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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2007

Integrity Can Keep Us Steady

Recent events in the mortgage industry underscore the need for honest, ethical business practices

r_2007-07_robbins_spotLet’s face it: The entire mortgage industry is under attack. It doesn’t matter what role you play; each of us is tainted by the events that have unfolded in the nonprime industry. In fact, if you follow the news, it is hard to find anything good being said about mortgage lenders and brokers.

Many news reports blame the increase in foreclosures on alternative loan products, such as nonprime loans and ARMs, which were designed to help people buy houses. Blame for foreclosures also often falls on an industry labeled “irresponsible.”

But no responsible broker or lender wants a mortgage to go into foreclosure. Foreclosures traditionally happen because consumers experience a trigger event, such as a job loss, a change in marital status, a death in the family, a sudden health problem or a decline in property value. Instead of recognizing that borrowers might bear some responsibility for their debt, brokers and lenders are blamed for not providing adequate information.

Clearly, some members of our industry have shown a lack of principles when it comes to placing borrowers in loans they can’t afford. These people give us all a bad name when the press labels brokers “home wreckers.”

Now more than ever, everyone in the mortgage industry must reflect on the principles of honesty, integrity and trust. These principles are simply the rules of conduct by which we should all do business.

Decisions of few affect many

There is nothing inherently wrong with alternative loan products such as nonprime and ARM loans if they are used properly. These products have helped many borrowers re-establish good credit and eventually qualify for prime loans.

They also have enabled those with minimal down payments or with self-employment status to attain homeownership. In fact, 87 percent of nonprime borrowers are paying their loans on time, according to a Mortgage Bankers Association analysis of 43.5 million loans earlier this year.

These types of loans tell U.S. consumers that the mortgage industry understands the dynamics of new demographics, work relationships and lifestyles. The mortgage industry developed products that matched changing demographics, guided by the highest principles. Our goal was to give people a chance to enjoy homeownership, not to build a house of cards and then watch it fall as we pocketed the money.

Unfortunately, we’ve recently seen that some mortgage bankers and brokers have not used sound business practices or adhered to our industry’s ethical standards. We must recognize that bad decisions were made by a few unethical originators among the thousands of originators out there. I find it deeply troubling that anyone would knowingly put consumers into loans they cannot repay. This is reprehensible, yet it has happened and is affecting every aspect of our business.

Perhaps the best illustration of poor business practices is the abuse of no-income, no-asset (NINA) loans, which some have dubbed “liar loans.” NINAs originally were created for self-employed individuals and were targeted at a market niche.

Some lenders and brokers have shown irresponsibility when making loans with no down payment and no income verification. They often use the excuse that they simply underwrite loans based on the financial information they are given and that there is no way to know what other financial resources borrowers may have.

This is simply a rationalization of bad decision-making. These lenders abandoned common sense and good business practices for short-term gains. Rather than making decisions based on their own underwriting guidelines, they often pushed the product envelope by allowing borrowers to make credit decisions. Further, when the mortgage market began to contract, some lenders extended the use of NINAs to get more business. Some lenders looked the other way and accepted any information to close loans.  It can make people wonder what happened to common sense, professionalism and integrity.

Doing the right thing is the linchpin of our industry. We must be prudent with potential borrowers. Underwriting guidelines are in place to help us make the right decision. Why abandon those for short-term gains?

Rebuilding our reputation

Tightened underwriting policies and uniform fair-lending practices are the best way to weed out people who are not committed to the principles on which our industry was founded. We need prudent regulations that will focus on revising the nation’s settlement laws and a strong uniform lending standard that brings those who are lacking principles to justice.

Mortgage banking is already among the nation’s most-regulated industries. No additional legislation is needed to regulate credit availability. It is unlikely that government regulation could adapt itself to the individual financial needs of millions of consumers without hurting the people that it is attempting to help. The result could be that some consumers, desperate to be homeowners, would be driven to seek back-alley lenders that would further tarnish our reputation.

It is inexcusable that a few bad apples have chosen to put their commissions before their customers’ welfare. It is now up to all of us to help change the negative perception of our industry and to rebuild respect for what we do.

Our goal is to open the door of homeownership to all who qualify. Let’s help consumers find the right home loan and extend credit to those who can make their mortgage payments. As an industry, we don’t want to hear that one of our loans is going into foreclosure. If this should happen because of some unforeseen event, we should do everything in our power to work with homeowners so they can stay in their homes.

Mortgage lenders, consumer-advocacy groups, legislators, regulators and other stakeholders are now working together to stabilize the nonprime-mortgage-credit system; to add more transparency to pricing; to simplify a complicated closing process; and to provide assistance to homeowners facing delinquency and foreclosure. Making changes now and sticking to our principles will prevent the situation from getting worse or, for that matter, from ever happening again.



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