It's Time to Go Back to the Future
Coop, Kevin, Mortgage Banking
"There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction."--John F. Kennedy
With apologies to the film trilogy (Back to the Future), the mortgage industry must take a step back in time to apply some lessons from the past to our strategies for the future. The year 2007 will undoubtedly be remembered as one of the worst years ever for the mortgage lending industry. The bust follows an unprecedented real estate boom fueled by easy credit, speculative fervor and, in some cases, overwhelming criminal activity.
Booms and busts are part of the natural cycle in a capitalistic system, and there are always winners and losers. What is important to remember, however, is that the recent mortgage meltdown is far more than a one-dimensional problem. As such, it will take a three-dimensional approach to effectively shape the future.
We must go back to basics in terms of lending decisions based on actual borrower income and assets, while at the same time taking into account myriad new fraud schemes. Those are the first two dimensions. The third is represented by new technology and analytics designed to help prevent a repeat of the current crisis.
We must begin by grappling with questions such as: What led to the mortgage meltdown? What lessons can be learned from what happened? How can risk be managed going forward? And what types of mortgage fraud will evolve if the industry chooses to rest in "comfortable inaction"?
How did we get here?
There have been countless congressional hearings and inquiries to ask what went wrong and who's to blame. Depending on who is pointing the finger, the fault lies with the mortgage brokers, the real estate agents, the borrowers, the lenders, the closing agents, the rating agencies and/or Wall Street investors.
Who is to blame is much less important than the end result--which is more restrictive rules, regulations and laws, and new dangers for lenders that err in a more controlled lending landscape. While the predatory-lending implications of the present crisis are well-documented, the contribution of mortgage fraud to the meltdown is not.
A refresher: Fraudulent appraisals can artificially inflate property values by skewing commercial appraisal databases and tax rolls if inflated values are recorded as bona fide values. Artificially inflated values can:
* tempt professional investors and wannabes to catch the gravy train, creating investor frenzy;
* turn homeowners into overleveraged and dangerously naive investors;
* encourage speculation; and
* create a sense of desperation in borrowers who are afraid homeownership will elude them if they wait and prices go through the stratosphere.
Desperate borrowers--and the brokers, Realtors[R] and originators who serve them--are tempted to do whatever it takes to close the loan, including fabricating income and employment, and understating liabilities (e.g., fraud for housing).
The traditional paradigm of fraud for housing assumed that borrowers who were just "stretching" a bit to qualify would be able to refinance their houses if they got into trouble. Or they'd be able to sell their houses for at least what was owed if they really got into trouble. Under this scenario, there was no harm and no foul, and it all worked so long as wages increased and property values appreciated according to plan.
But then real estate prices catapulted into the stratosphere.
Borrowers couldn't afford loans unless they were paying little or no principal at low introductory "teaser" interest rates. Borrowers (coached by knowledgeable industry professionals--Realtors, originators, etc.) began committing fraud for housing by lying about their incomes, and suddenly people who made less than $70,000 were able to get $500,000 mortgages by claiming to make $200,000 a year under stated-income loan programs. …