In response to the current lending/foreclosure crisis lenders have seriously increased the amount of paperwork and qualifying requirements needed to get a new mortgage.  Today a lender make an informed decision on the qualifications free of the need to re engineer the American social contract.  Just like the pre-Bush days a borrower needs to show good credit, a reasonable down payment and the ability to afford your mortgage payment based on your income.  Let the wailing begin.  Didn’t groups like ACORN and politicians like Barney Frank declare that owning a home is a basic constitutional right even if you can’t afford it?  Lender’s refusing to lend based on sound underwriting practices, it almost seems un- American!  But what about all the defaulting homeowners and all the people who still want to be homeowners even though they can’t afford to, doesn’t the Government owe these people something?   I’ll leave fixing those problems to the next Obama bailout but for now lets hope that the new banking rules make sure that the mistakes of the 2000’s are not repeated again.  Hopefully a return to sound lending practices will prevent the large scale destruction caused by the wild lending practices of the past.
From 2002 until mid 2008 getting a mortgage to purchase a new home was relatively easy as government policies were crafted to helped more Americans to become homeowners.  Fannie Mae and Freddie Mac loosened underwriting guidelines and introduced new products with lower credit score, income and down payment requirements.  Unfortunately the new underwriting rules coupled with an increase in exotic variable rate products combined with a general weakening in home values lead to a perfect storm for many homeowners.  With lowered property values owners who used low down payment variable rate loans found themselves unable to take advantage of low interest rates as they did not have enough equity in their homes to allow them to refinance.  Unable to refinance and with the interest rate on their adjustable rate mortgages increasing from the low initial rates mortgage payments increased.  Unable to refinance and without equity many homeowners found themselves unable to afford their payments and unable to sell their homes.  The downward spiral began and the foreclosure crisis struck.  Banks found themselves with thousands of bad loans and lost billions of dollars and many stopped writing loans.  Without writing new loans the struggling real estate market came to a halt as potential buyers could not find a place to get their loans.  It came back to the federal government to realize that its goal of encouraging homeownership without regard to ability to pay was a misguided policy.  While money to lend was made available to banks it came with a general tightening of underwriting requirements.  Now your lender wants to make sure before you get a loan that

1) GOOD CREDIT – – no more crazy products which sought to qualify every deadbeat for a loan.  Once again your banker can say if your credit is bad you are not a good risk so maybe you should get approved for a mortgage.
2) INCOME THAT CAN BE VERIFIED – no more stated income products where the borrower just signed a paper saying how much he made.  Just like in the old days, your lender wants to see actual tax returns, pay stubs and confirm with your employer that you are gainfully employed and make enough money to pay the loan back.
3) A DOWN PAYMENT – no more borrowing the purchase price plus the closing costs.  The days of 106% mortgages and people getting into a house for NO MONEY DOWN  are over.
4) TOUGH APPRAISAL STANDARDS – the bank appraiser can’t do the mortgage broker any favors.  No more exceptions or using dissimilar comparable sales.  The new (old) rules make sure the appraiser uses the best up to date valuations and any questions lead to lower appraisals.
Hopefully with a return to sane underwriting rules lenders will feel secure that the loans will actually be repaid and in the event of a default a conservative appraisal will not expose a lender to thousands of dollars in losses. I can only hope that ACORN and Barney Frank leave mortgage lending to lenders and their social engineering skills are focused on less costly areas.

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1) Toxic Mortgage Bank -a government takeover of the bad loans
2) Mortgage Reformation in Bankruptcy Court- permitting bankruptcy judges to reduce the interest rates and principal balance of mortgage loans
3) National Reappraisal and loan write down program- issue guidelines on valuing delinquent mortgages

From a real estate attorney’s point of view option 3 makes some good sense as it would free up the lending markets and allow assets to be valued and losses to be reported.  While the losses will be massive at least the banking system will be able to quantify them and go forward.  The worst thing that can happen is to continue to do nothing (although option 2 would vest unprecedented power in judges not envisioned by the credit markets and could be a disaster) and have the market continue to drift aimlessly. 

