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Home Ownership Is Too Important To Do Nothing!

By R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham

Mortgage and Lending with Bank of England (NMLS#418481) NMLS# 1046286

November 26, 2007 04:25 AM

Much has been written about who should bear the blame for the current real estate and mortgage crises. Some who's to blame in the mortgage crises have levied blame at the borrowers while others have levied blame at unscrupulous mortgage brokers.

I for one have levied most of the blame on the big Wall Street Investment houses that bundled non conforming mortgages into something called "Collateralized Debt Obligations" (CDOs) and then put makeup on this pig by getting them rated investment grade by companies such as Moody's.

Some have expressed opinions that we shouldn't be worried about who's "fault" it is, that we should worry about what to do about the problem. Others have written that we shouldn't do anything about the problem and leave it to the so-called "free markets" to work out on it's own. Well, for one, I do think that we should be worried about who's fault it is so that we can take steps to assure ourselves that this mess can never be repeated. In this effort we need to be very aware that not all is as it appears.

Big banks funding HR 3915? That there are players with vested interests moving behind the scenes to take advantage of situation. Such is my opinion on HR 3915, a bill that will do nothing to address the real cause of this crises and will only serve the interests of large banks in their effort to raise the cost of production for mortgage brokers, thereby eliminating competition and in the long run increasing the costs of borrowing for everyone.

My suggestion is to convene a non-partisan panel of representatives similar to the 9/11 commission to objectively examine how this mess came to be in the first place and to make recommendations as to how we should proceed.

If I were on the panel my current opinion would be that laws should be passed to hold Wall Street accountable for their actions. I would particularly place emphasis on the ratings agencies and the conflicts of interest that riddle this industry.

I would also make sure that steps were taken to make sure that current laws such as RESPA are enforced and that fraudulent activities are prosecuted.

Another step I would take would be to establish a pool of money to purchase loans that are currently in default or in serious danger of going into default. We could then work with EACH of these borrowers to establish a work-out plan for these mortgages. The terms on these mortgages could be adjusted to a point where the borrower could perform. After a period of time (say 12 or 24 months) of on-time performance, the now "seasoned", performing loan could be sold on the open market, possibly at a profit!

In the event that a workout plan couldn't be agreed to, this entity could then foreclose on the properties and liquidate them in an organized and systematic fashion. Thereby avoiding flooding the market with distressed properties.

As mentioned above, Home Ownership is a cornerstone of our economy and far too important to sit back and hope that the free markets (if there really is such a thing) will protect. Reigning in Wall Street, keeping people in their homes and managing the disposal of foreclosed properties would help stabilize the housing and mortgage markets and benefit us all in the long run.

R.B. Mitchell

ValueList Real Estate Services, Inc.

To read more of my thoughts on real estate and mortgage banking, as well as to find out more about ValueList Real Estate Services, Inc., please feel free to visit our web site at ValueListre.com

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Elizabeth Ruvo

Watson Realty Corp. - Ormond Beach, FL

BA, CRB

Good ideas, Bob. You've got my vote!

Nov 26, 2007 04:39 AM

Kate Bourland

Marketing with Kate - Redding, CA

Onlilne Marketing Mobile Marketing

Bob, yours is one of the first blogs on the subject that I completely agree with. As I write and comment on blogs that tout the free market economy as the solution to the problem I find myself in conflict. There is nothing wrong with protecting consumers, nothing at all. We cannot provide a complete bail out, but we can provide relief and spread the cost of the solution over a broader segment of the economy.

Nov 26, 2007 05:50 AM

John MacArthur

Century 21 Redwood - Washington, DC

Licensed Maryland/DC Realtor, Metro DC Homes

Bob - The young couple that decided to purchase a home using no money down had little thoughts about how that loan would be packaged. The tradesman that sought the no-doc loan because he runs a "cash" business did not care where the money came from. The people that opted for teaser rates in hopes of refinancing were not concerned how that loan would be sold.

If anyone has a legitmate gripe with Wall Street, it is the investors.

We did not get into the situation that we are in because loans were packaged and sold after the fact. Loan originators made a risk management decision to lend up to 110% of property value. These same people, in most cases, chose the appraisers. The appraisers were faced with coming back with a "good number" or risk not being called upon again.

Many buyers got caught up in the "e-bay" frenzy and homes all across America were bid up. The actual value rose to the level of the perceived value. The buyers went to the lenders and sought loans to cover these purchases.

