A wealth of refinancing business could be available via creditworthy loans trapped in filthy mortgage pools

Chip Larson, president, Home Equity Partners

As published in Scotsman Guide's Residential Edition, June 2009.

As the most recent government effort to revitalize the mortgage market takes hold this summer, brokers can grow their businesses by finding refinancing solutions for solid borrowers stuck in toxic loan pools.

Brokers can work with the buyers of those pools and help them separate the wheat from the chaff. Doing so can help jump-start a national economic recovery and also grow brokers' profit margins.

Here's a look at how brokers can take advantage of the government's plan to restore market confidence.

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This past spring, the federal government introduced several initiatives to free up credit, encourage refinancing and remove toxic assets from bank books. Finally, the road ahead for a beleaguered economy appears visible -- even if some missing signposts remain. As these programs kick into high gear this summer, mortgage brokers might be asking what to expect and how to tap into a revived market.

The core of the U.S. Treasury Department's plan is the Public-Private Investment Program (PPIP), aimed at creating a market for mortgage-backed securities and immobilized loan pools. Fingers are crossed in the worlds of banking, finance and real estate as investment partnerships prepare to bid on huge pools of distressed mortgages. As that drama unfolds, one of the challenges will be to determine a market price for these assets.

On the fringe of that major action, a smaller and less-publicized part of the cleanup has a more direct bearing on mortgage brokers. This lesser-known aspect involves creditworthy borrowers whose loans are on-time and up-to-date but are integrated in now-toxic pools by virtue of little more than their loans' origination dates and terms.

Historically low interest rates will entice many of these borrowers to refinance. Brokers hoping to unlock this market should understand how mortgage pools work, how to access the available opportunities and how to identify creditworthy borrowers. Armed with this knowledge, brokers can help borrowers -- and the housing industry as a whole -- refinance their way out of the current mess.

Anatomy of a mortgage pool

During the housing boom, Wall Street masqueraded as a giant money factory. Instead of money, however, major banks and investment houses produced financial instruments known as derivatives. Few people knew precisely what assets went into the making of securities backed by residential mortgages. As long as the securities were making money, few people cared what comprised residential mortgage-backed securities.

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