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].
