Before we can begin working on viable solutions for the mortgage and finance industry, we must first properly identify and define the problems. I would like to first share with you a simple analogy as it relates to the mortgage profession.
The most beautiful golf courses in the world are show cased on television week after week during the PGA tour. What goes on behind the scenes to create and maintain these master piece golf courses is what is truly amazing. The superintendent of the golf course must be aware of weather conditions, different types of grass and soil conditions just to name a few. He must also know how and when to react to devastating conditions before they are beyond control. Let's take for example, the common grass weed.
Grass weeds can wreak havoc on a golf course and are a golf superintendent's worst nightmare. Not only are they ugly, they strangle and kill the healthy grass root systems around them as they spread like wild fire. Because there are so many breeds and types of weeds, the right chemicals and treatment must be applied in a timely manner for the superintendent to achieve his goal and eliminate the weed. If the weed is not properly identified, valuable time can be wasted applying the wrong chemicals. The weed can be temporarily mowed down, only to return somewhere else a few days later. Before you know it, the weed has multiplied and popped up in places never imagined.
I have used the above illustration because I believe the common grass weed is a perfect example and a parallel to the crisis we are facing in all aspects of the mortgage profession. The golf course is the mortgage business. Just like the perfect golf course should be lush and green with healthy grass, the mortgage business should be green with money involving healthy participants. In our current and obvious situation however, our mortgage profession is being strangle by a weed and is not being properly managed. The weed is not new. It has been around since the beginning of banking. We have simply failed to identify the weed and therefore have applied or attempted to apply the wrong remedies.
Nearly 20 years ago, during the savings and loan debacle, some of the weeds were identified, but the most important mark has been missed or avoided. FIRREA Title IX was adopted requiring appraisals involved in a "Federally Related Transaction (FRT)" to be in compliance with USPAP and to be performed by appraisers licensed by their respective states. The assumption was that licensing individuals who would be held responsible for their valuation of real estate assets would improve the accuracy of valuation and thus assist in thwarting an over valued pool of mortgages. One problem with this action is there has been little accountability enforced on behalf of the governing boards due to a lack of staff, funding or simple obliviousness of the problem. The weed was mowed, but it has simply morphed and multiplied.
The real weed, as non-politically correct or un-popular as it may be to state, is nothing more than unadulterated greed. The mortgage business is chock full of money and greed from the top to the bottom:
- Wall Street- Made ton's of money by creating Collateralized Debt Obligations (CDO's). In order to create CDO's and SIV's, Wall Street was eager to purchase Mortgage Backed Securities from...
- The Secondary Mortgage Market (Fannie, Freddie & Ginnie).The GSE's (private when they are making money but conveniently government backed when they are failing) made money selling loans to wall street and investors by first purchasing loans from...
- Institutional & Non Institutional Lenders (Insurance Co's, Savings Bank, Commercial Banks) who purchased, bundled and sold loans originated by ...
- Mortgage Brokers (local mortgage companies) who made money brokering/selling loans to all the above players by hiring...
- Loan Officers, who are not regulated, often have little training or expertise, but make commissions typically directly tied to the amount of the loan and the YSP (Yield Spread Premium), who often get their business on referral from...
- Real Estate Agents, who also make commissions directly tied to the amount of the real estate transaction. The agents receive referral and repeat business from...
- Home Owners, who are mesmerized and hypnotized by the allure of easy money as advertised in a refinance or by the low payments of an exotic loan. NONE of this can happen however without the...
- Appraiser, who, because of regulations rarely receives an order directly from the one whom he/she is intended to protect (the soundness of the Lending Institution(s) and the General Public). Instead, the appraiser is typically engaged by the commission paid loan officer, who is under the pressure of not only the real estate agent to close the deal, but by his employer if he wishes to be compensated.
Whether done purposely or inadvertently, the entire system relies mostly on the opinion of one individual - The Appraiser. Without the appraiser's opinion of value (or an alternate such as an AVM), the loan never leaves ground zero. Should this really be a problem? No, it shouldn't. After all, the appraiser is regulated and has rules they must abide by right? Reality is, because of human nature and the innate desire to survive, many appraisers who have dedicated time and considerable amounts of money to enter the profession, are making tough and often unethical choices. The lesson is learned early on, that if one does not "play ball", they will be quickly ostracized and soon out of business. "Playing ball" is, and has always been the root that enables the nurturing of the greed weed on all levels.
Another new business model has emerged due to technology, which has agitated and empowered the issue. The mortgage industry has evolved from going to the local bank on the corner that your father's father banked with and applying for a mortgage. Now one can log on to their computer and apply for a loan from lenders from around the globe that they've never even met. In a capitalistic system, competition between businesses for a consumer will typically create the best deal for the consumer. Unfortunately, it has also created dark consequences. Many loan officers fear that they will loose a customer to another lender/broker that will "get the deal done". This fear is then transferred to the appraiser, who fears that if they fail to "get the deal done", it will still get done, just with another appraiser. In reality, much of the pressure the loan officer receives is from the home owner themselves, who feels empowered to take their business somewhere elsewhere that will "get the deal done".
Why does it seem that so many home owners have adopted this approach? Perhaps the definition of home ownership has also evolved. Owning a home has gone from owning a place that you plan on raising your family, retiring at and having the future grand children visit, to a place to sleep, make a short term hopeful investment and cash out every other year like a virtual ATM machine. The average American no longer looks at the actual price tag, but makes a buying decision based on the payment. From leasing a vehicle, using credit cards to support a lifestyle or purchasing a home, this toxic mentality has some how become blurred together and accepted as the norm. The abuse of cash out refinancing has falsely emboldened the general public into believing they can always fall back on the equity of their home. After all, their homes seem to magically appraise exactly to the amount they need to pay off all of their debts and avoid PMI. Our broken tax system also supports this behavior as many justify using home equity to pay off unsecured debt because of tax relief. This mindset has created the potential for and is revealing itself as a greater risk to lenders than ever in history. Another weed.
As we have seen over the past 12 months, the entire fabric of our economy is tightly weaved with the housing market. Think of all the jobs that are related to housing. You have the obvious ones: Builders, developers and construction workers. But think about all of the items that are the components of a home? The brick, roofing, lumber, carpet, tile, flooring, HVAC, appliances, electronics, furniture, paint, electricians, plumbers, landscapers, etc... All of these materials and jobs have components, jobs, and materials of their own that are all related. You also have real estate agents, appraisers, lenders, attorneys and a mile long list of other professions that are directly tied to the buying and selling of real estate. A melt down like we are experiencing is already having a major effect on the entire economy and sentiment of the American people. As home prices continue to decline, so does the consumer buying power for other good and services, which will lead to further suppression of our economy. The lesson learned here is that it is imperative to the stability of our entire economy to have a sound housing market, which must be supported by sound mortgage practices.
Until our elected officials (all of them, not just the President) pull their heads out of the sand, stop taking bribes from lobbyists and actually address all of the issues simultaneously, our children's children are goingto carry the tax burden for this absurd lending cycle indefinitely.
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