Ari Miller, vice president, Gelt Financial Corp.

As published in Scotsman Guide's Commercial Edition, July 2005.

Forget everything you know about the mortgage business. Put away your debt-ratio and loan-to-value calculations. Put away your charts and desktop underwriting. And most importantly, ignore FICO scores.

Let’s go back to a time when we didn’t approve a loan only because it fit into a chart or matrix. We approved it because we believed that the borrower would pay the loan back. Unfortunately, the mortgage-banking community has changed so much that for many of us, “paying us back” has lost priority when we look at clients. Technology and our desire to make our industry systematic and cookie-cutter have led our industry down a bad road — one where all that many people care about is what can get approved or get sold. All some of us care about now is fee income, yield spread and volume.

The fact is that if these lending practices do not stop and we keep lending and brokering deals to people who may not be able to pay us back, the mortgage industry is headed for disaster. When delinquencies increase and the industry is stuck with a bunch of 95-percent loan-to-value, no-docs and 80/20 stated loans, look out. There won’t be a rock big enough for everyone to crawl under.

There’s a fundamental truth to lending money that many of us have somehow forgotten: A bank or mortgage company lends money, and the borrower pays it back.

Things have become so convoluted because several mortgage companies never hold the loans long enough to see them get paid back. Their money is made by gain on the sale of an individual or a pool of mortgages. These mortgage companies have no stake in the repayment of the loan.

Many commercial- and investment-property lenders are taking part in a new — or old, depending on how you look at it — trend and becoming “true” portfolio lenders. There are no sales element and no securitization. Money is made when the loan is paid back, and that’s it.

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