Every level of service was impacted by this frenzy. Real Estate agents either showed property the buyer wanted to see or faced the prospect of the buyer moving on to another agent. Loan officers found a way to make the numbers work or the buyer moved on to another lender. The homes appraised for the contract price or the lender moved on to another appraiser. Everyone was faced with supporting the frenzied buyers or losing their interest in the transaction.

Now, a little over a year later, everyone wants to point fingers. It was not one thing. It was not one segment of our industry. It was a market out of control. I believe I covered it in a blog called something like "baby boomers backlash". The market was full of selfish "I want what I want and I want it now" folks that cared little about the list price and only wanted to know "what will it take".

Yes, lenders fed these folks that were bankrupt of any financial sense. Lenders followed guidelines that were before them at the time.

The buyers in the market 2003-2005 remind me of the plant in the "Little shop of horrors" that kept saying "feed me Seymour."

You want a 9-11 type panel? Hell, they haven't been able to correct the mistakes of 9-11. There was little personal responsibility involved with that attack.

You may wish to fund a pool to help the hundreds of thousands of people that are in trouble, I don't. I would not dream to have the ability to manage it. I would never ask anyone to fund it. I can see no merit to helping someone that has basically lived in a home, paying what amounts to tax deductible rent, get back on track. They invested nothing but occasional payments in the house. Let the lenders take the loss.

You and others keep raising the concern of a market flooded with fore closed properties. I did not hear many people complain when there was a glut of over zealous, immature buyers out there. The run up in prices was not a stable market either.

It would seem that everyone was o.k. with prices going up and a dearth of deep pocket lenders handing out loans to all that met the slightest requirement. Now, when the slowdown and adjustment directly impacts the income of those in the industry in a negative fashion, members are jumping on their personal white horse and riding in to save the day.

The prices that are too high will come down in the same fashion that they rose, they will tumble down. The housing market resembles a house of cards. There is no foundation, there is only a free market that is racing to balance itself.

As it does, our ranks with thin. The ranks of lenders has already been reduced. Title companies are merging or folding. It is as natural as the moon coming up every 28 days. The strong will survive.

Nov 26, 2007 08:01 AM

Bryant Tutas

Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL

Selling Florida one home at a time

Damn Bob very good post. I don't agree but good post none the less. I ditto John's comment.

I've added this to my resource post. Good job.

Nov 26, 2007 08:58 AM

R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham

Bank of England (NMLS#418481) - Raleigh, NC

Bob Mitchell (NMLS#1046286)

Elizabeth: Thanks for the vote!

Kate: Thank you too for the kind words. I do disagree just a bit on the use of the term, "Bailout", at least in terms of the individual homeowner. What I'm talking about is more of a work-out! I'm not talking about "giving" anybody anything. In my plan each loan would be re-underwritten to assure that the borrower has at least a fighting chance of being able to make the payment. They would also be charged a premium rate, below the usurious rate that these loans are adjusting to, but higher than the current rates would be on an equivalent "A" or "A-" loan today. This way the government will have an opportunity to make it's money back and maybe even a profit on these loans when they sell them. If the people make their payments and pay their interest, then they are not being given any "handouts".

John: Wow, where do I begin? Let's start with where I agree with you at. I agree that the investors who bought these "CDO's" are the ones who really have a right to be pissed off. They were mislead! What's funny is that many of these institutions ended up lying to themselves and buying their own BS! It was greed, pure and simple. The sad thing is that many of these "investors" were pension funds and that's a foot that hasn't dropped yet! Wait until it does!

The "risk management" decisions that you mention was glossed over when they bundled into the CDO's. It's one thing if I decide to take a risk on somebody and get paid a premium for taking that risk. It's another thing when a large institution player like Merrill Lynch hides the true risk involved and then bullies one of the rating agencies to rate it AAA+.

Regarding the feeding frenzy that went on, I have to agree with you on that one too. But that's not to say that there was anything unethical or immoral to have participated. Just like you can't generally time the bottom of a market, neither can you generally predict the top of a market. Again, if the facts of the matter hadn't be obscured by Wall Street and the ratings agency, then each of these loans would have been underwritten on their own merits. It was only after they were sanitized that investors, who thought they were getting AAA+ investments were willing to invest in 100% stated income loans to people with bad credit.

