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.
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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, IRA's,
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.
Copyright © 2007 TDO Properties, LLC
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