Saturday, April 26, 2008


We’ve given the example, relative to the current state of the mortgage industry, of a pendulum, having swung way too far to one side, now swinging back way too far to the other side, causing us all to suffer until it swings back to the middle, where it belongs.

Well, here’s a starker analogy. Think of the most of the players in the mortgage industry, over the past number of years, as a person who has gotten – really fat – 300-lbs-so-overweight-their-health-is-severely-threatened-fat– by eating everything in its sight, good food and bad food (i.e. an industry that has given loans to those who rightfully qualified for them AND to those who had no business getting a mortgage, and at the same time, giving good loans (such as 30-yr. Amortization, Fixed rate, full income verification loans) and, frankly, terrible loans (2-year adjustable rate, interest only, no income verification loans). Now, having looked (or, rather, been forced to look), in the mirror, and realizing it (the industry) is “300lbs overweight”, (i.e. stuck with all these terrible, and, in every growing number, “non-performing” loans, what does it, the mortgage industry, do? Go on a healthy, long term, diet (i.e. go back to the sensible
risk evaluation/risk formulas that served it well for (a least, for the most part) decades? NO!! Of course not. Rather, the mortgage industry has gone on a crash diet, eating less and less, getting closer and close to a fast, starving themselves (and, in the process, the real estate market) nearly to death (i.e. denying loans to those who rightfully don’t and shouldn’t qualify for loans, AS WELL AS, in FAR too many cases, denying loans to those who rightfully should qualify for a mortgage.

This near fast the mortgage industry has put itself on is manifesting itself in numerous ways. One of the most insidious was recently explained by Kenneth R.Harney in his syndicated real estate/consumer column “The Nation’s Housing”. (An aside – despite the fact that they make a big mistake by burying Kenneth Harney’s column in their real Sunday edition’s real estate classified section, nonetheless, Harney’s column alone is reason enough to purchase the Boston Sunday Herald.) As Harney explains in a recent column, many mortgage companies are making the acquisition of financing for the purchase of condominium units much more difficult. One example: one major private mortgage insurance company has now designated over hundreds of geographic sections (by Zip Code) around the country as “declining market” areas, and stated that they will no longer sell private mortgage insurance coverage on condominium units in these areas. (This ‘ban’ is irrespective of the prospective condo buyer’s credit score or financial assets.) Given that private mortgage insurance is a requirement on nearly all mortgages where the amount financed is above 80% of the property’s appraised value, the result of this ban will almost certainly result in a further decrease in both the selling price of and, even more importantly, the number of condo units sold in these “banned” geographic areas (areas that are almost assuredly already experiencing great difficulty in their real estate markets).

Contrast the above ban with, for example, the private mortgage insurance program offered by MassHousing, the quasi public mortgage institution that offers a mortgage insurance program which not only covers a property’s equity but also pays up to six months of mortgage payments for covered home owners who lose their job) and one can see how (not all, but) the bulk of the private mortgage industry – in its overreaction to the mortgage crises/fiasco is, rather than trying to correct the mistakes it made (which, to an extremely large extent, created the current mortgage/credit/real estate mess in the first place), is acting in ways that only make a bad situation MUCH worse.

What then, is the answer? At the risk of sounding like a broken record, while not a big fan at all of any kind of government regulation, in this instance, the bulk of the companies in the mortgage industry and their track record over the last five-plus years CRIES OUT for renewed and ongoing regulation. And, while such regulation WILL NOT cure this mess, it could, if done properly (admittedly, a big if whenever Congress is involved) prevent the current mess from getting worse, and prevent such a mess from happening again.