that does not require federal government involvement has not received the kind of traction it deserves. We often say, "he who has the gold, makes the rules." That simply means the lenders control all of the notes and mortgage loans the borrowers are committed to. Even though each borrower's case has much in common with lots of people, every situation is in fact unique.

The lenders certainly have the ability to pro actively modify the notes and home mortgages for every borrower that can justify a modification. This simple but powerful action will solve a lot of problems before people go through the needless stress and expense of foreclosure. This would also be a tremendous demonstration of "outside the box" problem solving by the lenders.

To make unilateral, widespread concessions for borrowers that are clearly guilty of their own brand of selfishness and greed would not be fair or effective. If you do the crime, you do the time.

A large number of the guilty lenders are already out of business by virtue of bankruptcy or suspended mortgage loan operations. The turmoil that exists will take some time to correct.

The really good news is the fact that however long it may take for the mortgage lending industry to right itself, home sellers have the ability to fund the sale of their properties without the need for a bank or a mortgage lender!

That is one of the best kept secrets in the home mortgage industry. Imagine that. Home owners can actually control their own property sale. Home owners can fund the sale of their property without a bank or a mortgage lender. Here is the really good part. Home owners can not only fund their buyers by financing their own property, they can also get their cash at closing! All of this can be done without a bank or a mortgage lender to slow things down.

This creative type of financing, that puts the home owner in control of the home financing, is gaining traction and momentum. After all it is a solution to very real problems.

Finally, I just wanted to share with you some insights and reminders that the freedom we have in this country is not free. We have always been known, recognized, respected, and appreciated around the world for our creativity, imagination, and resourcefulness.

It is not our government that makes this country great, it is our people. Let the government do what it is bound to do by the Constitution, and let the people do what we do, solve our own problems with creativity and ingenuity.

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