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Open House: Home loans going bust all over the country. Now, Congress is stepping in. Watch a special edition of “Open House” this weekend from Washington DC, covering the first mortgage meltdown hearings on Capitol Hill. 

Gerri is a reporter for CNN and she interviewed senior representatives from the Mortgage Bankers Association (MBA) and the NAMB, or National Association of Mortgage Brokers (sorry guys, I did not write down your names and I am not finding a video archive of the interview in my searches).  Gerri’s questioning appeared as though she was in search of some monolithic blame for the recent sub-prime meltdown.  It also appeared as though Gerri was pursuing a response from either mortgage industry representatives to absorb 100% of the blame and issue and nationwide mea culpa.  As I watched it, I was scratching my head… At one point during the interview, it was suggested to Gerri that the consumers need more education about their mortgage choices, to which she was quick to mock this otherwise indisputable idea with “So, it’s the consumer’s fault that they were stuck with option arms… come on!  PLEASE!!!”

“So, what’s my monthly payment? Cuz, the LOWER the BETTER right now”

Actually, Gerri, YES.  At least half the blame falls on the shoulders of the consumers.  Mortgage industry representatives cannot say this on national TV, but I can blog about it.  The vast majority of foreclosures are not from loans where consumers are victims of fraud, coerced, over-sold, or otherwise deceived in any way (I won’t bore you with the stats or research here, but if you look into it on Google for five minutes, it will confirm my claims).  Rather, the average consumer prefers the immediate lowest payment that they can get even with full-awareness of the implications for the future.  Frankly, today’s consumer seldom cares about the future, at the moment at hand, at least.  They live paycheck to paycheck today, and they will worry about next year when next year comes.    Without question, these are politically incorrect and otherwise offensive things to say about “the consumer,” but take a look to your left and to your right, amongst friends and family – you know this individual that I am describing above.  It is a reality.  Are these low-payment-seeking consumers qualified to make payments at the higher levels?  Actually, at the time that the consumer is approved for a new loan, they absolutely are.   However, like getting a raise, monthly savings as a result of refinancing or lower-cost mortgage options are often gobbled up by net-new expenses (new car, new credit cards, new unexpected circumstance, etc.). 
 

The Role of Government?  Laissez-faire, please.

Consumer lending is one of the most regulated industries.  There are piles and piles of federal, state, and local laws protecting consumers from unacceptable lending practices.  It should be made clear that the recent sub-prime mortgage correction was a not a result of violations of existing laws.  Thus, net new laws would likely struggle to make any incremental impact.  Thus, I vote for hands-off government policy on this one.  The only new laws that could come out would be designed to save me from myself, and this is not a helpful or healthy type of law. 

Piggy-backing recent comments by Countrywide CEO, Angelo Mozila, it is not the “product” per se (i.e. type of loan), but rather the use of the product.  This concept reminds me of Sony’s landmark win over the Motion Pictures Association of America (MPAA) and Jack Valenti in the 1970’s.  The Supreme Court deemed that the Sony Betamax had “significant non-infringing uses,” and thus, Sony was allowed to continue the marketing of their product (Jack claimed it would be the death of the industry).

Lower payment loans are “products” and an option offered by the mortgage industry.  So, should a responsible government make these types of loans illegal?  I certainly hope not.  Many mortgage borrowers would be severely and negatively impacted by the lack of choice.  I consider myself in that group. 

Defaults will, however, happen – always have and always will.  Our human hearts feel for any other human or family that is forced from their home, but the number will always be greater than 1.  We could probably argue all day about what absolute number or percentage of foreclosures that can be considered “acceptable,” but the reality is that our individual opinions just don’t matter in a market-driven economy.  In other words, the “Wisdom of Crowds” will always prevail.
 

Risk Modeling

However, predicting foreclosures needs to be MUCH MORE accurately factored into the mortgage risk models so that the end Wall Street investors providing the liquidity of these loans (equal victims in this meltdown, at least) are not scared away by inferior returns, thus negatively impacting an entire ecosystem.   This aspect of “risk modeling” is where the mortgage industry must share in the blame for the meltdown.  The problem is not the loans unto themselves, but it is the “price” of the loans that was the problem.  Frankly, there is no such thing as a “bad” loan portfolio on Wall Street.  Rather, merely “mis-priced” loan portfolios.  The more accurate pricing and modeling we should expect the future to bring will allow a handsome return for investors despite market-driven foreclosures.  I suspect sub-prime originations will return in force shortly, but with higher rates and tougher underwriting standards to ensure a profitably transaction over the life of the loans.   Where the industry quickly lost 20%, I predict it will quickly re-gain the very best performing 15% of the original 20%.  The other 5% may be gone forever and the market would say “good riddance.” 
 

Final Words to Gerri & CNN

Let the market work, Gerri.  Let foreclosures wake up poor-financial-planning consumers.  And please, do not limit my choices as a result of their foreclosures, nor blame those product choices currently available to me for what has happened.  The market pricing, the consumer qualifications, and the end-result of it all will work itself out. 

SPF