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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2007

How to Handle Market Tremors

To cope with a potential market decline, be responsible and educate yourselves and borrowers

In the past few months, there has been a lot of talk about defaults and foreclosures in the nonprime market, as well as about nonprime lenders filing for bankruptcy or closing their doors.

This may be our industry’s wake-up call. Brokers who stay responsible and ethical and who educate their borrowers appropriately may find that the tremors aren’t as destructive as they may seem.

Being responsible

In the past few years, some underwriting standards have become a bit lenient. This likely is a byproduct of the continuous stream of the “loan products of the day.”

In fact, many loan programs were introduced that helped many unqualified borrowers into mortgages. Let’s take stated-income loans. How many times have brokers upped the income just to make the ratios work? When they have lax guidelines, such products beg for problems.

The “fraud patrol” cannot sit in every mortgage office and monitor the manipulation of properly disclosed income. But isn’t it fraud if a loan professional purposely inflates a borrower’s income? Or how about when the borrower signs the loan application (1003) with a stated income that is false?

Certainly, we all must close deals to keep our firms alive and our personal bills paid — but at what expense?

The excuse can’t be that we are only following the program guidelines. We have a responsibility to conduct ourselves above that mind-set and to be creative for the borrower’s sake. Or we simply must be true professionals and tell borrowers we cannot help them with the level of borrowing they seek. Doesn’t saying “no” when that’s the best (and only) alternative reinforce our status as mortgage professionals?

Our clients put tremendous faith in us to handle their largest financial transactions. Therefore, everyone in the mortgage industry must take responsibility not to push the envelope simply because the guidelines leave the door open. We must interpret the guidelines properly and use certain loan programs when appropriate. Our bottom line should not cloud our judgment in analyzing the borrower’s ability to repay the loan. Loan terms must be explained to the borrower, sometimes ad nauseam.

Educating ourselves, borrowers

Consider option-ARM programs. If not applied to the correct borrowers with the right financial circumstances, some of these programs could ultimately be financial suicide for borrowers. Loan officers and brokers sometimes offer this product to borrowers because of the handsome payback from the lender on the back end. And some lenders dangle the carrot of high yield spreads but do a poor job of educating the mortgage professionals on the true dynamics of the program.

I think our industry should require loan officers and brokers to attend a training session on the nuances of a program before they can offer it to the public. And fraud prevention should be discussed in each session with real examples of what constitutes overt and implied fraud.

Borrowers also must be educated on the different types of mortgage programs, the terminology, the financial ramifications of their decisions and, most important, the criteria under which they should be making informed choices.

Buying a home typically is emotional for borrowers, especially when it is their first home. Help borrowers understand that the mortgage process itself should not be an emotional one.

If the wrong mortgage is chosen simply for the sake of not losing a home, no rehab work after the fact will make a bad mortgage go away. The walls in a new home can be painted or wallpapered, new cabinets can be installed, and practically any eyesore or blemish can be fixed or masked to make the home the dream home. A mortgage cannot be fixed. Such a decision could give borrowers a tainted mortgage history and damaged credit if the payment proves too costly.

As an industry, we can reshape our behavior and our reputation by educating the public. We should not turn the other cheek on fudged numbers; we should not push products based solely of the financial incentive to ourselves; and we must educate mortgage professionals before loan products can be offered to the public.

This may not be a panacea for the ailments we now see in our industry, but it’s a start.


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