For all the shortcomings of the mortgage industry that has become all too familiar there has also been benefits conferred to many members of our society if we desire to see and acknowledge it. For instance, we could recognize all the people that are currently in a home that should not have been because of affordability or credit quality issues; however they are successfully paying their mortgages. They have become successful homeowners and it is important to realize that they represent the vast majority of such cases, only a small percentage of mortgages have actually gone bad but it has tarnished the whole system. An even larger and more widespread benefit is that every mortgage borrower has enjoyed significantly lower cost of financing due to the liquidity provided as capital flowed into the market. The system operating with Fannie Mae/Freddie Mac, the capital markets, securitizations, the shadow banking system and others have funneled large amounts of capital into the mortgage market resulting in substantial savings through the decades for borrowers. It is unknown just how much money has been saved over time, but it has been substantial and it was shared by every borrower most likely without their realization of that fact or how significant it was.

It is extremely difficult to concede these points with the knowledge at hand today and the current suffering that is being experienced. The payment being extracted from our society will be expensive indeed, maybe far exceeding any benefit provided by the system. This cost will be in the form of lost wealth and a heavy dose of intrusive governmental control going forward, which will bring its inefficiency into the equation that will be paid for by future borrowers. Taking this full picture into consideration, the question to ask is was it all worth it now that the bill has come due? This question really becomes rhetorical because it is certain that people will not have as much gratitude for the benefits of yesterday as they will anger for the pain and suffering of today.

The poor execution of the mortgage broker channel by the lenders is where the true breakdown occurred. Mortgage brokers should serve as nothing more than an alternative marketing avenue to access loans, but the resulting product must be evaluated in the same manner as the product obtained directly by the lender through a retail channel. To execute meticulous underwriting and quality checks with retail loans and not put the same scrutiny on the broker loans is foolish. At the end of the day the lender acquires a loan in which they own the risk, so it seems obvious that quality is essential regardless of the origination channel used. The practice of handling the retail loans more strictly than that of the broker loans is the reason why it produced a fraction of the losses experienced with the brokers. The mortgage brokers were allowed to operate in a negligent and deceitful manner with little consequence, and this was not tolerated to the same degree on the retail side. How could there be any difference in performance if the origination, underwriting, and quality control functions were applied equally? The simple fact that a performance difference exists between the two illustrates the disparity in how they operated and what controls were in place.

A very prominent CEO of a major U.S. bank recently stated publicly that not terminating the mortgage broker business sooner was the biggest mistake of his career. It makes me wonder what gives him such confidence in the retail business that could not have implemented through the brokers if desired. Truthfully, they could have been applied equally, but lenders simply failed to create the procedures and the expectations of such. Proper management of the brokers by practicing product restraint and pricing discipline along with limiting broker approvals to a more select group would have produced the results expected. Putting all the blame on the mortgage brokers for the industry’s failures is not an honest conclusion of what occurred, and doing so is allowing lenders to excuse their own failures in the process.

The borrowers are not just innocent victims as the press and the Government would like us to believe. The ones that got caught up in this debacle generally fall into two categories. The first are the ones that purchased a home at the height of the market, thus overpaying. The others are those that have owned a home for years and had equity from which they proceeded to strip out with the current market values supporting it. In either case, these borrowers made an individual choice that did not turn out well. This occurs each and every day when people purchase a car, buy a stock, invest in a business etc. Sometimes it works out successfully and sometimes it does not. People that obtained their loans long ago and resisted the temptation to strip out the equity as market values increased are continuing to make the same payments as always, and even though values have clearly receded, they are still in good shape with their homes.

It is concerning to hear reports of borrowers claiming that lenders took advantage of them. There is a certain amount of personal responsibility that we must all exercise in our business dealings. Had these borrowers been interested enough to scrutinize and understand a 3-4 page promissory note, it would have informed them of their loan terms exactly. It seems to be a minimal amount of diligence considering it is the largest financing that most people experience in their lives. Almost certainly the majority of them had full knowledge of the terms, but their desire for the loan and its purpose exceeded the perceived risk, and for the people that did not know, shame on them for failing to question what they were signing. Participants had mistakenly viewed that the market would continue its upward journey, thus lessening the risk by allowing them to refinance or flip the house for a profit. However, the market started turning downward instead, thus they became locked once the tide turned away, and the cries of foul play began to surface right into the ears of a sympathetic Government that now wants to use cramdowns as part of the solution.

If mortgage cramdowns are allowed, it will directly impact the entities that provided liquidity into the mortgage market over the years, the same entities that will be needed for this market to rebound. These firms just provided money in an investor capacity in exchange for securities backed by mortgage loans, they are not the parties that originated or securitized these loans that are currently being criticized. The end result is that any relief given to the borrower through cramdowns will be fully realized by these firms that hold the mortgage securities that we may depend on for future liquidity. This same argument applies even if the credit associated with these securities is insured by the various structuring methods that were used. Some entity, through the process of securitization, is going to realize any losses that are generated. Should these firms bear the loss with a cramdown while the borrowers are being excused for their bad decisions, or should they have the right to exercise their available contractual remedies to mitigate their own losses?

Another issue that will appear in the wake of exercising cramdowns will be the extra cost associated with getting future mortgages. Many viewpoints expressed suggest this will not be the case or that it is unknown. An area that might provide some guidance on this is the added costs of a second home or an investment property financing. Regardless of your credit profile, the industry has long adjusted rates upward for these loans. They are considered riskier than a primary residence loan because it is viewed that a borrower will forego the payments on other loans before they will their primary home. The market also realizes that these loans currently can be modified in the courts during a bankruptcy. Introducing this same cramdown risk in the financing of a primary residence will pressure rates upward to reflect this risk in much the same way. Plus, the investors that get burned by cramdowns will require a higher rate going forward to offset this risk as well as more stringent guidelines on new loans, both of which will not be conducive to restoring the mortgage market.

