As published in Scotsman Guide's Residential Edition, November 2008.
With this past September's government takeover of Fannie Mae and Freddie Mac, U.S. taxpayers essentially will be bailing these companies out. Many of us feel that these and other mortgage companies took much more risk than they should have.
And many U.S. residents are angry. After all, most people kept their heads, didn't buy homes they couldn't afford, didn't take out large home-equity loans and stuck to the fundamentals.
It's important to keep our heads above the water in this changing industry. Mortgage brokers can do so in two ways.
First, brokers can help explain to their borrowers what the recent changes mean to them depending on their situations. And brokers also can return to the basic fundamentals of lending to help ensure that our recent flubs don't happen again.
Help borrowers understand
Although many borrowers and prospective homebuyers have seen recent headlines about recent mortgage-industry, finance-industry and government bailouts, a number of them don't understand how these moves impact them.
Placing Fannie Mae and Freddie Mac under government conservatorship likely will help everyone in the short term by lowering interest rates. In fact, the drop in rates already has some mortgage brokers advising their clients to "take advantage now."
Mostly, though, this move will help conforming-loan borrowers. Many people who go to foreclosure-rescue clinics, however, are those who broke with traditional, conservative borrowing practices and took advantage of the industry's "drunken sailor phase." These borrowers are in for a true lesson in risk and return.
What will happen to all the borrowers who can't afford their current mortgages and who don't qualify for a new loan? They likely will need to short sell or find a hard-money lender that believes in them to bail them out on an individual level.
Now, potential borrowers should take action only if it makes sense for them, not just because rates dropped a bit. And if they choose to get a new loan, they should get a conservative one that they can repay easily with the income they earn now.
Overextended borrowers must look in the mirror and face the music. Often, that music is a negotiated workout with their lender. This gives borrowers their best chance for keeping some of their credit intact and getting back in the game as soon as possible.
Return to the fundamentals
It amazes me that people think that 100-percent, no-documentation loans are still out there to save them. It amazes me further that there are mortgage brokers saying they can still find these loans for their clients. Please let's act responsibly.
The model we should change to is the model we've had for so many years. We need a return to the long-term view and a move away from the "flip until you get rich" view.
A move back to the financial fundamentals is the change our country needs. Mortgage-industry professionals should emphasize a return to the basics with their clients. The cornerstone of this philosophy is to never risk the family's nest egg -- the home. Homes should not be treated like piggy banks.
Forgetting the fundamentals got us in this mess. The mortgage industry likely will recover by returning to fundamentals. That means no exotic loans -- just plain-old 70-percent loan to value (LTV), real cash in the deal and good credit ratings.
For people who need higher LTVs or have lower credit scores, private lenders -- if you can find them -- are the source. More private lenders are entering the market as it evolves.
Also, how can borrowers who defaulted on their prior loans get credit? Lenders will look at these on a case-by-case basis. The higher the perceived risk, the lower the proceeds and the higher the interest rate -- again, a return to fundamentals.
There are a growing number of high-net-worth investors and institutional lenders out there working on ways to fill the gap. It will be a long road. But if we get back to the basics, we will make it back to a vibrant market again.
Jim Fried has been a practicing mortgage
professional for 25 years. He is president of Freedom Real Estate in Miami. Reach Fried at firstname.lastname@example.org or (305) 371-7118. Visit www.freedomre.org for more information.