At the end of the day the current credit meltdown can be tied to one thing: easy money.

Regardless of how many times we hear terms like "CDS," "CDOs," "synthetics," and all the other buzzwords of the high-finance world, it comes down to giving too many people too much credit — credit that they didn’t have a chance to repay once the housing market went sideways.

While there are many examples, the ever-popular option-ARM (adjustable-rate mortgage) — particularly in areas like California, Las Vegas and Florida — allowed people to buy homes at seven to 12 times their annual income by using negative amortization and a rising housing market to mask a dangerous gamble that the market would let them flip the house before they had to make a fully amortized payment.

Editor’s note: This guest essay is a part of the Roadmap to Recovery editorial project, which focuses on the future of the real estate industry. Essays should be 400 words or less and should detail your views on how to reinvent the industry and revive the housing market. You can pick a specific industry category — such as brokers, agents, technology, title or lending — or discuss the entire industry. Our editorial team will review the essays — authors of essays published in full will get a free pass to the upcoming Real Estate Connect conference (for new registrants only), and the author of the top essay will receive $500. Send your essays to future@inman.com. There are other ways to participate in the Roadmap to Recovery project, too. Click here for more details.

By MORGAN BROWN

At the end of the day the current credit meltdown can be tied to one thing: easy money.

Regardless of how many times we hear terms like "CDS," "CDOs," "synthetics," and all the other buzzwords of the high-finance world, it comes down to giving too many people too much credit — credit that they didn’t have a chance to repay once the housing market went sideways.

While there are many examples, the ever-popular option-ARM (adjustable-rate mortgage) — particularly in areas like California, Las Vegas and Florida — allowed people to buy homes at seven to 12 times their annual income by using negative amortization and a rising housing market to mask a dangerous gamble that the market would let them flip the house before they had to make a fully amortized payment.

This financial alchemy put more homes in reach for folks with normal-sized incomes, but it allowed housing prices to artificially skyrocket. Homes that would traditionally cost three to four times their annual income now ballooned, sending property values soaring. The two-year ARMs, 80-20 mortgages and interest-only loans played a role as well. By masking the true cost of credit based on a rising-tide mentality, the lending industry fueled the bubble.

Coming out of the ashes we’ll see a much different lending environment with a return to common-sense underwriting. This is going to necessitate further pain in the housing market as home prices MUST return to affordable levels based on traditional underwriting guidelines. In addition, we’re going to see several other lending changes that, if enforced, should help prevent similar financial hocus-pocus in the future. We should see:

  • The formation of a national licensing system similar to the National Association of Securities Dealers;
  • Easier-to-understand mortgage-loan disclosures;
  • Caps on fees and interest rates on loans;
  • Stricter licensing and capital requirements for lenders;
  • Mandatory counseling for certain loan types;
  • Outlawing of particular types of financing vehicles;
  • More frequent and regular enforcement.

The key is enforcement. There are plenty of laws on the books already, but they’re not being enforced properly as enforcement resources are limited and underfunded. Case in point: In California there were more than 500,000 licensed real estate agents and mortgage licensees in 2005 overseen by the California Department of Real Estate, with a staff of less than 50. There is no way that the system can be fixed if there isn’t proper regulation and oversight to enforce the laws.

Morgan Brown is an ex-mortgage broker, creator of the Blown Mortgage blog and director of marketing for online video company TurnHere Inc.

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