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My Solution to the Lending Mess---An Open Letter to The Nation's Top Banks

Dear Top 25 Residential Lending Banks---

As you know, we are in a mess. A downright mess.

Foreclosures are at an all-time high in many areas. Most housing markets are depreciating. Millions of homeowners are facing the recast of their adjustable rate mortgages. They cannot refinance out of them so they will watch their payment skyrocket and reluctantly join those already in foreclosure.

For those of you who can survive it, and most of you won't, this is going to cost you billions. It's also going to create a new low for an industry that, although its had its downs before, has mostly been vibrant and alive for decades....the real estate industry.

As I write this, I am looking at a list of the Top 25 National Residential Lenders for the 1st Quarter of 2007. Three of you are already gone. There are rumors that three or four more of you are going soon.

This is going to last years and take you all out unless someone offers a reasonable, sensible solution.

Here is mine. It's not new and I know you have thought about it but now I am involving my friends at ActiveRain, the most powerful real estate community in the world.

We are demanding that you do something and do it now. You can no longer bury your head in the sand and say "this will all turn itself around," "the market will correct itself," and "things will be better soon."

Just ask American Home Mortgage, who was # 14 on this list before yesterday.

It is time for you to offer every borrower who has an adjustable rate mortgage that will recast in the next three years, whether they are currently late or not, a note modification.

You made a mistake. We all made mistakes. We offered 100% financing, on interest only loans, to people who never would have been able to even get a loan with 10% down a few years back.

Then to top it off we lured them in with the false hope that this payment would last forever, or at least long enough to where if it adjusted too high "they could always refi."

You were wrong to offer it. We were wrong to sell it. This is how we make it right.

You re-work all of these loans to new 30 year terms. You let these borrowers keep their current rate for at least five more years, and then it can start SLOWLY adjusting yearly.

After five years, it will increase .250% every year for the next 10 years and then be fixed for the last 15. If someone rides it out all the way, you will pick up an extra 2.5% from where they are today and that should be a nice profitable loan for you.

However, you know as well as I do that they won't ride it until the end. They will stay in the house for seven years, like they have always done historically. Or they will refinance in three, like they have always done. And guess what? They will turn to you again for these new loans!

Its certainly much better than the $50,000-$150,000 that you will lose per home if it goes into foreclosure.

Just ask Fremont, #22 on the list.

I know note modification is the hot topic at your board meetings right now. I know you are holding back on rolling this out currently because many of the packaged notes you sold in bulk to large institutional investors don't allow for note modifications.

I also know that opponents of note modification point out that the average borrower who had his note modified in the past, was still late on his mortgage.

However, it's time for you to be men of business. Men of industry. Men of honor.

Abraham Lincoln once said, "You cannot escape the responsibility of tomorrow by evading it today."

Now I know this idea won't be easy to implement. It will take additional staff that you no longer have because you have suffered cutbacks as a result of this mess. It will take too much organziation. The task is far too cumbersome and challenging. There is no way possible to pull this off.

I disagree. We are here for you.

Give every loan officer, every mortgage broker, and every mortgage banker the ability to "sell" this solution, just as we sold the problem.

You go back to the originating broker with the customer list, their customer list, and you give them strict compliance instructions on how you want to be represented and what can or cannot be done.

And then you offer a small commission on each file that is successfully modified. I am sure .500% of the loan amount would have loan officers lining up to help you in today's market. This commission is added into the borrower's loan, like closing costs are on a refinance, and you are done.

The borrower gets to stay in his home and keep fulfilling his dream of homeownership. You get to collect the interest payments that you deserve to get for the committment you made to loan him the money originally. And you also get rewarded by your investors who don't have to worry about your stock dropping 40% in a day like Beazer Homes did today.

You will also have created goodwill among your client's. You will have created goodwill in the industry by which you make your living.

Most importantly, for your company, your employees and their families, you will have been profitable and survived.

