New Year’s Resolutions for the Mortgage Industry

What are the chances of repeating last year’s actions and getting better results?

January 3, 2009 -- BLOOMFIELD, MI – What a challenging ride the year 2008 was. A worsening mortgage meltdown, the nationwide decline of real estate values, lack of credit liquidity causing a banking bailout, a bailout of the domestic auto industry, rising unemployment and the beginnings of a worldwide recession. Did I miss anything important?

The real estate and mortgage industries were decimated by the deteriorating economy, not to mention almost 25% of home owners nationwide watching their biggest investment going upside down.

One of the definitions of insanity is doing the same thing over and over again, hoping for different results. What changes can be made so that the industry has better results in 2009?

1. Registration and testing of all loan originators, including those working for federally chartered institutions.

WHY: Although borrowers should ultimately be held accountable for their ignorance and greed in taking out mortgages they couldn’t afford, a percentage of mortgage professionals did some serious misleading and worse. A mortgage is no more a commodity item than a 401k, yet consumers took mortgage advice from loan officers with little or no training. Several federally chartered organizations, most notably WAMU and Countrywide, had “sweatshop” refinance operations. Both these organizations were involved in lawsuits filed against them for mortgage abuses.

2. The return of common sense underwriting. There seems to be a lot of pressure on underwriters to be perfect, causing a lot of good mortgage applications to be rejected or picked apart. FNMA/FHLMC should issue some guidance on this.

WHY: Underwriting guides were too loose in recent years, but now the pendulum seems to have swung the other way. The government’s stated goal is to unfreeze the credit markets. Hypersensitive underwriting practices work in opposition to this.

3. FNMA/FHLMC should create a streamline refinance program that does away with appraisals & income verification modeled after HUD’s FHA Streamline program. FHA Streamline allows no cash out, but only requires that mortgage payments for the last 12 months have been on time. I’ve written about this several times before and there was a news leak on December 10th that it’s finally being considered.

WHY: Homeownership really boils down to affordable payments. Most people lose their homes, or walk away from them, when they can no longer afford the payments. Allowing homeowners upside down in their homes to still refinance and lower their payments, will keep more homes out of foreclosure. Slowing foreclosures will slow the dropping of real estate values, which will improve consumer confidence that’s now at a record low.

4. FNMA/FHLMC should remove their current limits and allow real estate investors to buy up foreclosed homes and rent them out. The limit is now 4 mortgages backed by FNMA/FHLMC, but with restrictions it should be unlimited.

WHY: The pool of qualified homebuyers has dramatically shrunk with the end of zero-down programs, easy credit requirements (both extremely abused) and the increasing number of consumers with foreclosure blemishes. This is one of the reasons we have excess real estate inventory. Many of these same people though, would like to rent a home, even rent-to-own it. Qualified investors are best suited to accomplish this. They just can’t get commercial financing due to the credit freeze. To avoid abuses, investors should only be allowed to buy foreclosed properties, have deed restrictions against reselling for 12-24 months and have either significant experience or liquid reserves.

5. Even though the program was a bit ill-conceived by politicians, lenders should embrace HUD’s Hope for Homeowner’s program (H4H) to avoid foreclosures.

WHY: The H4H program allows lenders to refinance nonconforming loans through FHA at 90% of the home’s current value. These loans usually won’t qualify for FNMA/FHLMC and are in danger of foreclosure. The current lender does have to write off the difference, but this is usually less expensive than the property going through foreclosure & being resold or being sold through a short sale.

6. Creative rules should be conceived that will motivate lenders to better staff their loss mitigation departments.

WHY: Ever tried calling a lender concerning a short sale, loan modification or foreclosure? You get to speak to someone with little training, reading from a limited script, that can’t make a decision. If you mail/fax/email something to them, it has a high probability of getting “lost”. In actuality, the easiest thing for these overworked individuals to do is to claim they never got what you sent. If the government is serious about doing more to keep homeowners in their homes, creative penalties need to be instituted to motivate lenders to solve this problem.

I’m sure some of these ideas will be addressed and some may end up not being feasible. We do need to do something though, or we’ll be worse off at the end of 2009 than we were at the end of 2008. Send me any ideas you may have.