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National Mortgage Professional
Aug 15, 2007

Letter to the editor: Sub-prime truthsJoe AdamaitisSub-prime mortgages,fraud Watching this unfold in your own industry is something akin to watching a high-rise building being built with phony cinder blocks for the foundation. After nearly 27 years of this, it was obvious, not just to me, that this was a train wreck waiting to happen similar to the "Big Dig," if you know what I mean. The noise being made on a daily basis is certainly deserved; however, let's keep in mind that before the work of a small portion of mortgage wannabes who took advantage and used them to line their pockets, sub-prime loans did have a place in the market. The problems have all been fully dissected by the press and, of course, those looking to grandstand in the political arena. However, I would suggest that all these naysayers stop sidestepping some of the more obvious problems associated with this type of lending and with all lending. If we look carefully at the problems linked to this meltdown, we might begin at the root of all fiascos greed! Sure, the guidelines were loose, but so are the laws that monitor mortgage marketing and advertising to the consumer. Consumers are fed bait and switch ads on a daily basis. Over and over, the TV and radio blare, "Rates as low as XYZ." Doesn't anyone ask why the same rates every day? Hello? Doesn't anyone know that rates change hourly? Do we really expect the consumer to understand something as complex as how the mortgage market works? Does the saying "When it sounds too good to be true, it usually is" apply anywhere here? Of course it does, and that's the problem. In addition, can someone please tell me why it is so hard to understand that if there are no closing costs to obtain a mortgage, doesn't a bell go off that says, "Who pays them if I don't?" Are these mortgage advertisers simply feeling good today, and therefore, you get a free loan? Common sense should kick in here somewhere, right? Obviously, my point is that marketing mortgage products to today's homebuyers or those looking to refinance should be scrutinized just as hard as anything else. Next, let's examine the real dregs in our industry those who train mortgage telemarketers to think that less than five points does not cut it. Not to mention that it pushes down the telemarketer's income! We all know the big name companies that have gone out of business or are facing major lawsuits. Gouging 101 run amok! Yet it keeps on happening. As for the sub-prime guidelines and the damage they caused, perhaps the politicians should forget about jumping onto the regulation bandwagon and focus on ways to help loan officers and brokers receive access to Federal Housing Administration (FHA) loans. FHA, as we all know, is the loan program that helped people with poor credit and lack of down payment before the sub-prime market exploded. Politicians should review this program as it has not done the job for borrowers hence why they turned to sub-prime loans. If FHA guidelines were eased to help the borrowers and to help experienced people present the programs, perhaps this could have been avoided. The guidelines need to shake out the non-professionals who fed on this frenzy like craved wolves, and create guidelines to allow the experienced loan representatives to sell the product. High-cost audits and fees required to originate FHA loans pushed many small brokers and lenders away from the program and into selling sub-prime. Further, the actual sub-prime guidelines can still work, given some restructuring. While the statistics seem to point to a huge disaster, many of these people will continue to pay on time. We must come up with new guidelines that allow them to refinance and remain homeowners. The real mistakes with sub-prime guidelines can be attributed to incorporating the no-income documentation option. A few changes can keep these programs safe and continue to allow these borrowers an opportunity. One other issue that can take blame is today's credit scoring models. I will say that the credit industry has its own fair share of blame, as the scoring formulas used to rate a borrower are farther from accurate than one would like to believe. The inaccuracy pushed many borrowers from possible conventional financing to sub-prime. Trying to correct a credit score is impossible and has now blossomed into an entire new business if you're looking for the next sub-prime type fiasco, watch the number of credit repair companies that pop up. In closing, I can admit that we in the industry knew who the bad guys were but were helpless, as we could not stop the huge machines they used to outpace everyone with advertising, hiring and training. I can also say that "it takes two to tango," and that not all deals were the result of overzealous loan officers. In fact, I can recall a number of borrowers who I personally advised not to buy the home they were looking at. They could not afford it. The result: they went down the street to a competitor. In closing, if we're to change this landscape, we need stricter guidelines for the marketing of loan products to consumers. In addition, strict guidelines on who can offer these products are necessary. We must continue to create strict guidelines for those who want into the business for the fast buck, so as to stop the next sub-prime fiasco. Let's not forget that as long as the big lenders want to use brokers and avoid the costs of brick and mortar, brokers will obtain the majority of originations. Mortgage lenders and brokers are the backbone of the industry and these two parties must continue their efforts to police our industry. Sub-prime will take a serious hit, and it should be a lesson learned. However, there are thousands of people out there waiting to hear how they can get out from under the mess they're in. Let's not forget them. This is just my humble opinion. Joe Adamaitis is president of Portsmouth, N.H.-based Direct Mortgage. He may be reached at (603) 427-6083 or e-mail [email protected]
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