Unlike New Century, #15 on the list.

Sincerely,

A Concerned Mortgage Professional

Posted by Aaron Gordon, Home Loan Consultant, Las Vegas, NV on 08/02/2007 01:56 AM

Comments (15)

note modification, mortgage mess, subprime lending mess, solution for change

15 Comments on My Solution to the Lending Mess---An Open Letter to The Nation's Top Banks

AUG

2007

Interesting proposal Aaron, I don't know anything about the mortgage business except that the cause was greed. People looking to make a fast buck by putting loans in place that never should have been. They are responsible and I hope they fix it. If your suggestion works I am all for it but we also need tighter policy on loans. No more hocus pocus.

yes, the industry needs to step up and fix the mess. the consumer has a cross to bear as well, they are the ones that made the final decision. i am happy to say that none of my clients went with an ARM or an interest only loan. i advised against it, but in the end it was the consumers decision

Well something sure as heck needs to be done. Why shouldn't such a proposal be considered? Will it ever be seen by some of the required folks, however..?

Powerful stuff. I just don't understand why no one seemed to have seen it coming. The least able borrowers where given loans with the worst terms. It seemed obvious to me, and I advised my clients against the offers that appeared too good to be true.

Your approach is very interesting, and quite engaging for opinion. Very clever approach with some emotional validity. Having said that, in a stable, and some areas declining equity position throughout the US, we are now in the position where many homeowners are sobering up after the long party of having BENEFITED from the affordability of an adjustable rate mortgage, without the understanding, or more often, acceptance of what would happen when rates began to climb. Several have been responsible and are being able to take some action to NOT have to pay a significantly increased monthly payment. As a consumer, is it any different than the deferred interest option at your favorite store that is accumulating interest at 24% if not paid in full by a due date? Is it really the stores responsibility to amend their terms after you've used the product for a year or two, or in the case of some furniture stores, up to 3 years of no payments?

The individual has to own up. Yes, there are instances of abuse by unscrupulous lenders and agents; if you're in this business you know that this is the exception, not the norm.

Think of all the mortgages that were written in each segment, prime, alt-a, subprime, etc. Was the greater good served even if there is a 5, 10, or 15% default ratio? Have we considered that irresponsibility exists on the part of the consumer by buying more than we should or could afford? I'm not immune. I've done it myself, and have hated the consequence of having to pay more than I expected to pay.

I believe that you will continue to see lenders work with borrowers based on their specific circumstances, but definitely should not take a blanket approach to address a problem that they arent responsible for in my opinion.

Being that you're in Las Vegas, should the banks step in for all of the investors and second home buyers that jumped into the frenzy to capitalize on the extraordinary rate of appreciation because they're now upside down, and in their mind, losing the home is their only option?

Bill---I agree with you 100% that the greater good in the creation of more homeownership than ever was created in this boom.

I also agree with you that responsibility lies with the consumer. With a few exceptions most people knew what they were getting into and you are right, they are now waking up to a sobering experience.

However, if that furniture store you were mentioning were about to go out of business because many of the consumers who took out the "3 years, no payments" credit card were in default, certainly the store-owner would reconsider the terms of those notes.

Furthermore, if this action against the furniture had the potential to ruin some of the biggest Wall Street firms like Lehman Brothers, Wachovia, and Bear Stearns, like this potentially has, you can be assured there would be some kind of assistance program.

Do I feel sorry for the speculators who played the real estate market like they did the tech stocks of NASDAQ in the late 90's? Not at all.

However, in my opinion, and in most cases, this is not the same. It has much deeper economical consequences to a mostly different sector of people. We are talking about people's homes. Where they live and have Thanksgiving dinner and Christmas.

If my idea were to work, you could certainly only allow for a modification of owner-occupied properties and I believe that would be fair. However, the solution I propose is not just to save the family home but to save the bank.