For mortgage lenders having delinquent mortgages on their balance sheet stops them from making new loans as the value of delinquent loans cannot be accurately calculated.  Homeowners have no guidance as to what proposals can be made to their lender to work out problem mortgages which would benefit both borrower and lender.  A new proposal is for a reappraisal program to allow lender’s to fairly value delinquent mortgages.  Once a valuation model could be agreed upon this would set the stage for the bank’s non performing assets to be valued and /or liquidated in an orderly way.  Once values are agreed to lenders will be much more willing to listen to current market value based proposals to help homeowners make payments and keep their homes.  This proposal would have licensed local area appraisers come up with current fair market values of distressed properties so the lenders could give them real value in their portfolios.  The lending markets could now get a true reading on the value of the assets held by the banks and banks would be encouraged to make arrangements with homeowners to modify mortgages based on realistic numbers. 

The Bush TARP plan offered government money to struggling mortgage lenders to allow them to remain afloat.  The lenders promised to try to help struggling homeowners modify their mortgages to try to keep them in their homes.  While the banks did receive the funds new mortgage guidelines caused the vast majority of loan modification requests to be rejected so the TARP bill did little to help homeowners.  While this reappraisal plan could be used to allow homeowners to stay in their homes at current values it needs to be coupled with real enforcement mechanisms to insure that lenders and homeowners do not game the system by over or under valuating properties.  There should be a streamlined process to determine the value and guidelines to try to allow homeowners to keep their homes.  This needs to be coupled with a much quicker foreclosure process for those homeowners who cannot be rescued by this program or who get its protections and again become delinquent.  This would serve both lenders and homeowners as the lenders liquidity would be increased as non performing mortgages could be made performing and homeowners would be released from the strictures of bad sub-prime mortgage programs and given a fresh start.  This fresh start must come with a price as those homeowners unable to make it despite the new start would end up without their homes but in most cases these people should not have been homeowners in the first place.
Allowing Bankruptcy judges to reform mortgages including reducing principal balances is a radical change that can only serve to further distort an already distorted market.  Lenders were encouraged by FANNIE MAE rules to relax lending standards to increase which led to poorly thought out mortgage programs offering which required down payments, credit scores and income levels to qualify for home loans.  These programs set the stage for the mortgage crisis as the is  participation which encouraged reckless lending would The goal of any mortgage bailout program should be to facilitate new lending while attempting to help delinquent homeowners stay in their homes.  The problem is that these goals do not necessarily work together.  To facilitate lending the old bad loans need to be dealt with quickly and efficiently but the pain of homeowners faced with the loss of their residences makes this option.  The first two options would radically change the lending landscape for good.  Both would interject government into the lending equation in a way that would increase lending costs for borrowers and give the government unprecedented influence over homeowners.  A toxic mortgage bank option would allow the banks to be rid of the bad loans but could saddle the taxpayer with trillions in losses.  Coupled with the likely provision that the government as the owner of these bad loans would be much less likely to start foreclosure proceedings against borrowers would mean these bad loans stay around for a lot longer than if banks followed normal lending practices and brought timely foreclosures.  The increased time that the bad loans remain in the system will only increase the government’s losses and continue to weigh down the sales markets.

Lender’s have assets which cannot be valued so they clog up balance sheets stopping them from lending to new qualified borrowers. 

Supposedly the $900 Billion will kick start everything and in a couple months everyone will be fully employed at great wages, the housing market will rebound, state and local government deficits will disappear and a new era of general happiness will ensue.  While I didn’t vote for Obama, I am someone who had great hopes that a really smart person with a mandate could come in and make some meaningful changes in desperate times.  I see first hand the trouble that Washington business as usual politics has wrought as the local housing market continues to flounder under the weight of foreclosures. Maybe the Obama message can lead to meaningful changes that benefit all Americans.

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