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Today’s Lending Environment: Calling Oliver Stone!

A Call to... ACTION!!

Movie director Oliver Stone is often tagged as someone who sees conspiracies in everything. I just wonder how he would see the evolving lending environment…

For the most part, this blog is intended to inform home buyers and sellers, as well as real estate agents and mortgage professionals, as to market conditions and how they will most likely affect them…..because KEEPING CURRENT MATTERS! What is unusual about the blog is that it is read by thousands, shared on Facebook and retweeted around the globe, but there is little dialogue and commentary.  Today’s blog, hopefully, will be different…..we need to elevate the chatter…we need to voice our opinions.  We need to mobilize people before it’s too late!

First… A History Lesson

There was a housing bubble fueled by many factors, among them were:

  1. Consumer Greed– People began looking at real estate as the replacement to their stock market investments.  When the “dot com bubble burst”, people needed to put money somewhere; somewhere became real estate.  People were leveraging small down payments into properties that were appreciating at incredible rates.  Everyone jumped on the bandwagon. Furthermore, many consumers used their home as a cash register, refinancing to pull out their equity to fuel a lifestyle they could not afford.
  2. Easy Access to Capital– Mortgage Lenders lowered qualifying standards and made huge sums of money available without really evidencing the borrowers’ ability to repay.  In an appreciating market, those who couldn’t actually pay were able to still sell for a profit; therefore, those weak loans never went to foreclosure.  Because foreclosures were so low, the mortgage industry lowered standards even more, erroneously believing that these were good loans.
  3. Wall Street Greed– The creative slicing of Mortgage Backed Securities in tranches and use of derivatives was sexy and alluring and short-term profitable, but it ignored fundamentals of mortgage lending… primarily, “Will this loan be repaid?”
  4. Home Appraisals supported the climbing home prices. Remember, an appraisal has long been considered “what a reasonable buyer would pay a reasonable seller.”   In those days, nearly every home was in a bidding war, so there were multiple “reasonable” buyers validating the price.  Blaming the appraisers, is in my opinion, somewhat ridiculous.  They give a value that is a snapshot in time.
  5. Unscrupulous Industry Players who took advantage. Real estate agents, loan officers, appraisers and Wall Street Fund Managers are huge industries, and there was a portion of each of those populations that chased dollars rather than protecting their clients.
  6. Underfunded, unprepared, and under educated regulators– The people who were charged with overseeing it all were overwhelmed with volume.  It was like drinking from a fire hydrant with a hose.

The bottom line is that there is plenty of blame to share.  My challenge, however, is that while the pendulum moved too far towards lower standards, the pendulum has already moved too far towards higher standards….and every indication is that the standards will be set too high….maybe too high for the industry to survive.

Granted, things had to change.

We have seen some very positive changes:

  1. Gone are the exotic mortgage products that, while excellent choices for savvy borrowers, were given to unknowing borrowers.  For the most part, the only people who get loans today are those who prove they can pay them back.
  2. National Licensing Requirements for loan officers (course work, testing, background check, etc.) was long overdue.  The ability to track the performance of someone’s work helps on many fronts.
  3. HVCC made appraisers more clearly independent evaluators of value by limiting their interaction with the other parties in the transaction.
  4. Clearer, but not as clear as they could be, consumer disclosures and Good Faith Estimates (GFEs) are helping to educate the public… or, at least, getting them to ask questions.
  5. Fed Monetary Policy and Federal Government Initiatives gave the public some confidence that there is a plan (for modifications over foreclosure, for low interest rates, for tax credits, and so on).  Many will argue that actual effectiveness beyond the rhetoric is debatable, but I believe the rhetoric prevented a total collapse.