Its OK to punish the speculator in Las Vegas for making a bad investment. And I agree they should bare the losses of thier investment.

However, they won't personally. They will simply let it go. And if the banks keep writing $150,000 checks to cover the stages of foreclosure and then the loss of home value, they won't be here much longer to make loans for anyone.

Thanks for your comment!!

Darrel---I agree with you and that is already happening. Tighter lending guidelines are here and getting more restrictive every week.

As each big name lender falls, many more products go with it.

Today, ALT-A or alternative loans, like stated income, interest only, etc. are much more difficult to get and come with a much higher interest rate.

This is going to get even worse in my opinion but will also continue to hamper the real estate sales market for some time as well.

Bill,

I must say i disagree with your take on Aaron's position. Even if Aaron is being kind in his response to you.

My take is simply that, yes the consumers are just as culpable if not more then the banks and lenders. But, regardless of fault we are where we are. We can sit and say who is at fault. But where does that land everone . How many more foreclosures or lenders have to go under.

Take it one step further. What happens to the few thousand employees who lost their jobs today at AHM? Who is going to make their mortgage payments next month? They did nothing wrong but go to work. They will just be the fall out foreclosers in 6 months.

So without pointing fingers, everyone just needs to say we are where we are and how can we fix it. Regardless of blame. It is time to erase the line in the sand and do what is best.

As for the store credit cards, you know what bro. When you are mailing 18 year old kids pre approval's on a daily basis, I think, yes you must assume some responsibility.

AUG

2007

Mike

I actually agree with Aaron's post, and have no problem reading through political correctness. I've read his stuff before, and respect what he always has to say.

There must be something about my birthday yesterday that I must have been too honest in my postings, as I've had a couple people disagree with me on the same day, probably because while I empathize with each individual situation, I believe as a whole that the responsibility falls on the consumer. Yup, I said it; I am a consumer.

I absolutely believe that the banks should provide assistance, but at what cost? For any responsible borrower who calls their bank in advance, or even as they are falling behind, or have fallen behind, makes arrangements to catch up with their payments, then that person should indeed be rewarded for being accountable. But for all the others that spent their equity like drunken sailors at a bar, shouldn't they also be accountable? Should we reward them for their irresponsibility so that we can protect the equity of the rest of the neighborhood? Maybe. Maybe not. Modify the terms or payment period. Maybe. Maybe not. Is a short sale the right decision? Maybe. Maybe not. My point is you help those that are willing to help themselves. If you signed on the dotted line, you cannot claim ignorance that you didnt understand, and IF you choose to go down that slippery slope, the responsibility falls back on you because you really should've read what you signed.

Trust me. I've signed contracts before that I wished I could've walked away from. Second mortgages, cars, electronics, all of it. But I've done everything I can, even when I've been flat broke to make sure I didn't default; late at times, yes, but never defaulted. But what message would I be sending to my kids, or loved ones, if I cannot live up to my word? I received my citibank card when I was 18 with a $500 balance. It was charged to the max within 24 hours. Did I get to go back to the bank or my parents letting them know that the 19.24 percent rate was too high, and would they work with me? Seriously....its about character and personal responsibility.

Oh, and by the way, I personally know a LOT of people at AHM at all levels. They did NOT see that coming in. One person in a regional capacity told me yesterday that it was a freight train that slammed into him with no warning, and no noise. Yes, that is a tragedy that is being worked on. In fact, that one is an example of Wall Street overreacting to a company with solid performance and solid financials; I know that most of the employees there will be picked up fairly quickly, and hopefully will not be harmed too much. BUT, again, most of the ones I know have been through this cycle before, and had savings and investments to get them through these bad times.

Thanks for your response Aaron, and thanks for backing him up Mike. I always enjoy thinking things through.

AUG

2007

Bill,

Enjoyed reading your reply and agree with much of what you stated. Like you I once was an out of control credit fiend. And like you at some point in my mid twenties asked myself what that hell am I doing and figured out a way to pay my debt off and start a new responsible financial life. I didn't ask for help. I just did what I needed to do to get straight.

