The fact that we have a serious mortgage delinquency problem in most parts of California is now irrefutable. The Central Valley has had more than its share of casualties over the past several months and the pace at which homeowners are losing homes to foreclosure is showing no signs of abating.
The mortgage delinquency problem is clearly not a problem exclusive to California. In fact, there are states that, on a per capita basis, are having a tougher go than California, most notably Michigan and Ohio. There has been plenty of pain to go around and as the media is wont to do, a face has been given to the problem. For those paying attention, we have been told we have a “subprime” problem.
In fairness, the media should be granted a free pass on this one because they were led to the conclusion that this is a subprime problem by the industry that has all this data — the mortgage industry. As this story develops, (and it will develop badly), the mortgage industry desperately wants the public to believe that mortgage delinquency is primarily visiting those that tend to do a poor job of paying their bills.
Put simply, if the problem can be explained away as one of too many credit-challenged consumers getting into the housing market at an inopportune time, a conversation on the real source of the problem can be avoided. And that is a conversation the mortgage industry wants no part of.
Allowing the subprime label to stick to this problem is just plain wrong. Now is the time to characterize the situation accurately as discussions of mortgage delinquencies and the problems those delinquencies create for communities, the real estate market and real people take shape.
The majority of those suffering through serious difficulties with their mortgages are borrowers with perfectly acceptable credit histories who somehow got involved in mortgage loan products that were entirely inappropriate for their circumstances. If there is a real value in putting a label on the problem, let’s give the problem the correct label. What we have is a loan product problem.
When the best and the brightest of the mortgage industry cloistered themselves at a retreat somewhere to develop loan products designed to appeal to potential borrowers in a rapidly expanding housing market, it was without malicious intent. The creative minds that packaged loan products enabling borrowers to qualify for mortgages based on initially benign monthly payments did so in an environment that was almost intoxicating. The real estate market was that good, creating wealth all across America at a staggering rate. No one wanted to be left out and the mortgage industry delivered products that allowed nearly everyone to chase real estate riches.
It was against this back drop that these loans became the rule rather than the exception — zero-down-payment loans, loans with significant negative amortization, loans in which borrowers picked their own payments and interest-only loan products. Large numbers of borrowers — most with strong credit histories — were drawn to these loans because they either made home ownership possible or facilitated the purchase of a bigger, better home. It was just too easy for buyers to get caught up in the mania and reach for a house, the purchase of which could only be achieved through the use of a nontraditional mortgage.
The loan product that really brings the problem into specific relief is the stated-income loan. The stated-income loan invites the borrower to “state” his or her income for the purpose of loan qualification without the requirement of providing tax returns to support the income “stated.” This invitation is generally only extended to those with a strong credit score. These stated-income loans are failing at an alarming rate because they were offered to borrowers for whom the loan type was entirely inappropriate. But, they were by no means “subprime” borrowers.
Fairly or unfairly, the borrowing public has looked to the mortgage industry to police their borrowing behavior. To ra large extent, home buyers seeking new mortgages looked to their lenders to check their behavior if they attempted to get loans they really couldn’t afford. As much as it should not be the duty of the mortgage industry to protect borrowers from themselves, it is clear that imprudent underwriting practices have been a major contributory factor to the mortgage default problem.
In the end, the problem is real and the problem will get worse before it gets better. What we need is an effort from all involved, particularly the mortgage industry, to work constructively to moderate the damage. Sometimes foreclosure is the only answer, but most times there are better solutions. Losses on mortgages in default can be mitigated, and borrowers can be allowed to move forward with some degree of dignity. All it takes is a commitment to get to the right solution and the removal of the roadblocks currently in place that stand between the borrower and that solution.
There are instances where it makes sense for a lender to make arrangements through a forbearance agreement to allow the homeowner to bring the loan current on a negotiated repayment plan. Unfortunately, most times the borrower is not actually able to stay current on his loan and pay an additional amount to chip away at the delinquent amount.
In most cases, the only solution short of foreclosure is a short sale. Assuming the borrower lacks the ability to bring the loan current, which is increasingly common, a properly negotiated short sale allows the homeowner to avoid foreclosure and provides the lender with a way to limit the costs that go with foreclosure.
None of this is easy. Cleaning up a messy situation usually isn’t. But it is necessary. No good will come from flogging homeowners whose only crime was to take on a bad mortgage — in most cases, a mortgage that should not have been available to them in the first place. We can make progress towards a solution, but it is going to take a big commitment from the mortgage industry. The ball is in their court.
Scott Thompson is president of Sacramento, Calif.-based Mortgage Resolution Services, which specializes in arranging mortgage settlements on over-encumbered properties.