Peeling the Onion: How Many Layers of Protection Do Lenders Need?

Real Estate Agent with Berkshire Hathaway Home Services Montana Properties

We've all heard it.  Those darn buyers, leaving the lenders out there holding the bag on these distressed properties, causing the national economic meltdown.  They promised to pay their loans back and now the lenders are taking these horrendous losses! 

Wait a minute.  Didn't the lenders protect themselves from this eventuality?  Let's count the layers of protection lenders used to minimize losses in the event of default on a mortgage.

First, the borrowers creditworthiness offered a layer of protection.  Simply put, could the borrower repay the debt?  Lenders ignored this in recent years and instead gambled that increasing equities would protect them if they ever had to repossess a home.

Second, the borrowers cash down payment offered some insulation.  Again, many lenders were loaning not just 100% of the purchase price but in some instances 125% of the appraised value. 

Third, an appraisal showing the current market value of the home offered some protection against loaning too much against a property.  However, appraisers were hired by lenders who wanted to lend money and who wouldn't be hired back if they became "deal killers". 

Fourth, what about mortgage insurance for high loan-to-value loans?  Buyers were paying for it, didn't the lender get at least protection on the top 25% of the loan amount? 

Fifth, what about credit default swaps?  Didn't lenders at the institutional level hedge their bets in this manner?  Can you say AIG?

Sixth, when the media reports that trillions of dollars will be lost, have they forgotten that trillions were also MADE?  Where did the profits go?  Check the CEO of a half dozen lending entities.  They're not living in shacks.

Seventh, it's assumed these troubled assets have NO current book value.  False.  Just because they have become non-performing assets to lenders doesn't mean they have zero real value.  Lenders, in my opinion, are ignoring their real value because it's profitable to do so.  Which leads me to

Eight.  The Final Layer of the Onion.  You and me.  The bailout kings and queens of the planet Earth.  "Too Big To Fail" really means you and I are "Too Small To Stop Them."  They can "fail" and still make money, enough to reward their top managers and employees with outrageous bonuses, trips, salaries that you and I couldn't begin to imagine.  I mean, who among us would not be awestruck at the prospect of receiving a $160 million BONUS!  Taxpayers.  The Big Boys love us.

Sympathy for lenders?  No.  The housing crisis could be solved in a year if lenders would simply write down values to current market, keep owners in homes by offering a deal that would keep the lender as an equity partner for 10 years, have the borrower pay 2 points above par interest rates and let everyone start over.  Can't be done? 

Not if lenders rule the world.


Comments (2)

Mike Carlier
Lakeville, MN
More opinions than you want to hear about.

Well written post. If we follow the money, it leads to the sellers, and I'm surprised nobody is asking them to participate in the losses -- I'm not suggesting that this happen, just surprised it hasn't. For that matter, others were the recipients of the proceeds of the bad loans, loan originators, appraisers, and real estate agents. There could be some recoverable funds there too.

Banks made bad loans and other profit centers agreed to share the risk. It's just business. There are no innocent victims, including the accidental homeowners who will once again become renters.

Dec 13, 2010 04:13 AM
Dennis Erickson
Berkshire Hathaway Home Services Montana Properties - Bozeman, MT
My Best..., Always!

Mike, I'd agree with you regarding the professional corps who originated, approved, reviewed, created innovative loans, etc. that there should be some responsibility assigned to these folks.  Inasmuch as the Realtor was involved I have to say I'm conflicted.  Yes, we took the commission money, but I don't know what your experience was but mine was this:  I referred financing out to mortgage brokers and bankers who I deemed to be honest and reliable.  Beyond that, I was out of the decision process.  I didn't approve loans, negotiate terms or conditions, try to sway anyone to make or not make a loan etc. so I don't feel culpable.  I'd be interested to hear your take on this point.

As for sellers, I place them in the ranks of the non-professional.  Sellers aren't engaged in valuing, marketing, selling or financing homes on a consistent basis.  If their professional advisor says the price is right, the appraisal is correct, the loan is approved, what is the seller to do?  I think they stand right next to the borrower in the line of responsibility, neither was well-informed enough to foresee what we as professionals couldn't see. 

One last point, I and many others are paying the price today in terms of trying to negotiate short sales for short commissions and I'm trying to do a great deal of "pro-bono" counseling work to keep people out of trouble.  I think a lot of Realtors are doing the same.  Thanks for your comment.

Dec 14, 2010 05:08 AM