Truth of the matter is we both are doing exactly what needs to be done to get out of the mess. We are communicating. As long as people keep on communicating we can find answers. We don't have to agree 100% on all the specifics but as long as we communicate we can find a fair enough balance. Like with the start of any war, once the communicating stops, the bombs will drop. Once the financial institutions, the lenders, the brokers and the customers stop talking Armageddon will hit.

For some, like AHM, that day has come. Who knows why. Maybe they just didn't see it coming. Maybe they just believed it was the other guy. Maybe is just greed. Probably a combination of all three with 15 other reaons on top of it. Who knows? All we can do is learn the lessons and adapt to a new and better industry. One can only look forward with a laundry list of checks and balances driven by the lessons learned.

Back about a year ago I watched a movie called "The Smartest Guys in the Room" If you have not seen it I would highly reccommend it. It's a documnentary about Kenneth Lay and the rest of the Enron bosses who decieved their investesors and employees out of billions.

The story itself is a tragedy. Innocent people lost all their retirements, a fortune 500 company went bankrupt and a top accounting firm was exposed for deceving the books.

Mr. Lay, is now dead. After being found guillty he died of a massive heartattack. One of his main cohorts (Jeff Skilling) is now serving 20+ years for his role in Enron

Enron was about greed, decent and unethical business practices. When it fell, it's tenticals were felt far beyond the leaders of the company. While Mr Lay is dead and others are in jail, many are not. They got to keep their millions (provided it was not in company stock of course). But what about the little guy. The guy who saved his whole life in a pension fund that is now worthless. The guy who did nothing but go to work everyday and punch a clock to support his family. Where does he turn for help or support? What does he have left? What are his options?

While I am not trying to imply anyone intentionally decieved or defrauded anyone. What is going to happen to the little guy? Wall street investors made their millions on mortgage bonds. They are the ones that pushed for the guidlines to loosen. Why? Greed. There was a tremendous opportunity to make millions and they did. God bless. But, you did so under a false set of pretenses. There was a reason for 40 years a 650 FICO couldnt get 100% financing. Past history told you it was a risk. But dispite the historical data you still decided to allow it. It was not the borrower who asked. It was Wall Street who suggested. Wall Street is goiing to be fine. For them it is on to the next big thing. You see whether it is .com's or mortgages, Wall Street types end up ok. They land on their feet.

But unlike .com's we have real people who are going to suffer. YThere is trail you are leaving behind. You can't just move on to the next thing. It is time to reap a bit of what you sowed and accept some of the responsibility. Did the borrower sign on the dotted line? Yes, absolutly. But did a greedy investor, possibly take advantage of a borrower, dispite not only 40 years of data but also the credit history of the borrower himself. After all a 650 is a 650. You got there some how. That alone should have been enough to tell you this person is not the most responsible with money.

Let's not make this a story a tragedy. Dont walk away from the mess. We all created it. So let's put our heads together to fix it.

Mike Wesselhoft

AUG

2007

Aaron

Good blog, we did sell those loans to our clients and now the banking industry should bail us out but it will be the tax payer as usual.

Gary--- As you saw today with the Fed keeping rates where they are, I don't think the government is looking to assist this problem. Their belief, and I think they have made this pretty clear, is that this is a private sector matter.

Short of Countrywide going out of businesss, and that is not beyond the realm of possibility, I believe they are going to stay on the sidelines for now and probably never jump in. That could all change with the 2008 election but for now I think banks are on their own.

JUN

2008

John Novak sent me over to read your series of blogs about note modifications. I'm toying with writing something for my newspaper column and appreciate that you've shared what you know.

Chirs--- Thank John for me. Give me a call to discuss. I have probably assisted about 50 people so far so I can probably give you even more insight than what is written here.

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