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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2005

Realizing the American Dream

Despite criticism of alternative lending products, U.S. homeownership is at an all-time high

Your job as a mortgage broker is to make the American dream of homeownership come true. Nothing beats seeing the gleam of excitement in first-time homebuyers’ eyes when you have qualified them for a loan.

Still, we all have heard the “doom and gloom” reports of a housing bubble. In fact, the state of our industry has been up for constant debate ever since the last refinance wave. Everyone waits for the so-called bubble to burst; it’s the “what goes up must come down” philosophy.

In turn, the mortgage-banking industry has encountered criticism for increased use of adjustable-rate, interest-only, payment-option and nonprime products. Accusations fly that our industry preys on today’s homebuyers by pushing loans that are bad for borrowers. Some believe that these loans make mortgage money too easy to come by in a market that is sure to contract. The concern comes from an anticipated drop in home values as well as a predicted climb in interest rates. Critics claim this change will put an enormous burden on homebuyers who will face “sticker shock” when they see their monthly payment after interest rates rise. The fear is that this could result in an incredible number of foreclosures when these borrowers can no longer make their payments.

It is true that alternatives to “vanilla” mortgages are used more frequently. According to Loan Performance, a firm that tracks data from the majority of U.S. lending institutions, about one-third of homebuyers were using interest-only mortgages in 2004. Further, the Mortgage Bankers Association reports that 63 percent of homebuyers are selecting ARMs and interest-only mortgages.

As mortgage professionals, though, we can ensure that we do not harm the individuals we are trying to help. We would never do anything to cause any of our customers to destroy their credit or, worse yet, lose their homes. It’s time to let everyone know that. Here’s how.

Take a closely controlled approach

Just making the “sale” is not what our business is about. With all borrowers, it’s important to focus on features that have been added to these alternative lending products to ensure that borrowers can qualify. We cannot let our underwriting and credit-risk standards slip to help someone fit a loan. Taking a disciplined approach to our guidelines becomes even more important if we will offer these alternative lending products.

Although most principal payments on an interest-only mortgage may not begin for 10 years, it is not acceptable to offer this loan if it does not fit with a customer’s situation. Payments will increase significantly. You must help borrowers determine if their income will meet the demands of the new payment.

One of the most-important things we can do is to help better educate potential customers as well as our existing ones. Unfortunately, there will always be unscrupulous people in our industry who take advantage of those who may not be familiar with all aspects of loan offers. Our job is to explain the advantages and disadvantages of various programs in understandable terms and answer questions every step of the way. We should earn our customers’ trust, not expect it.

Understand the market

To be successful in our business, we have always had to understand emerging trends and demographics. Now, these demographics play an even larger role.

The U.S.-homeownership rate is about 69 percent, according to Harvard University’s Joint Center for Housing Studies’ “State of the Nation’s Housing 2005” report. The study also found that the population of second-generation Americans is increasing, with Hispanics — 47.4 percent of whom own homes — comprising about half of these households.

The nonprime market has done a great job at servicing the growth in first-time and minority Americans’ homeownership, which grew 59.8 percent from 2003 to 2004. A reason for these figures is the modern loan products that meet the specialized needs of today’s homebuyers. The loan products being scrutinized are essential to these borrowers of the future.

Conversely, true professionals in our industry want repeat customers and do not push products that would hurt their clients. None of us wants to have a borrower default on a loan and go into foreclosure. It is better to turn down potential customers with marginal credit or an insufficient income or down payment than to give them a loan just to make a quick buck. We are in this business to get people into homes not to take them away.

As an industry, we understand that unforeseeable circumstances can occur. Many companies now have payment plans available and extend mortgage terms to accommodate these events. Our priority is to do everything in our power to help homeowners through difficult financial cycles.

Mortgage bankers, brokers and real estate professionals need to take advantage of any opportunity possible to speak with the media and spread the word about how these products contribute to the well-being of homeownership in America. We can help explain that we recognize it is a privilege to design products appropriately and to provide advice that contributes to a healthy economy and the moral fiber of this country.


 


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