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Volume of maturing commercial/multi-family loans to be low in coming years

May 26, 2008

Future shock William H. James Jr., CMClegislation, mortgage industry, mortgage-backed security, principle balances Deliver us from the politicians. It seems like every senator, representative, governor, attorney general and bureaucrat in America is jumping on the bandwagon with proposed legislation or new rules of the game for the mortgage industry. Someone please explain to these people that: •You cannot and must not destroy the sanctity of the written prospectus setting forth the rules and workings of the mortgage-backed security/bond; •You cannot and must not allow judges to arbitrarily reduce principle balances or terms of a real estate note and mortgage; •You cannot and must not excuse the criminals who fathered this calamity. Identify them, determine the extent of their guilt and prosecute them—or at least banish them from any future positions of authority; and •You cannot and must not create a bailout for selective borrowers who are not meeting their mortgage obligations, while disregarding families who are suffering the same dilemma but are somehow meeting their obligations. The feelings and intensity of this situation by those meeting their responsibility is much stronger than you would expect. The most threatening condition facing the industry today is not the foreclosures rampant in our country. It is the total disruption of the funding mechanism that has created unlimited liquidity in the mortgage industry since the 1970s—the mortgage-backed security/bond! Many mortgage lenders/providers have either gone down the tube or are in the whirlpool, not because they were guilty of irresponsible lending/business practices, but because of the sudden demise of the market for mortgage-backed securities/bonds needed to fund their mortgage originations. Thornburg Mortgage is just one example of a mortgage originator who is in collapse, but not because of their business operations; they originate plain adjustable-rate mortgages and have no unmanageable foreclosure problem. They have been forced to the brink because they can no longer sell their originations through issuance of their quality securities. To further drive the knife into the industry, all lenders borrow from investment banks or other sources for short-term funds prior to issuance of the securities. To secure these borrowings, they put up mortgage securities they own. The banks loan a percentage of the value of these securities subject to a daily "mark to market," a Financial Accounting Standards Board regulation, showing the market value of the offered security. The mortgage-backed securities market was decimated when it was discovered that the securities being issued by many investment bankers were rated triple-a by rating agencies, even though they may have been laced with garbage sub-prime mortgages. No one could tell a good security from a bad one! Therefore, all mortgage-backed securities were tainted! When lenders were forced to mark to market each day, the values plummeted, as no one knew what the securities were really worth! Were they full of garbage mortgages or were they really triple-a? The integrity of the mortgage securities market has been tainted, hopefully not permanently. The rating agencies must have their feet held to the fire for their incompetence. The action of the Federal Reserve in injecting funds into organizations other than banks, which is the first time this has been done since 1933, was possibly a nation saving action. Unfortunately, the Federal Reserve cannot continue to print and inject money into the system for very long. It's bite-the-bullet time. If we destroy the integrity of the written real estate note and mortgage or the absolute adherence to the mortgage security prospectus by allowing political hacks or judges (many of whom are without the wisdom to have such power) to dismember the sanctity of such agreements, the industry is finished. Lenders will find alternative sources to place their lendable funds. This is not a possible reaction; it is certain! The mortgage industry has many fires to extinguish; where do we start? William H. James Jr., CMC is board chairman of Residential Bancorp in Canton, Ohio and is a founding member, past president, secretary and treasurer of the Ohio Mortgage Brokers Association. He may be reached at (330) 495-6041 or e-mail [email protected].
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