Dear Mr. President: Who in our lifetime would have thought that owning a home, the largest financial investment most families ever make, would spew so much financial misery when the housing bubble exploded? But it is not just about the money. It is the about the trust that was violated by the very ones homebuyers must trust the most, their mortgage broker or lender.

Lenders were advising marginally qualified buyers to purchase homes with creative mortgage products such as negative amortization, one and five year arms and all the rest, because "in five years increased home prices would more than cover the expense of refinancing."

Even worse, those who were purchasing mortgage-backed securities, such as pension funds, did not understand that although the loan pool, from which they purchased, included 'first mortgage' homebuyers, many of the mortgage products attracted buyers who could not or who would not make mortgage payments on time, and therefore would go into default.

The more we learn, the more it seems that lenders got out of the home lending business and into the mortgage selling business, and developed mortgage products to help anybody and everybody buy a home regardless of their income.

To help shed some objective light on what happened and what needs to be done to prevent such a meltdown, Realty Times asked Mr. Harold Green principal of The Scollard Group, a national and international housing research and marketing firm to share his thoughts about what happened to the housing industry and what needs to happen now. He is not an economist. He is as he refers to himself, 'an observer."

RT: What caused this recession?

There is always going to be a reason that people point to when the economy slows down. I believe that most people would agree that a credit crunch caused this. The credit crunch was caused by too much easy credit inflating the price of everything including housing. It ended when lenders, for all practical purposes, quit lending.

RT: When do you think it will turn around?

It will turn around when liquidity returns. Many of the funds that were the tried and true sources of liquidity were virtually put out of business when the bubble burst. These funds took years to create and they will not suddenly re-appear.

RT: How long do you think it will take to rebuild the funds?

It will take years for these funds to rebuild. Until then, we will have to rely upon the sources that are available and they are going to be limited to banks that are solid and programs that are sponsored by the government.

RT: What can we expect from banks in the near term?

You should expect banks to move to more secure business models where taking risk is removed and replaced with more banking fees. Qualifications will tighten and the cost of borrowing will be significant. This will relax and get back to a normal market when the alternative sources of capital become healthy again.

RT: What does a 'normal' market look like?

A properly balanced money supply will enable reasonable people acting reasonably to acquire assets for reasonable prices and obtain reasonable financing from reasonable lenders. Right now the source of funds to create liquidity in the markets is pretty much going to be provided by the FED, the government and foreign investors.

RT: How did we get where are today?

From what we see from the sidelines, the lenders created this situation. Traditionally the people that are on the front line writing the paper, approving the loans and the lender's themselves, are compensated based on their ability to write good loans, build and maintain profitable loan portfolios and make some money servicing those accounts. There is nothing wrong with that. It is a well established, proven business model. This model changed.

RT: How did the lender model change?

Simply put, the primary focus on how to make money in the mortgage market changed for some big lenders. While there were a number of factors involved, the sudden and significant demand for mortgages that came from the Wall Street was the straw that broke the camel's back.

RT: How so?

Lenders saw this demand and rushed to fill it. Some of these lenders created programs that never existed before to get the paper to satisfy the hunger that arose for the mortgage-backed securities. These investments secured by first mortgages, sounded like a safe place to invest.

RT: The demand for mortgage-backed securities caused the problem?

This demand created an opportunity for companies to potentially generate huge profits by simply writing and selling loans. If they really wanted to be in the business, they could also build and keep a large loan servicing business that in normal times would not have been possible.

RT: It sounds like the new products helped no one but the lenders.

Lenders created new mortgage products that put a lot of investor's money into the mortgage market and that money simply should not have been available. People that did not have the ability to repay were getting mortgages that they could not afford.

RT: The Lender, Not The Homebuyer, Created The Market?

You might say that. The ever increasing need for more and more paper to satisfy the appetite of the mortgage-backed securities that Wall Street was selling so quickly meant that the lenders that participated in this program needed to create a market.

RT: How did they do this?

They did this by marketing new mortgage products that were outside of the norm. They effectively relaxed lending rules to accommodate higher risk mortgages.

RT: The government did not have the authority to regulate this, true?

This unregulated transactional-based profit center was one of the primary factors fueling the housing bubble. They transferred the entire risk for the loan to the investors that bought the mortgage back securities and kept the profit center for servicing.

RT: How could this risk be minimized?

The incentive to take unreasonable risks would be greatly reduced if the pay check of the people writing and approving the loan was based on the quality and performance of the loan. For instance, fees should be earned and paid out over the term based on performance. Compensation should be reduced if the loan defaulted or if it was terminated.

RT: Do you favor penalties in some cases?

The penalty for misrepresenting or failing to provide a professional service should at least include a significant fine, perhaps forfeiting a license and ,of course, if there was fraud, jail.

RT: What was the homebuyer's role in this?

The home buyer was offered and accepted easy access to money. The funds that purchased these mortgage products combined with the lending policies of Fanny Mae and Freddie Mac enabled large volumes of dollars to flow into and out of the mortgage market. Lenders seized upon the opportunity to generate huge profits and enticed people to borrow excessively.

RT: Homeowner Association foreclosures are mounting and fees are not being paid.

It is my strong conviction that every American homeowner should be safe and secure from adverse action by lenders pursuing their neighbors for payments. Condominium fees or community home owners association fees need to take priority over mortgage payments and interest. A mortgage holder should not be able to take down your entire community and affect the value of your home because of its poor lending practice to your neighbors. Foreclosures are bad for communities and large numbers of foreclosures are devastating.

Please come back next week to see Part II of this column.

Copyright © 2010 Realty Times. All Rights Reserved.
Source: Realty Times Last Updated: 03/25/2010 12:30 AM CDT

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