Mortgage Mess: An Insiders View

As a former mortgage professional, I have a little experience and some pointed opinions about the current mortgage mess. And possibly some solutions to prevent it from reoccuring.

First, a personal history. I worked as a loan originator from 2000 to 2005. I left the industry because I saw the housing slowdown looming on the horizon, and couldn't convince anyone that it was coming. No market can withstand price increases of 15 to 20% for long without imploding. My employers had their greed glasses on and couldn't see it, so I left.

Now, the reasons for the crash are many, but primarily greed driven. First, the real estate market was pushed to a breaking point. People panicked thinking that prices would continually go up, and they bought homes out of their ability to afford thinking they would never be able to in the future (an historically incorrect viewpoint). People also used their highly inflated home equity to buy toys (boats, personal watercraft etc.) instead of improving the home to increase value. And the government did little or nothing to control the runaway pricing of mortgage loans and zero-equity transactions.

Again, some historical background. In California anyone with a Real Estate Brokers License can become a lender. They are regulated by the Department of Real Estate (DRE) who has a ratio of employees to licensees of about 5,000:1. There is no way they can truly regulate licensees activities. These licensees are allowed by law to represent both buyer and seller in a transaction and can negotiate the mortgage loan for the buyer. Although the sales transaction has a commission limit of 6%, the loan has no limits unless it is a government loan(FHA or VA). Assume 4% on the loan (actually low for a 100% transaction), that leaves the broker making 10% on a transaction or $45,000 on a $450,000 home sale.

Secondly, 100% loans are generally made as two loans; a first mortgage and a second. This is known as an 80/20 (and the broker can make commission on both loans, with the 20% second paying a much higher percentage). The first mortgage is made at 80% of the purchase price and carries NO MORTGAGE INSURANCE. This means that the first mortgage lender is at risk for 100% of the loan. The second mortgage is at 20% of the purchase price, leaving the buyer paying nothing to the purchase but the costs of the transaction. He has NO EQUITY! So when the value of the home goes down, even fractionally, he has no motivation to keep the home. Combine these factors with "Stated Income" loans for self employed individuals in professions like gardeners, housekeepers and child care providers (where the income can easily be inflated) and adjustable rate mortgages with artifically low starting rates, and we had a disaster begging to happen.

Solutions are relatively simple, once the causes are identified. First, the States must fund their investigative branches to the point where they can actually investigate, and put some teeth into their fraud laws. Jail terms and serious (5 to 6 digit) fines. Make it illegal to represent more than one party in a transaction to reduce the greed factor. Require "live" underwriting for any loan outside of "plain vanilla". If there is no cash from the borrower, automated underwriting should be disallowed (I'm not a big fan of AU. It takes away the human thought process and assumes that the person who compiled the model was absolutely correct). 80/20, 100%, adjustable rate, interest-only and variable payment loans need a closer look than AU can provide. Provide for criminal and civil penalties for ALL parties to a transaction who can be proven to have knowledge or suspicion of fraud. Some of these deals got through simply because one person in the process thought "This ain't right but hey, it's not my problem!"

So, in order to prevent this from reoccuring we should demand from our State and Federal Governments the following;

1) Realtors may act as agent to only one party in any transaction; buyer, seller or lender.

2) All compensated individuals with access to transaction information shall be held individually responsible if there are indications that the transaction may be fraudulent. Any person who refuses to complete a transaction that appears to be fraudulent shall, upon reporting their suspicions to the proper authorities be held harmless in any subsequent criminal or civil action.

3) Lenders shall not use Automated Underwriting systems for final approval of any loan where the borrowers income is not factually established; or where the borrowers actual cash equity is less than 10% or the mortgage interest rate is not fixed for the entire term of the loan, except in cases of Government Insured loans (FHA/VA); or where the payment has a variable monthly payment amount; or where there the loan is not fully amortized over the term of the loan.

These simple propositions will greatly reduce the possibility of this kind of calamity ever reoccuring.

Revolution or Revolutionaries?

OK, so I'm going to rant about bureaucrats and fascists (one and the same, really). The real problem with California is that people want to blame the wrong person/thing. We blame the Governor when the Legislature spends more than they take in, then want to raise taxes to cover their incompetence. We blame the legislature when the laws don't stop criminals when by definition criminals are people who don't obey the law (is that a dichotomy or a conundrum?). We blame politicians when the bureaucrats are mindless and refuse to think (outside or inside the box, they don't think at ALL), the system breaks down and deserving people fall through the cracks. I makes you want to foment revolution. We don't need revolution; we need revolutionary people. People who want to see change that works, not just change for the sake of change. How about a Constitutional Amendment that requires any bill passed that conflicts with another law must be reconciled before it becomes law? Any bill under consideration must be reviewed for redundancy and rejected prior to committee if it is found to repeat any law already in effect? Any bureaucracy that duplicates the duties of another bureaucracy must be eliminated? Any tax must have a "Twilight Clause" that reduces or eliminates the tax after a certain time (say, 5-10 years) and requires a review and new law passed to reinstate it? We are told that lawmakers should not be subject to term limits, because by the time they understand how the "system" works, they are out of office. That is EXACTLY what I want. No more career politicians, no more "working the system". No more "system" at all. Just ordinary people trying to protect the innocent and help the disadvantaged (help, not support for the rest of their lives). People who understand that a free society means minimal government intervention. That when you tax something, you get less of it and when you subsidize something you get more of it. That those who would sacrifice liberty for security deserve neither. That the power of Law eminates from the People, not from the Government or the Bureaucracy. Security comes from the People being able to enforce societal norms. Whether it is through police power of government or vigilante power of the community. Where the first breaks down, the second must take over or anarchy and ultimately the Law of the Jungle will come to supremacy. History tells us that the animal called Man is evil. Children must be TAUGHT to live together and society will reject, forcefully if necessary, those who refuse to recognize the rights of others. Every revolution has been based on the right of the people to choose how they will live and be governed. If our society will succeed and survive, we need a few more revolutionaries.