By Dustin R Burke, Adonai Financial
What ever happened to common sense? There seems to be a shortage of it everywhere: from restaurants to the movie theater to Wall Street to the banks we are in need of common sense.
Well, I am a mortgage guy, so this is going to relate to the lack of common sense in the mortgage market. I've heard people say that this epidemic is a recent occurrence, but it's really not; we've been in short supply of it for a very long time. Now this is not attempt to bash the underwriters or banks or even the mortgage brokers themselves.
This is an attempt to shed some much needed light on a cultural problem that rooted itself in very important industry. We've heard there are problems with those now famous sub-prime loans or those state-income loans or those negative amortization loans. These loan products are not the problem. The problem is how these products were used.
As of today LenderImpode.com shows 226 banks and lending institutions that have gone "kaput". Some of these lenders are rightfully out of business and some were just caught up in the mess of it all. The lenders that are rightfully out of business, in my opinion, originated loans that they knew, or should have known, would not perform well.
Really, does it make prudent business sense to give a person who works at Walmart a 100% negative amortization loan for $550,000? Or even $300,000? Or even $200,000? I don't care what rational you use; we know that this loan will probably not perform well. So why did the banks originate this type of loan? It was because of lack of common sense and greed.
Now, I'm not trying to say that stated loans are bad or even that 100% loans are bad. Both have their proper place, but common sense should be our guide, not bright-line rule underwriting guidelines. Personally, I will not originate a loan that I believe will not perform well. I have been in the business for 10 years and there is only 1 loan, which I know of, that has ever gone into foreclosure, and it was the second loan I had ever done -- frankly I just didn't know better.
There are good reasons to do sub-prime loans, stated income loans, 100% loans, and even negative amortization loans. The industry just hasn't figured out when these products are acceptable and when they are detrimental to the market -- hence the problem we are in now with the real estate "depression".
The pendulum of mortgage reason (or lack of it) spurred a white hot real estate market. It now swung back now starving the market of much needed liquidity. There is a flood of well qualified borrowers who cannot get into the market because over-stringent underwriting guidelines.
If a buyer with a 750 FICO wants to buy a house, puts 5% down, and his new house payment will be less than his rent payment then I do not care what his income is. He/she has show they can make the payment, so make the loan.
If a buyer with a 660 FICO wants to buy a house, puts 40% down, and wants a negative amortization loan, fine. It will take him/her 10 years to eat all their equity. Make the loan.
If a buyer with a 630 FICO wants to refinance their home, has 25% equity in the property, and the new mortgage payment is less than the old then I do not care about his income. He/she made the old mortgage payment; he/she will make the new one.
So, what's the solution? Train underwriters to write common sense loans and then let them do their job. The training for underwriters is a disaster. It is a manual of bright-line rules that restrict qualified borrowers and reward those doomed to default.
Before the days of secondary markets and bright-line rules, loans went before a "loan committee" who discussed the loan, the strengths and the weaknesses. A group of educated financiers made a decision and then were held accountable for it. Bring back a common sense approach to mortgage financing.
What is your opinion? Email me at dustin.burke@adonaifinancial.com.
"Adonai Financial, your friends in the mortgage business!"
© 2008 Dustin R Burke & Adonai Financial Corporation
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