You're also right to a certain degree that people weren't griping about the glut of buyers. Generally speaking though, people weren't getting hurt when this was the case. If you didn't want to buy at that particular price for that particular house, you had a choice to not buy. With the situation as it is now, people are getting hurt though no fault of their own when these distressed properties are dumped onto the market. Governments intervene in markets all the time. One could make the argument that our forays into the middle east is nothing but our government meddling in the oil markets! Most people wouldn't have a problem with the Fed stepping in to support the dollar or giving a tax break to an automobile manufacturer in order to attract or keep an assembly plant. Why is it okay to cut the discount rate to support the banks, but not to provide the infrastructure necessary for the individual home owner to navigate this crises?

I totally disagree with you on your point that real estate values have no foundation. Real Estate values do indeed have a foundation and that foundation is population growth combined with housing formations. MARK MY WORDS HERE! The price declines that we are seeing now are an example of the market over-shooting itself. As long as people need a roof over their heads and that roof costs X number of dollars to build, then in the long run that is going to provide a bottom to this market.

If builders can't build and make a profit, then they will simply not build. The same holds true for people who want to sell their existing house, but don't HAVE to. Eventually, the market will stabilize and as long as the population continues to grow, they will start to appreciate again. This is even true in markets that probably did get carried away because those markets tended to be near the coasts and living near a coast is an amenity that people are willing to pay for. As the old real estate adage goes; Location, location, location!

And lastly regarding our ranks thinning, HoRAh! They need to thin! As it is right now there are far too many real estate agents and just about every other ancillary service provider too. Once we get rid of all of the dead weight, we need to make sure that the requirements to be in our business are raised to where being a real estate agent or a loan officer is truly a "profession".

Bryant: You can let on...most people have forgot about our previous debates....I know that you are smart enough to know that what I'm saying is true! Even if not, thanks for the kind words and the inclusion in your resource post.

Bob Mitchell

ValueList Real Estate Services, Inc.

Nov 26, 2007 10:23 AM

Elizabeth Nieves

The Elizabeth Nieves Realty Group - Durham, NC

Bilingual Raleigh - Durham North Carolina Real Estate Team

Bob: I agree with many aspects of your post...especially the fact that home ownership is the cornerstone of our economy...that it is worth the investment (whatever it takes) to get it back on track...responsibly. I suppose I struggle with who is really to blame...as I have seen so much irresponsible lending in the past few years...and I believe the real problem began with the loan officers who were so greedy that they did not exercise their moral obligation to ensure that their borrowers could realistically repay the money they were borrowing. I also feel that many realtors did not give sound advice to their clients...thinking first of the commission...not about the client. We ALL know that there are times when our clients get so emotionally wrapped up in the home buying process that they do not have the ability to think logically. I feel obligated...morally and legally...to be the voice of reason at those times...at all times actually (if I'm completely honest.) What I'm trying to say is that...we (the professionals on the local level) are the first filter for these transactions. Once they get past us...no one is going to care about the individual. At that point, it is just business...buying and selling money. I'm not even sure I said this correctly...but I tried. Thanks for a very thought-provoking post. Blessings!

Nov 28, 2007 12:26 AM

R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham

Bank of England (NMLS#418481) - Raleigh, NC

Bob Mitchell (NMLS#1046286)

Elizabeth: Thank you for the comment! I too am a bit torn when it comes to determining what level of culpability we loan officers and real estate agents have in this mess. While it's probably not a perfect analogy, the best that I can come up with is that it's about the same as being a clerk at a 7/11 and selling someone cigarettes.

They are a legal product and as long as the clerk made sure that the buyer was of age to purchase them, it's not that clerks fault if the smoker gets sick.

Does the clerk have a moral obligation to point out to the customer that smoking is bad for them? I don't know. What would you smokers think if the clerk at a 7/11 started to lecture you?

Now, there is a difference between a licensed professional and a clerk at a 7/11 (not much when you think of the lax standards for licensing in both real estate and mortgage banking) and I do think that the loan officer and Realtor do bear some responsibility to act as an adviser to the client. But it's still up to the client to make the final decision. I can't do that for them.

I'll fess up, I did quite a few of the 2/28's and don't feel guilty about it in the least. At the time, it was the best program for the client to obtain their goals. Did I make sure that my clients knew the good, the bad and the ugly about the program? I tried. I think that most did. Did I move ahead with clients that still wanted to do the deal even after I advised against it? Yep!

As I mentioned above, it's the clients decision to move ahead or not.

Therefore, I still with my theory that the real culprit in the mortgage mess was the Wall Street Investment houses and the ratings agencies. If they hadn't created the "CDO's" and hid the true risk to the investor, then we wouldn't be in this mess.

Again, thanks for the comment.

Bob Mitchell

ValueList Real Estate Services, Inc.

Nov 28, 2007 01:37 AM