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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2008

3 Secrets to Market Recovery

Take steps to weather the downturn and speed up renewal

The mortgage industry is like any other when you look at the basics of the business. Operations and sales departments distribute a product or service, and company executives keep everything running.

Now, many are looking to lenders to get the industry back on its feet, but executives are pressed to keep business flowing. The problem is banks’ negativity toward lending. Instead of anticipating profits from loans, banks fear losses from these same loans.

Three elements will be help aid recovery: 1. temporary aid through federal agencies; 2. greater lender security; and 3. creativity and resilience from mortgage brokers.

The temporary answer to a lack of funding for unconventional loans is to look to Fannie Mae, Freddie Mac, and the U.S. Department of Housing and Urban Development through the Federal Housing Administration and the U.S. Department of Veterans Affairs. But that funding also will soon recede. The markets that had conforming jumbo loans of as much as $729,750 are being forced to recede to the new $625,500 conforming limit for single-family homes.

The real answer? Secure the lenders and they will start lending again.

There are several ways to achieve lender security. First, mortgage insurance for loans that have 60-percent to 80-percent loan-to-value ratios (LTVs) can give lenders more security. Premiums and claims should be low. These borrowers will have another fee, but they can get loans, which is needed to jump-start the industry.

In addition to paying mortgage insurance, an upfront premium, like the mortgage-insurance premium on government loans, may motivate borrowers and lenders. The amount of the add-on would be 2 percent on jumbo loans to $1 million and 1.5 percent on loans greater than $1 million. Lenders would hold the monies, which could be counted as additional capital for the first two years. After two years of on-time payments, the lenders would remit the money to the borrower in installments over the next three years.

An upfront premium could motivate lenders for two reasons. First, it would give borrowers an incentive to pay on time, an added element of security for the lender. Second, it would keep borrowers in the loan for a longer period of time: If the buyer sold or refinanced before the two-year term was up, the money would be forfeited to the lender. After two years, the borrower could receive half of the money back while the balance remained with the lender. This type of program would give lenders an additional incentive to make loans they wouldn’t otherwise consider, which could help energize the industry.

During this uncertain time, loan officers do not have to sit on their hands, either. A lot of business can be done now that could also revive lending.

Refinancing is one option for some borrowers. Interest rates have been relatively low for a long period, but the long-term trend likely will be upward. Healthy borrowers with good credit scores and LTVs who have home-equity lines of credit could be candidates for refinancing. For these clients, a new first mortgage could combine the two loans, thus lowering their combined interest rate, shortening their amortization and lowering their payment.

Other clients may be staggering under credit card debt. For these clients, perhaps a shorter-term amortizing loan would be comfortable because of credit cards' higher interest and payment rate. A 30-year fixed-rate mortgage and a number of credit cards could be combined into a 15-year fixed-rate mortgage to save them money on a monthly basis over what they had been paying on their total debt.

Whatever you choose to do to weather the market, remember this: Only a fraction of loan officers are still operating versus a year ago, and you are one of them. You are a cut above those who left, and now you can devise a strategy to prove it.


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