Mortgage Payment Program

All you homeowners out there, as you read the real estate headlines and wonder how and if we are ever going to see a full recovery in the housing sector, I want you to think about the factors that went into you qualifying for your home.  Most of us had to fully qualify for our mortgage based on a full documentation mortgage. The mortgage company looked at several key items: your ability to pay the loan which was based on your income, your willingness to repay the loan which is based on your credit score, and whether or not the collateral (the home you put the mortgage on) supports the price you were willing to pay.

The first two factors are pretty straightforward.  You give them bank statements, pay stubs, and tax records to validate your income and ability to pay.  Your credit score reflects your payment history on your previous credit lines and loans. Those who want to blame the sub-prime market for the housing crises can look at these tow factors as the driving cause.  Sub-prime loans often overlooked the ability to pay because they did not require the borrower to fully document their income or assets.  Lenders were also willing to accept a lower credit score – and potential lower ability to pay – in exchange for higher fees and higher interest rates.  There is not denying the impact bad sub-prime loans have had one the housing market, but they are also a smaller percent of the overall loans made over the last 5-6 years. There is also a disturbing trend of people who had strong documented incomes and solid credit scores whose homes are now in foreclosure despite that.  That is where home values come in.

Home values for mortgages can be based on many different things.  Most often the value is based on an appraisal made by a professional appraiser.  The appraiser visits the home, evaluates the items inside and outside the home that make it either similar or different than the other similar homes in the area, the evaluate recent sales of similar homes locally, and then submit a report documenting their opinion of the home’s value.  This is not an exact science, but a trained, experienced local appraiser is one of the best sources to obtain an accurate opinion. Unfortunately, loan officers and brokers who source the appraiser work out often put tremendous pressure on appraisers to “hit the number” or bring in an appraised value that supports the mortgage amount requested by the borrower. When this happens, the collateral of the home is not accurately reflected and when the market slows down, as it has in South Florida, California, and Las Vegas then the overstated home values become a problem.

People who are paying as agreed see neighbor’s homes foreclosing on a regular basis and the number of for sale signs in the community seems to grow daily.  Eventually, these people ask the question: are we better off just walking away from this home since it is now worth $200,000 less than what we bought it for?

Some economist and real estate experts predict another wave of foreclosures as homeowners in down markets become frustrated, disillusioned, and ultimately walk away from their homes and good credit just to get out from under the decreased home values. Whether, this happens or not remains to be seen. One thing is for sure; expect additional oversight in all areas of the home lending process in the future.

Some lenders are investors are now looking to sophisticated computer models to determine the home value.  These models are not new – in fact millions of American’s use scaled down versions online to get an online estimate for their home values by going to sites such as Domania.com and Zillow.com.  What you may not know is that the data companies that source these models have robust versions that can accurately calculate the homes value.  Some recent models have been referred to as “hedonic” models.  Based on the word “hedonism” which means to derive pleasure, these models look at the aspects of the home where people derive pleasure from using them.  This includes things like a gourmet kitchen with granite counter, luxury master suites, upgraded roof, and in ground swimming pools.  The models gather information recorded in public record files, apply unique values for each item, and then calculate the value compared to other homes.  The process is similar to that applied by the professional appraiser but is completely automated and free from the human bias.  These automated valuation models are fairly common and may be leveraged more frequently to determine the home value for underwriting purposes n the near future.

So, what’s behind the mortgage crisis? Who is to blame? The current mortgage crisis was caused by a series of things that all went wrong and in a chain reaction continued to cause problems throughout the entire industry. It is hard to find a single area of blame – instead errors were made by most of the players in the mortgage transaction. Here is just one example of many where things went wrong.

One of the biggest culprits to the current crisis was the use of reduced document loan programs – specifically the Stated Income, Stated Asset (SISA) products. The underwriting requirements for these products allow borrowers to state their income and asset but did not require the lender to confirm them with pay stubs and tax returns. This left open the possibility for loans to get approved for people who would not otherwise qualify for them. In many cases it was crafty Loan Officers who gamed the system by taking the application and filling in the income and assets required to get the loan approved. Sometimes borrowers were complicit in allowing this to happen so they could get the loan and in other cases the borrowers were unaware because they didn’t carefully review the huge stack of documents they were signing.

But these SISA loan products existed because there was a market place for them. Mortgage Insurance companies would insure them, the ratings agency’s would rate them high enough to be marketable, and Wall Street was buying and selling them. How could they possibly understand the true risk without having all the information necessary to assess it? Hindsight being 20/20 tells us they really couldn’t. But when everyone in the process was making money along the way, it is hard to shut something down that “seems” to be profitable. And in many cases they were making money again and again with many borrowers continuing to refinance to pull out cash and keep teaser rates as home values continued to climb. That is until values started to drop and they could not refinance any more. Today we see a lot of the SISA loans originated in the last three years going into foreclosure and a return to stringent documentation requirements on loans.