The Mortgage Guru

I have been in the real estate business for most of my adult life and have been through many ups and downs. Real estate is cyclical and we will re-bound from our current situation…eventually. Many ‘experts’ have voiced their opinions on how we can navigate our way out of this mess we created. The problem with these opinions, as I see it, is we are in somewhat unchartered waters here. Myself as well as many seasoned veterans to the business I have spoken to all agree that we have never seen anything quite like this before. When I first entered real estate finance 90-95% of the loans I wrote were 15 & 30 year fixed mortgages with some sort of down payment; usually 10-20%. FICO scores and credit history actually played a roll in the qualification process. The exotic mortgages were just being introduced (mainly by smaller lenders) and they were just that; exotic. These loans were looked down upon by the majority of those in the business. However as word spread that a borrower with bad credit and little or no money down could purchase a home it gained popularity very quickly. It did not take long for these ‘exotic’ mortgages to become the new mainstream. At the peak of the real estate ‘boom’ lenders were giving money to anybody with a pulse. A borrower with a 560 credit score and numerous outstanding collections could by a house with no money down. Not only could they buy a house but they could lie, I mean state their income to a level that would qualify them for a home that was way out of their price range. There were loans being offered by certain lenders where a borrower with no credit scores whatsoever could apply for a mortgage and the lender would assign the borrower a 620 credit score and give them a 100% loan. These are just 2 examples of literally hundreds of exotic loans that flooded the market. How could we not see the writing on the wall? Wall Street was selling these mortgages on the secondary market under the assumption that housing prices would never fall and these borrowers could just come back and refinance out of these exotic mortgages down the road when they had improved their credit and they had some equity in the home. Now we all know if you’re bad with money and have a history of bad credit, buying a home is more than likely not going to change this. Look at all the lottery winners who go bankrupt their first year after winning millions. If you’re bad with money, you’re bad with money; no matter how much you have.

Let’s look at a few of the solutions offered up by the experts:

• Ben Bernanke, Chairman of the Federal Reserve, has suggested lenders give a break to distressed borrowers by lowering some portion of the loan amount. A lower remaining principal will permit more manageable monthly mortgage payments for borrowers. More importantly, the write-down of the principal changes the homeowner’s position from being under water (negative housing equity) to above water. The idea is that borrowers can still make payments rather than walk away.
• Martin Feldstein, Harvard University professor, made an intriguing proposal of immediately converting 20 percent of the existing loan balance into very low interest-rate loans. The federal government will provide the exceptionally low rates.
• The FHA Secure Program offered through HUD allows borrowers to get out of their high-interest rate, subprime loans into a lower-interest rate FHA loan if they meet certain conditions. Those conditions include having some level of housing equity and having demonstrated timely mortgage payments prior to the time when interest rates reset at a higher level.
• Sheila Bair of FDIC was one of the first to call for voluntary loan remodification. Lenders’ profit margins will be lower, but remodification is still better for their bottom line than a foreclosure. Recently, she called for systematic lowering of those resetting rates on 2/28 and 3/27 subprime hybrid loans.
• Henry Paulson, Treasury Secretary, called for essentially the same after bringing key financial institutions together and putting the voluntary loan restructuring into more concrete form. There are a lot of hoops a borrower has to go through to qualify for the relief, however.

This one is my favorite:

• Senator Chris Dodd (D-Connecticut) has proposed legislation that would permit bankruptcy judges to modify the terms of the loans in order to make payments more manageable

EXCUSE ME? Chris Dodd actually wants to allow judges to re-write mortgage loans? There are plenty of loan officers out there that can’t put together a decent loan package. With suggestions like these we may be where were at for a while…

As I see it, the bottom line is this…we have an influx of foreclosed properties flooding the market. The good news is if you’re in the market to buy a home you can find a bank owned property on every block in Las Vegas/Henderson for 50-60 cents on the dollar. There are many downsides to this scenario; one of them being these are pretty much the only homes people are buying right now. You can buy a home in Las Vegas/Henderson built in 2006 currently valued at $325,000 for around $220,000. If you have a home on the market in one these neighborhoods you can forget selling your home for full price if 6 homes on your block is selling for 40-50% under market value.

Foreclosure notices are expected to peak sometime this summer pushing the current situation into the 3rd and 4th quarter of this year. Until these foreclosed homes are off the market we will probably not see a rebound in housing prices.

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