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Let the Doctors Do the Diagnosis

The opinions expressed by columnists are their own and do not necessarily represent the views of

What is happening in Washington with the mortgage market is unimaginable. We are having the politicos, the nations bankers and some of the heads of the lending institutions figuring out the problem with the mortgage market and writing the prescription for recovery. Let me show you how this could work in the real world. I graduated from two top schools with a B.A. in Economics and an M.B.A. in Finance. I was active in all types of sports, so would you like me to diagnose and prescribe a cure for your tennis elbow, sore back or the knee that doesn't cooperate any more? I don't think so even though I have good credentials. When we have had the pilots strike on an airline should we just send in management to take over flying? Seems a bit ridiculous! How about we as a nation give incentives to people to buy a Hummer automobile as their sales are way down? Naw, that doesn't seem too wise either.

Then why are we having people who do not know how our industry works trouble shoot and decide what should be done to put it back on the right track? The main thing wrong with the industry was the excesses that led to all kinds of problems. Before we diagnose what caused those excesses we have a chicken and egg problem to solve. Was the housing boom caused by the mortgage industry, Wall Street, the Federal Reserve, the building industry, the press or Santa Claus? (I put Santa on the list to try to throw you off).

If you ask John Q. Citizen they won't even hesitate before telling you that my industry, the mortgage industry, gave loans to anyone who wanted one and never even checked anything but the "fog on the mirror" test. As bad as the housing problem is, and it is bad, we still have over 90% of the homeowners in America making their payments and remaining in their homes. In my opinion it was each one of the above that caused the problems all of which could have been partially avoided if they had fulfilled the main part of their job which would be regulating their turf. But they didn't because everyone had something to gain by the housing boom.

Now back to the problem: How to fix the mess and put safeguards in to ensure that it won't happen again. You start by not changing the rules in the middle of the game. The first thing that must return is stated income loans, or bank deposit verification, for self employed borrowers. I didn't say employed, I said "self " employed borrowers. Why? Because if you don't you are setting up for a new wave of problems from people who never did anything wrong. We have been told forever that the backbone of this nation is the thousands of small business owners who employed the vast majority of the workers in our country. We have given them all types of ways to make money including the ability to pay less taxes as a trade off for the risk they are taking and the employment opportunities they create. Because of this they do not show sufficient earnings, in a classical way through their tax returns. Does that mean they are bad borrowers? Hardly. So why are we trying to punish them now?

Also you can set realistic parameters such as higher credit scores, lower loan to values and larger reserve requirements. You can also tell more from cash flow as shown in bank deposits than you can from tax returns. And most important of all you can check their track record as homeowners and I believe you would find their foreclosure record below average over the last several decades. We no longer offer stated income, except in rare cases where a regional bank allows it on their own portfolio of loans. The pressure that is building on those who can't finance their existing homes or buy new homes because of the prohibition is building and could lead to either additional unforeseen foreclosures or a slower rise of new home sales at a time when we are trying to get more sales.

The next problem was created by the politicos and the nations bankers when trying to solve the first problem. We, as a nation, through our representatives empowered Fannie Mae, Freddie Mac and the FHA through the stimulus package to raise their limits and help more people. As per usual that was the last we heard from our representatives. Did anyone follow up or look at what happened once this was done? I doubt it because in all three cases above the rules and the rates changed, for the worse, for the "stimulus" borrowers versus their normal borrowers at the lower loan amounts. Is this what we had in mind? Did anyone even know this happened? I really don't think I need to answer those questions. Oh, and by the way, did you know that everyone in our country is treated differently under the stimulus. The new loan limits are based on the county you live in and many areas have had no increase in the dollar amount of the loan that qualifies while others have gone up to $729,750. Did you know that happened? Also did you know that when the stimulus came out Fannie & Freddie added Fico requirements on all of their borrowers which effectively cause anyone seeking a loan with an amortization over15 years to pay more, except for those with the best credit and lowest loan to values. Before you agree with that realize that a 679 credit score with a 71% LTV is charged 1.25% of the loan as fee when they originate the loan. And it gets worse from there.

Time prohibits me from going on but I will discuss this subject in greater depth in subsequent columns. This is not the time for borrowers to sit back and take whatever is being dished out. This is the time everyone who will participate in the mortgage market needs to know what is happening and either applaud it or voice your opposition. Otherwise you will be forced to live with the results and when I say live, I mean live.

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