Coach Vince Lombardi who led the Green Bay Packers to many football championships was a stickler for the basics and the details. From this statement he focused and hammered on every detail and nuances associated with the basics of blocking, tackling and running until he had the team running like a well orchestrated machine all hitting with one beat. The mortgage industry is in desperate need of some of these basic principals of blocking, tackling and running. Somewhere, on the way to Fannie Mae, Freddie Mac or the securitized sub-prime paper, the mortgage industry (that is the subprime segment) has lost its way. With the originators of high risk paper taking a hard right into the high weeds of high risk, high yields and high returns the market has set fire to that patch of weeds with entire portfolios of high risk paper going up in smoke. Play with fire and many will be burnt. When the smoke clears it will be interesting to see who is left standing.

The autopsy of this debacle will be debated for years to come as lenders and banks will be sorting through the debris left by this wildfire. This is not an exclusive club relegated to just the mortgage industry. All industries have had their turn. From life ending safety mining practices, to Three Mile Island melt down, the Enron debacle, Union Carbide and the Indianian incident leading massive deaths, to the Love Canal poisoning, to Derivative financial fiasco, insider trading, SEC scandals, all across the gamut of business. When things like this happens, the facts eventually are revealed through investigation and discovery with some sort of conclusion being formulated. Those at fault are dealt with and those who may have broke the laws of our society are prosecuted with some even being convicted. On the surface no deaths have been reported as a direct cause of this mortgage fiasco however, many lives have been adversely affected. Divorces, financial ruin, bankruptcies, credit destruction and medical problems grounded in stress may have their roots in having been touched with one of these mortgage products that has worked directly against a families budget.

Originally, savings and loans were the main lenders in the mortgage industry with available funds being driven by savings from depositors. No available savings many times meant there wouldn’t be any mortgage loans available. When Fannie Mae and Freddie Mac were set up, the liquidity problems were resolved as “good" mortgages were bundled and sold as mortgage backed securities on Wall Street. Later on the subprime (persons with less than stellar credit or provable income) market used the concept of securitizing mortgage back securities albeit with subprime paper with much higher risk. Recently, high foreclosure rates sent shock waves through the financial markets and investors turned their back on buying these subprime mortgage portfolios. With no where to sell the originated loans, a litany of subprime lenders found it necessary to close their doors or seek bankruptcy protection. Now the industry in this segment possesses extreme “radio activity" with few wishing to touch them. Not all of this mortgage paper is bad, just a higher percentage than previous experience. Many of the Option ARM mortgage products are being converted, where they can, to a fixed rate mortgage. With the market slumping in real estate values, many owners are upside down in their properties and owe more than the property is currently worth. Eventually, the values will come back in many areas. It’s not bad everywhere, but those that had unusual spurts of appreciation may have fallen back in many areas of the country. Principles of supply and demand are at play here. Too many dollars chasing too few properties drive the prices up and too few dollars chasing too many properties drive prices down. Currently, there is an abundant inventory with too few buyers looking at them.

It’s a great time to be a buyer who knows what they are looking for and has the wherewithal to do it. Choices are many and seller motivation is high. A buyer can get a great deal right now.

If the mortgage industry is to find its way out of the weeds the process is already under way by implementing the old basics of mortgage lending. Lower Loan To Values (LTV), lower Debt To Income Ratios (DTI), more Appraisal Reviews with say 3 month range of comparable sales. It will be back to basics for many lenders if they want to have a chance to garner favor with any would be portfolio buyers of their originated mortgage products. One of the low point product offerings was encapsulated in mortgage product known as “Stated Fixed Income". Someone on a fixed pension and say social security would state their income, in many cases way above the actual, putting an extreme strain on a “Fixed Income" budget. Many of the limitations on NO DOC, NO RATIO, Self-Employed Stated Income, Stated Wage Earner (W-2), Option ARMs with low starter rates of 1% or so with negative amortization have already been tightened and cut back.

The future days for these whacko esoteric loans are numbered. There is a mortgage clean up under way. Much like the “Valdez Oil Spill Incident" there is much work to be done to work out the mortgage portfolios that have current non-performing loans. The good news is that over 90% of the portfolios are performing in the subprime niche AND like mortgage products are not being currently originated. Borrowers who can see the handwriting on the wall are refinancing many loans that had major built in feature traps and timed land mines. An example of this would be 2/28 ARMS that are fixed for two years then go up dramatically. Or the Option ARMs moving from 1% minimum payments rates while accruing interest at 7.5% all the while the mortgage goes up to say 115% of the original mortgage amount. Payment shock soon follows with radical increases. These troubled loans will be worked out through selling, short sales, foreclosures, refinances to fixed rate loans and eventually things will improve. It will be a long road with many bumps but is necessary for the mortgage business to find itself out of the weeds. Fortunately, it’s a great time to refinance, if the value is there, as the rates are very low at the moment.

As Vince Lombardi would say, “This is a football". The mortgage industry must take a long look in the mirror and get back to the basics. To start, all aspects of the mortgage origination process and programs to turn it inside out to ferret out all the problem areas and products that are turning mortgage industry on its ear. The loans with a “wink", the “stated programs" = “liar loans" and the other mortgage programs that will blow up in the consumer’s face down the road must be eliminated. It’s all about getting back to basics of “blocking", “tackling" and “running". For mortgages it’s focusing on the products, underwriting, origination and finally selling into the secondary market. Right now, what the mortgage industry is selling no investor is buying. Laws of business, change to conditions or die. The remaining lenders left standing are so busy that underwriting is backed up a week or two. The industry needs to get back to the basics of the business by originating products that are beneficial to consumers and to financial health of the secondary market. Both will benefit.

Dale Rogers

www.brokencredit.com