There was a great article about the discussion of if the federal government should help homeowners that are in trouble with their mortgage payments and assist them to get them out of trouble. 

Here is a background to understanding as little about the debate.  Most of the time, when you obtain a loan, that loan and the terms and payments that go with that loan after you sign the documents and close aresold on the secondary market.  You may get the loan through a local mortgage company(XYZ) that has certain parameters to you qualifying (ex. over 680 FICO scores, 10% DP, a certain % debt to income ratio).  When you sign the loan docs the lender gives the Seller the money needed to close.  Once the lender completes the transaction they look to sell the loan off in the secondary market.  In other words, they want their money back to fund more loans and the risk of repayment to be taken off their books.  The lending company already made the money they needed in the upfront fees.  There are companies that buy those loans and are betting on a specific return on investment from the mortgage payments you make, otherwise they wouldn’t buy the loan. These companies get their money from investors that buy stock in the company or invest in the company in some fashion to get a return on their investment. 

Since you, the borrower, fit into those parameters to be able to obtain the loan (risk assessment) then these secondary market companies are willing to buy that loan and the 30 years of payments you are going to make to them over the years. The interest you pay is their profit.

One glaring problem to me was the process for which to obtain a loan.  If the lender did not have the borrowers best interest in mind, this created a real problem from the top down and put the credit market in the position it is in now.  For the past few years, a lot of unethical lenders (mainly mainland lenders) persuaded borrowers to go with loans that weren’t in the borrowers best interest and a lot of the time the loan info was false so the borrower could qualify.  It was the 100%, interest only, stated income financing Adjustable Rate Mortgage, with the “wink wink” loan info filled out so they could qualify loan.  (for example) 

The problem was two fold. 1. That the lending company that made the loan was getting paid from up front fees (origination fees, points, rebates, etc), would then sell the loan in the secondary market so it is no longer on the books, and the more they cranked out, the more money they made.  In a market where valuations of homes keep going up it isn’t a problem, but when you have 20% price appreciation in one year, it is easy to see that this isn’t a sustainable appreciation level.

2. The Secondary market was buying these loans.  They found a “100% financing, stated income, Adjustable Rate Mortgage loan to be an acceptable amount of risk to purchase. 

When the real estate market softened (leveled out or declined) and borrowers began either having problems making their mortgage payments or their mortgage rates “adjusted” and drove their mortgage payment up to a point where they couldn’t afford the payment and didn’t have enough value in their property to be able to refinance into a better loan program, the problems began.  This is where the secondary market began to put the brakes on the riskier loans.  As the secondary market began to not be able to get their return on investment and lost lots of money due to borrower defaults, which in turn hurt these companies investors, it began to dry up the available money used to buy the loans on the secondary market that lenders were making.  The loan companies in turn either would go out of business because they didn’t have enough money to make the loans and keep them “in house” or they couldn’t make the loans because there were no buyers in the secondary market.

If the secondary market had not given lenders the ability to sell the higher risk loans (like we see now), then we would see less problems for borrowers.  The other option was if their was a more fiduciary responsibility on the lenders behalf to the borrower to begin with.  Once the loan was done the lender gets paid and if the loan is sold on the secondary market, their is little to no responsibility left to the lender.

We have probably seen what was necessary, when we saw a lot of riskier loan options disappear and are no longer available, thus we have borrowers that can and should qualify as opposed to borrowers who really shouldn’t be getting into home ownership. 

I don’t agree with the legislation that is being proposed in the article.  That would be called a Bailout.  We have seen most of the necessary correction with the option of less mortgage programs.  The other option could be to establish more fiduciary responsibility or consequences for lenders towards their borrowers.  This mess will have to take it’s course.

Anyway…your best bet is to find a lender that is going to look out for your best interest.  If you don’t know of any, contact me at scott@kahalaassociates.com and I can put you in touch with some great ones.

Check out this other article about the new proposed Mortgage Industry Coalition.