At the same time there have been casualties

And I can’t help but believe there is a conspiracy working in closed door meetings…..especially when I see the following results and the following proposals:

  1. The number of loan officers nationally has been reduced from a peak of 450,000 to estimates now of between 120,000 and 150,000. It is clear to me that the Bubble Blame starts with loan officers.  I just wonder if the car salesman at Toyota is being blamed for faulty brake lines.  I mean, LOs didn’t create or market the loan products….they presented and sold them.  Now, I am the first to recognize that many didn’t know what they were doing and they shouldn’t have been allowed to talk to consumers, but didn’t Licensing and Product Elimination fix that?  Doesn’t it make sense the “bad apples” were among the 300,000+ who have already left the industry and we should be looking for ways to support the core qualified and conscientious people who remain?
  2. Mortgage Brokers have been virtually eliminated. Mortgage Brokers just a few years ago were originating nearly 70% of all mortgage applications.  In 2009, the number was down to 23%, and forecasts for 2010 are at 16%.  The new GFE requirements (where a broker must disclose the lender they are using on Day 1, as opposed to waiting and shopping for the best loan program or interest rate later) when added to their limited access to FHA, VA, 203Ks, and many state programs has their days numbered.
  3. The Senate Finance Reform Bill had language in it that would require lenders to have cash reserves of 5% of their loans originated.  In one stroke, you could have virtually wiped out the Mortgage Banking industry because no one has that kind of cash lying around. Now, the bill has been amended in the Senate (not the final bill) to make the 5% “skin in the game” only apply for loans outside-the-box, but I need to point out that the bill was voted on TWICE (and not passed) as it was!  Are mortgage bankers the next target after the mortgage brokers? This attempt would have little impact on the major banks, which is why they didn’t really oppose the issue or even make many people aware of it.  (Think your representatives in Washington won’t allow things like that to happen?  Call your friends from Lehman Brothers, or Merrill Lynch.)
  4. The Department of Labor (curious why THEY are looking at the mortgage industry) is forcing companies to pay, traditionally 100% Commissioned people (loan officers), minimum wage. While I respect their contention that LOs are designated employees who are managed and told where to be at what time, the net result will be the further elimination of loan officers as mortgage companies are unable or unwilling to pay salaries to people who may never produce.  Who’s next for the Minimum Wage Restrictions?  Real Estate Agents?
  5. Rising Mortgage Insurance Premiums for FHA are next. HUD has even gotten the endorsement of the National Association of Realtors on this one.  An increase of 1% to the Monthly Insurance Premium (which we are hearing whispers about) is in effect a 1% increase in interest rates!  It will make homeownership less affordable at a time when we have more inventory than we can handle now.  What is the logic there?  Is it coincidence that the government is trying to keep rates low and then charging this increased premium or are we seeing yet another example of government thinking they should have more money and have the ability to spend it as THEY see fit?
  6. Did you see that the Fed “lent” $2 TRILLION to the European Union to keep Europe financially stable (nearly three times the Bank Bailout money), and now they are saying they don’t know who got the money or where it is???  Why isn’t this story the front page story of EVERY MEDIA outlet???
  7. Speaking of the Fed, you know, the ones who set monetary policy.  Why is it that one of their new appointees is not an economist, but rather someone who helped set up the licensing of loan officers?  Why has the Fed published in their Registry that they want to cap loan officer compensation and not have it tied to loan amount or interest rate?  And, you see, the Fed Board isn’t elected like your Congressperson, so there’s no one to complain to.

We live in a world where our government believes they have the answers… and maybe they do.  I am just petrified about the prospect of my livelihood, my industry for 25+ years, being destroyed by the stroke of a pen WITHOUT proper inclusion in the debate… that in back rooms there are people deciding my fate based on things they don’t fully comprehend.  To all who have read this far, I beg you to get more informed, have your voice heard, and take action!


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1 reply
  1. Tom McGiveron
    Tom McGiveron says:

    wow – to hear you write about this – i am speechless. a little scared actually. 2 trillion? i googled it and came up dry for the most part. i went to http://drudgereport.com/ and came up dry – but wow – that website is just scary.
    dean – keep me posted my friend. email or call me. let’s keep in touch on these topics…because i get it…i GET IT.

    Reply

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