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New appraisal agreement could further tighten market

Apr 10, 2008

What goes around comes aroundAndrew L. Liput Esq.government-induced lending criteria, mortgage market collapse How government-induced lending criteria helped create the mortgage market collapse To hear Congress and our presidential candidates tell the story, the recent collapse of the mortgage industry—which has fueled the largest number of property foreclosures since the Great Depression—was entirely the result of banks' and Mortgage Brokers' greed. In fact, it was the politicians themselves who created the mess. These politicians are now looking to enact punitive measures against brokers and banks to satisfy the public need for a scapegoat. When Bill Clinton was in the White House in the 1990s, special interest groups and democratic congressional leaders criticized the mortgage industry for red-lining urban areas and bypassing minority applicants. These leaders claimed that minority applicants were unfairly being denied the opportunity for homeownership. As a result, underwriting standards and criteria were relaxed. This was done after the first raw data from the Home Mortgage Disclosure Act (HMDA) reported that minorities in the mortgage market were underrepresented. In fact, as Dr. Stan Liebowitz, economics professor at the McCombs School of Business at the University of Texas at Austin, has pointed out recently, "no sooner had the ink dried" on the initial HMDA reports when the Federal Reserve Bank of Boston issued new guidelines for mortgage lenders. These guidelines were designed to eliminate what the Federal Reserve Bank of Boston called "arbitrary and outdated criteria that effectively disqualifies urban and lower income minority applicants." One of the problems of taking raw data and using it to create policy is that raw data often fails to define the whole picture. Prudent governing sometimes requires patience and clarification of important information. A closer analysis of HMDA results showed that many lower income and minority applicants were shut out of the mortgage market because they were economically unqualified to shoulder the financial burden of a home mortgage payment. This was largely due to income and credit problems. Instead of designing economic policies to correct the cause, such as creating more opportunities for higher income, credit counseling and education, the government did what it does best—it created a dramatic, quick fix. It encouraged the marketing and processing of sub-prime loans. Relaxed underwriting standards meant that credit history, income, assets, savings history and the overall ability to repay would either be removed from the equation or have its significance reduced in decision-making. Relaxed standards also meant products which avoided the fundamental criteria of good lending practices would be permitted in the process. Lenders were thusly encouraged to offer products and underwrite loans in a manner that would be unbiased—not as to color, ethnicity or national origin, but irrespective of financial soundness and the ability to repay. Thus, the industry found itself in the undesirable position of being pressured to grant loans to people who did not have to demonstrate the ability to repay. In addition, any demonstrative failure to make minority and urban loans threatened regulatory retaliation, as reported under HMDA. Now that the regulators created the mess, how did they respond? They pointed fingers at the industry, demonizing the Mortgage Brokers and lenders who did everything they could to meet the expectations and directives to make homeownership available to everyone under existing guidelines. The sub-prime loan, once the preferred solution to perceived economic disparity, is now a term of derision and outrage. How far we've come! Out on the stump, the hypocrisy is evident. Sen. Hillary Clinton's husband was president during the relaxation of lending criteria, when it was a good thing. Now that it has become a bad thing, Clinton accuses the industry of predatory lending and greed for having used relaxed lending criteria. Clinton is not alone in her new found concern for borrowers. All the remaining candidates, including Gov. Mitch Romney, Sen. Barack Obama and Sen. John McCain have suggested drastic federal intervention in the mortgage market as a method to protect the victims—victims these senators had a hand in harming. Bankruptcy assistance, judicial restructuring of mortgage terms, frozen rates and billions in federal government foreclosure bailout monies have been suggested to protect homebuyers. I have a better idea. Leave the market alone and let capitalism work. Each side had reason to want the relaxed guidelines. Wall Street, lenders and originators wanted the business, borrowers wanted the homes and investment properties, and the federal government wanted to satisfy special interest groups. Each side has suffered as a result. People need mortgages, lenders and originators need business, and the government wants the economy to rebound. Slowly, products are coming back, the inefficient lenders are going out, inexperienced and fraudulent brokers are unemployed, and borrowers who were drunk on the real estate boom are sobering to the realities of responsible credit and debt decisions. The market will come back, but a restructured mortgage market overloaded with new, dramatic and punitive government regulations and requirements will resemble the type of knee-jerk reaction that got us here in the first place. Andrew L. Liput Esq. is president of The Liput Group and owner of New Jersey-based Repurchase Resolution Specialists Inc. He may be reached at (888) 424-3728, through his companys Web site or e-mail [email protected].
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Apr 10, 2008
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