Borrowers Should Not Be Abandoned

Over-Reaction by Investors and Lenders-
They Need to Allow for a "Soft Landing"

The news about the mortgage defaults and foreclosures is in
all the media, several times a week. Statistics show that the
rate of defaults is much higher than they have been over the
last few years.

When the real estate market peaks and property values
start to decline even a little bit, the mistakes that the lenders
have made with aggressive lending practices start to be
revealed.

This is what we have been seeing, starting with the what has
become to be called the "sub-prime" crisis. The underwriting
of these loans was very aggressive, allowing cumulative loans
up to 100% of the value of the home, allowing below-average
credit scores, little insistence on documenting the income
for qualifying and not caring if there was much in the way of
cash reserves for the borrower.

As a result, these high-risk loans are having trouble performing
by having payments being made on time. This makes the
investors nervous, and there are monetary losses up and down
the line when the money doesn't arrive as planned.

Now the investors, and by extension the lenders, have with-
drawn many lending programs and over-reacted to the situation.
Just a few months ago, they saw reasonable risk associated
with certain credit profiles and they were willing to make those
loans. In today's environment, these same credit profiles are
representing unacceptable risk at any price.

So, the pendulum has swung from being very permissive to
very restrictive in such a short period of time that borrowers
are finding themselves without many acceptable choices
for restructuring their debt.

The borrowers need to have some confidence that the rug
has not been pulled out from under them. For their well-
being, a reasonable plan would have been for the investors/
lenders to slowly pull back from their most risky lending
profiles and continue to accept reasonable risk. This would
have allowed borrowers to still have an opportunity to
restructure their debt, albeit with fewer choices and possibly
somewhat higher rates and fees. But at least they could
pursue options.

Instead, the investors/lenders have lost all confidence in their
ability to assess mortgage risk. They do not know where the
line is where clients will still invest in their mortgage-backed
security pools, so they have decided to withdraw to a large
degree from offering loan programs that rely on funding through
Wall Street.

It will take some time for these investors/lenders to slowly
introduce different degrees of risk in their mortgage offerings
from the very conservative posture they are now taking. They
will have to discover where the clients' appetite is for any new
mortgage offering. They know that there will be a market among
the borrowing public because they are effectively creating pent-up
demand by withdrawing programs from the market.

I have always tried my best to fully inform my clients of how
their particular loan works, what the moving parts are in their
home mortgage, where they have stability in the loan and where
there are risks of which they need to be aware. My clients and
myself discussed exit strategies and time horizons to do forward
planning for restructuring their loans if necessary.

What is happening now is that the assumptions we made about
mortgage products continuing to be available as they had been
are proving to be troublesome. The wholesale changes we have
seen - the over-reaction and severe cutbacks in lending programs -
will create a default problem for borrowers that will be much deeper
than it needs to be.

The lending community needs to recognize that there are many
borrowers who want to improve their mortgage situation, especially
those who are facing resets of their interest rates and payments
who opted for loans with rates that were fixed for 3 or 5 years. Many
of these borrowers have good credit scores, sufficient equity in their
homes, solid employment, income and cash reserves.

These borrowers deserve to have their needs met by a responsive
lending market. They are currently the proverbial baby being thrown
out with the bath water.

While it is unfortunate that there are borrowers who will face
foreclosure because they borrowed more than they could ultimately
afford (for many reasons), that does not mean that the vast majority
of borrowers need to be under-served with reasonable lending
alternatives.

If you, or anyone you know, needs to investigate their options for
a new mortgage, have them call me. I still have access to
lending choices that may provide a solution.