Supporters of mortgage cramdowns also suggest that using them are a better and less costly solution than the foreclosure process. This is a judgment that should be reserved for the parties that are at risk for these losses, and they should be free to exercise any preferred course of action using their contractual rights to lessen expected losses. The whole issue of cramdown really boils down to the validity of contracts and the rights associated with them. However, since we are now facing a calamity, our Government is willing to trounce all over those rights under the guise of rescuing the economy. It will undoubtedly result in unintended consequences that we will all be paying or regretting for years to come.

Real estate values are suffering from reduced demand, and the values shall continue to decline until demand is improved. It sounds elementary enough until you examine how this is being determined. It used to be that only the desire for a house, along with a pulse, was all that was needed to purchase a home. Nowadays, the process is being complicated by the difficulty of securing a mortgage. There are many worthy potential homebuyers that are being turned down on their mortgage applications, thus keeping them as renters or in their current homes. To make matters worse, refinancing of existing homes has slowed considerably because of severely impaired valuations, which is forcing homeowners to recognize the market decline with cash at closing if they desire to refinance to obtain better terms. Unfortunately, this is a recipe for a continued decline of value until it equalizes with the market of those that desire to purchase and have the capacity to either pay cash or to obtain financing in this environment. Regrettably, the Government feels the need to intervene with this mechanism to prevent further value declines by wasting taxpayer money. In the end, the market forces will prevail because only lenders willing to lend can energize the mortgage market, and these lenders can not be coerced to participate, but they can be encouraged by good policy and potential gain.

Focusing on the reduction of interest rates to get the mortgage market moving again will not alleviate the whole problem. This will have limited effect even if the rates dropped substantially because such a small segment of our population has the credit profile to take advantage of it. Obtaining conventional financing is requiring 700+ FICO scores, 10% money down, and the ability to fully document the loan with reasonable DTI ratios. There are not many people that fit into this ideal profile, and failure to meet these parameters will make it increasingly difficult to obtain a loan. There are other options available such as VA and FHA loans which have more favorable credit terms, but they are often associated with higher costs and some limitations. These loans are being used more today than in the past years due to the absence of the subprime market. In spite of these other options, mortgage loan access has remained severely constrained and not likely resolved with lower rates alone.

Adding to the difficulty is the oversupply of housing that was built to stay ahead of demand during the easy money days, and that demand has waned dramatically. This excess housing will have to be absorbed before values can begin stabilizing. Solving this oversupply and the returning of a market for existing homes will be essential to get housing back on the upswing. To make this happen, the mortgage market would need to become accessible to a greater number of people again. Ideally, it would expand to the availability of a few years ago except for the excluding of the bottom 10-15%, thus forcing this group to continue renting while working on their credit profiles. Bringing strength back to mortgage lending will not be an easy task since lenders have become so risk averse, the ones left standing are struggling to stay alive while investors have stepped aside until integrity and stability returns. This could prove to be a long period of time, and unfortunately, home values will continue to suffer until a more positive environment develops.

The decline in home values is a certainty that we will come to reluctantly accept over time, but it will be necessary for market forces to take hold and bring some life back into this market. Any action taken by the Government is unlikely to solve the problem, it will only serve to delay the inevitable and waste a lot of taxpayer money in the process. The best indicator for when values will stabilize and recovery can begin should be found in watching for the return of a dynamic mortgage market, not a meddling Government.

Borrowers demanded loans to buy unaffordable houses, extract cash out of their primary residences, or to flip houses for a quick profit. Most borrowers have responsibly played by the rules and continue to do so. It was the reckless ones that created this tragedy that has destroyed the financial markets. Some of these reckless few claim to have been hoodwinked by their lender, but where was their responsibility in the process? If all the bad loans were analyzed, there is no doubt a common thread of borrower irresponsibility or deception would appear in the overwhelming majority of them, provided an honest assessment was given.

This tragedy could have been stopped at any point in the mortgage chain. The mortgage lenders and brokers could have refused to participate, but they were more interested in the revenue generated. Wall Street could have stopped being a conduit pushing questionable securities to unsuspecting investors, but they did not care as long as the money was flowing. The rating agencies should have paid more attention analyzing the structures of mortgage securities instead of just collecting fees from Wall Street firms requesting the ratings. The investors could have performed some due diligence to understand what they were buying and reject questionable investments. Last, but not least, our Government could have paid attention and taken regulatory action when abuses were brought to their attention years ago.

We should be asking ourselves “what allowed this to exist?” Bottom line is that borrowers wanted to borrow money at any cost to satisfy their own purposes. The interest rates didn’t matter because of the prevailing belief that home values would always go up. Falsifying documents and borrower intentions became a sport that somehow became acceptable in pursuit of a loan. This continued until the party ended and home values started to plateau or slide back, suddenly defaults started skyrocketing. First payment defaults on newly originated loans quickly followed. It is hard to believe that good intentions existed when a borrower accepted money at a closing and did not make the first payment just weeks away. This makes it difficult to view this as anything other than simply fraud. Moreover, upon a first payment default, the loan servicers usually found it extremely difficult to reach the borrower because they often supplied incorrect contact information to remain inaccessible.

It is much too easy for citizens and politicians to point a finger at companies because they are faceless entities that can be easily vilified. It’s not so easy for people to point at themselves, and politicians have difficulty pointing at potential voters they depend upon for election. The marketplace is washing out the entities that provided the product, what should happen to the deceptive and irresponsible borrowers that demanded the same for their own gain, the exact ones the Government seems so eager to rescue?