The Ready Way

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How we got in this mess. Another view

Wednesday, January 13th, 2010

We have all heard the basics as to how the housing crisis happened. Wall street got greedy, banks turned a blind eye and loan originators pillaged people. That is more or less the sweeney toddesq version.

One of the huge problems is that in order to be a loan consultant 5 years ago, or even at some places today, you did not need an education or really anything beyond the ability to “sell.” This lack of requirements led to a industry of salespeople who did not understand the long term consequences of the products(loans) they were “selling”.

Loan originators are often blamed for tricking people but a large portion of them really believed the bogus loans they were selling were great. They did not know any better and did not have the aptitude to recognize the potential long term problems.

I got into the loan business at the tail end of the “glory days.” The stated option arm was the go to product. It was sold to me as “Jen, this is a great way for borrowers to manage their money. Why make a full payment, if you can live in your house, make a low payment, and write off the interest?” My response was the loan balance is growing, and when it adjusts the borrowers payment will jump and they are going backwards. To which I got “prices are just going up,just refi them before it resets.” At that time that was true but my concern was that refinancing is expensive and it did not make sense to do the Option Arm due to the potential issues. The response to that concern was “if you do not do it the client will just go to the lender down the street.” yikes.. I did one Option Arm and it haunts me to this day.

Here’s the thing, if a loan consultant understands what bad things a loan can potentially do to someone they are less likely to push it. Now here we could get into a ethics debate, but if a loan consultant does not even realize the product is bad they have no ethical dilemma. The product looks good, the bank wants them to sell it so they sell it. Client loses, market tanks etc…

If the loan consultant understands the product has potential devastating effects at least they have to have the inner ethical debate before they sell it.

It would be great if a consumer group put together a test that all loan consultants had to take that tested their reasoning ability. Seeing if they understand cause and effect through a bunch of hypothetical multiple choice questions. Like

Q: If Bob chooses an option arm loan and makes the minimum payment while his value decrease dramatically and his rate adjusts what can Bob do?

A) Refinance into another option arm

B) Accept the new higher payment or face foreclosure

C) Try to modify his loan or short sale his home

D) B and C

The answer is D.

q: If you state Bob makes $10,000 per month so that he can qualify for a $400,000 house but Bob really makes only $5000. Can Bob really afford his house?

a) No

b) Yes

Obviously A is the answer. It may seem like a silly question today but just a few years ago thousands of people answered b by their actions and that is a big reason why we are in the mess we are in today.

Bottom Line: Loan Consultants deal with large financial transactions. They should be able to reason and understand cause and effect. This is not a just a sales job, we are helping people frame their financial future.

Posted in Call for action, What the media is saying | No Comments »

I guess I really do need a blog for my less than PC thoughts

Monday, December 7th, 2009

Julie and I blog on Trulia about the market almost daily. I have never had any problems and generally the blogs are well received. Well last night I wrote a blog that was meant for The Ready Way but ended up on Trulia because the server for Ready Way was down. Big mistake. I posted the blog, checked it had posted and went to sleep happy; feeling that I had pointed out some solid issues. This morning I told Julie to check it out and lo and behold it was gone. No email, nothing. It was as though it had never existed. What did I talk about that would need to be scrubbed so quickly? Must have been pretty wild right? Not really.

Of course I do not have a copy as it did not cross my mind it would be scrubbed, but here is my position. I had read an article in a local newspapers about modifications. It was the same article I have read in various newspapers and magazines for the last year and a half. There is always a picture of a nice family doing something wholesome (lawn with kids; cooking etc..) and the article says nothing substantial. We get it loan modifications are hard to come by and the nations largest banks are not rushing to do them. This is not “news.” What would be news is if they told us what various investors guidelines were for a modification. What would be news is if a newspaper or magazine actually had some useful facts in their story. Crazy right. I called out journalists to do some investigative work and get to the bottom of what is really going on. We need a lending Watergate. It is insane that we know all of a famous golfers text’s but not the guidelines for modifications. Instead of looking into how to help Americans by providing them an inside look we are getting an inside look into a red headed starlets propensity to go back to rehab. There is something off in the balance system here. I challenge all journalists to right the balance.

Posted in What the media is saying | 1 Comment »

FHA: It’s the end of the world as we know it…

Saturday, November 28th, 2009

Over the past two weeks there have been many articles highlighting the woes of FHA. Their reserves are lackluster and it seems that people have just realized that FHA is the new sub prime. Yes cringe, everyone cringes when you say it is the new sub prime but guess what? That is what it is. Lets do the math:

Low Down Payment+less than stellar credit+higher debt ratios= SUBPRIME

There have been FHA borrowers that I have not felt are qualified to buy bicycles that other lenders have helped get homes.

In a nutshell with the way it is set up it sets the borrower up for failure. Reserves are not a requirement of the loan and the 3.5% down paymentcan be a gift and the seller can pay 6% of the closing costs. You basically can have someone get into a house with no money down and $50 in their checking account. So here is the million or trillion dollar question, since the tax payers will ultimately bail this bad boy out. What happens when something goes wrong. A car breaks down or the water heater blows. The person has NO RESERVES. Looks like they are not making a house payment and the foreclosure cycle starts again.

Now that a few congressman have noted the “Oh no, this will tank everything again,” they are attempting to fix FHA. They are proposing stricter underwriting requirement or higher down payments. They are also proposing perhaps instead of tougher underwriting and higher down payments maybe increasing the upfront mortgage insurance fee and the monthly mortgage insurance because “it will not hurt the borrower as much.” It will up their monthly payment but whatever right….?

Let’s talk about the Upfront mortgage insurance fee. Every FHA loan has a built in 1.75% upfront mortgage insurance fee. They are proposing 2-2.25.% It is basically a gimme fee. It can be built into the loan and 95% of the time it is built into the loan. And yes you will still pay mortgage insurance monthly. Currently it is .55%, they are proposing .75%. The one justification right now for the upfront MI fee is that the MI on FHA is cheaper then conventional. Raise the upfront MI and the monthly MI and that is no longer true. People will still get the loans but will be set up further for failure with the higher premiums.

I have shaken my crystal ball and I think that they will not increase the down payments or the underwriting standards but instead will up the fees. It will be interesting to see what happens. If they increase the down payments and underwriting guidelines it will put a stall in the market as currently FHA is the most popular loan program. If they do not stall now they will have a flood of foreclosures later. It is lose lose. If they up the fees it is a bit akin to taking the last $20 before it is gone.

Posted in Foreclosure, Government, What the media is saying | 1 Comment »