Stop Me If You've Heard This One Before
Roger Schlesinger
Thursday, July 17, 2008

The government, purveyor of laws, rules and regulations, has decided that the credit crunch could be greatly helped by some new laws, rules and regulations, believe it or not. Obviously the powers-that-be take great pleasure in showing that they care and are willing to create these new edicts to prove that very fact. That also was the motivation behind the last group of laws, rules and regulations—which didn’t actually work. This doesn’t mean that either the new ones will work or that any attempt was made to make the old ones work. Freely translated, it means that the government is great at producing laws, rules and regulations, but not great in their enforcement.

Let us take a look at what is happening. Ben Bernanke, The Chairman of the Federal Reserve, has proposed some new(?) ideas to calm the nerves of the participants in the credit markets, namely the lenders, investors, brokers, borrowers and of course the Federal Reserve. These new rules include eliminating stated income/stated assets loans, misleading advertisements, loans without escrows for taxes and insurance, and prepayment penalties on loans that reset their interest rate in less than three years. Although Bernanke didn’t state that this was the definite answer to the problem, he did give us the feeling the end of the problems will be near thanks to this piece of work. Unfortunately he is also a politician and so to be fair, to all he will phase the program into the mortgage market in October. Before you get too excited or depressed, that would be October 2009.

I am sure that Ben Bernanke knows that the lenders have all the tools they need to do the loans according to Hoyle, or in this case according to Bernanke. If they decide to do a stated loan, they usually have the borrower sign a release form that allows the lender to pull the tax return or the pertinent figures from the tax returns to see if the stated income figure is correct. They have always had this form and could have used it at any time in the past few years when all the craziness took place. They simply chose not to do it.

The lenders had many ways to check the value of the property from running the address through numerous automated value modules to having a desk review by the underwriter or a field review by a review appraiser. This has always been available but the lenders didn’t always choose to use these resources. In as much as every loan has a credit report on the borrower (s) which goes to every lender, they could have taken more than a cursory look at and probably learned more about the borrower than they even needed to know. They simply choose not to take advantage of this report.

Many politicians in Washington who attempted to help with the problems created bigger ones. One senator trying to light a flame under the Office of Thrift Management leaked his letter of concern about a hefty bank’s solvency to the press and almost singlehandedly took down the institution. After looking at a rate sheet that showed that the worse the loan, the more the broker could make, the same official decided that the brokers were the problem. A more prudent student of the mortgage market might have reached a different conclusion, realizing that the lender created the rate sheet and thus initiated the problem, not the broker.

The politicos have popped up for sound bites and head shots with archaic ideas and little knowledge to draw upon. I wrote a column several months ago, "The 1% was the Culprit," which pointed out the biggest problem about the worst loan that this industry ever developed: the option ARM. Contrary to what the press has reported, this is not a new loan but one that had been around for decades. It was the darling of the savings and loans but had a more reasonable teaser rate. The teaser rate, or pay rate, is the one that is advertised and was generally a couple of percent lower than the actual interest rate. People liked this loan because the payment was less than interest only and they weren’t concerned about their balance on their loan going up because real estate seemed to increase in value.

When the 1% teaser or pay rate was introduced, it was one of the greatest marketing successes of all time because people could get an amazingly low payment on a rather large loan. Therefore, they could actually buy more house than they could afford and the rest is history. Have you heard any politician point this out to anyone? They have nibbled around the edges and discovered some uncomfortable facts about this type of loan but could never put the whole problem together.

That is why new legislation will do nothing to help, but I am not sure if anyone from any side really cares. I have seen a report about tougher standards for loan officers that simply stipulates what we’ve had in California for about 70 years. They want fingerprinting of loan officers, background checks, education and tests. We’ve done that, been there and yet have the same problems that most of the other states have.

When will people learn that you can’t legislate honesty? The good news is that about 75% of the loan officers in America have left the business, and I can assure you they weren’t the true professionals for the most part. The bad news is that once the industry is back on its feet, we will have a rush of the same types that we lost, returning to wreck havoc again. There aren’t any simple answers to our complex situation but those who have stayed are trying to make sense of it. I am optimistic enough to believe that the good guys in the white hats generally win. If that is true, then you can believe that the public will be well-served and the mortgage industry will once again be on sound footing.