- - - - - - - - - -
Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc. Larry’s commentary is his and his alone and does not necessarily reflect the views or opinions of the management of FlippingFrenzy.com. You can read Larry’s thoughts here on FlippingFrenzy.com most weekends.
- - - - - - - - - -

The U.S. economy is suffering from a serious illness. The “doctors” in charge of treating this illness – Federal Reserve Chairman Ben Bernanke, Secretary of the Treasury Henry Paulson, and other economists and experts – are throwing every treatment imaginable at this illness in an attempt to cure it. Unfortunately, in the process of trying to cure the patient, these doctors may be killing it. In an attempt to do something, they may be doing too much.

They need to take the Hippocratic oath and pledge first to do no harm.

The truth about the current mortgage meltdown and foreclosure epidemic is that these problems are merely symptoms of a serious and life-threatening illness. The illness is more systemic than the experts are willing to admit. The problem is that the U.S. has been living far beyond its means for far too long. It simply can no longer sustain the fraud, corruption, and overspending that has become endemic to this great nation. Here are some of the deeper problems that the current solutions are failing to address:

• Loss of jobs with decent wages: In an attempt to boost business profits and keep inflation low, government policies rewarded companies for moving operations (and jobs) overseas. How can you have a consumer-driven economy if the consumers have jobs that don’t even provide them with enough income to pay for housing, groceries, medical care, and education?
• Increasing cost of healthcare and insurance: Fewer and fewer U.S. citizens can afford health insurance, and for those who can afford some sort of insurance, the coverage these policies offer is almost laughable. People are essentially paying thousands of dollars a year so the health insurance company can send out explanations of why their claims were refused. One serious illness is enough to send most families into foreclosure and perhaps even bankruptcy.
• Commissions-based compensation for loan originators: In the lending industry, brokers, loan officers, and sales executives at the banks were often compensated based on the number of loans they approved, not necessarily the number of good loans.
• Rampant fraud: Everyone seems to be ripping off the system nowadays – illegally flipping homes, arranging cash back at closing deals, falsifying information on loan applications, hijacking homes using counterfeit deeds, and so on. Some estimates show that over 80 percent of fraud involves industry insiders – people who should know better and who should be dedicated to the well being of their industries.
• Loss of home equity: In an attempt to stimulate the economy, the U.S. government inadvertently manufactured a housing bubble. Homeowners were tripping over themselves to buy bigger, more expensive homes and to cash out the equity in their homes, thinking that their property values would continue to appreciate forever. When the bubble burst, the equity went “poof.” No matter how much money the government pumps into the system, it can’t force that equity to magically return.
• Alt A and Subprime loans: With rapidly rising home prices, people were soon unable to qualify for traditional qualifying conventional loans. Instead of accepting this fact and possibly denying people loans, banks and other lending institutions “helped” people qualify by lowering the qualification standards and offering mortgages with low teaser rates. Borrowers could qualify for loans at the lower rates, but as soon as the rates adjusted up, many people could no longer afford the payments.
• Speculative buying: Some investors who mistakenly believed that property values would continue to rise forever purchased multiple properties at a time, hoping to flip them and score some quick cash. Some companies encouraged the speculation by offering condo conversions and hotel condominiums as low-risk, no-hassle investment opportunities. Banks and other lenders also encouraged this by offering easy qualifying programs with little or no cash needed.
• Rising fuel and food costs: Fuel costs have doubled and nearly tripled in a very short period of time, and nothing indicates that they will drop anytime soon. In fact, with demand growing from China and other developing countries, fuel prices are almost guaranteed to rise. And when fuel prices rise, so do the prices of just about everything else, including a gallon of milk and a loaf of bread.
• Deepening national debt: We have a national debt of over $9 trillion. The recent federal budget called for $3 trillion in spending. Where’s this money coming from? Other nations. As a result, the dollar is quickly losing its value and its purchase power, and this is happening at a time when the American worker is seeing very modest gains in pay.

Up to this point, the government has attempted to treat only the symptoms of the disease in an attempt to prevent owners from losing their homes and keep the banks open. Although some of these moves have had positive short-term results, most of them are very short sighted.

Here are some of the solutions the government has enacted:

1. The FHA (Federal Housing Administration) was given more flexibility to assist homeowners who have subprime mortgages.
2. FHA increased its loan limit to $271,050. In some counties, the limit can be as high as $729,750.
   Fannie Mae and Freddie Mac temporarily increase their loan limits – up to $729,750 in very few select markets.
3. Qualifying homeowners do not have to pay income tax on any debt that the lender chooses to forgive the homeowners as part of a short sale agreement.
4. The Federal Reserve has lowered the prime interest rate – the rate it charges banks to borrow money.
5. The U.S. government along with other central banks in Europe is going to exchange up to $200 billion in US Treasury securities for other debt including mortgage securities.

All of these solutions fall short, because they fail to treat the underlying problem – for various reasons, the U.S. is living beyond its means. Some of these solutions are very likely to cause additional problems. For example, any attempt at making loans easier to come by is going to facilitate fraud, irresponsible lending, and irresponsible borrowing. Having FHA, Fannie Mae, and Freddie Mac increase their loan limits selectively goes against reason – why not increase loan limits to allow more to refinance and save foreclosure. The current plan applies to 25 percent of homeowners in trouble.

In addition, some of the actions the government is taking are fiscally irresponsible. For example, lowering the prime interest rate simply cuts the government’s return on its investment to the benefit of the banks that caused much of the problem in the first place. The government is rewarding banks for their bad behavior. These banks are not passing the savings along to the consumer. In fact, as the government has cut the interest rate it charges banks, banks have been increasing the interest rates they charge customers. This is nothing other than a subtle way for the government to bail out the banks.

Also, as a taxpayer, I would like to know where a government that has a $9 trillion national debt and a $3 trillion annual budget is getting $200 billion to buy mortgage-backed securities. This kind of irresponsible spending is going to lead to massive inflation, further eroding the purchase power of the dollar.

I think we will recover from the mortgage meltdown and foreclosure epidemic, but we need to follow the Hippocratic oath and first do no harm. Throwing money at the problem is what drove us to this point. Easy money fuels greed and fraud and depletes our resources. The current treatments haven’t worked. We need a holistic treatment that cures the disease and adds real strength to our economy – not the smoke-and-mirrors illusion of strength we have bought into over the past decade.

- - - - - - - - - -
Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc. Larry’s commentary is his and his alone and does not necessarily reflect the views or opinions of the management of FlippingFrenzy.com. You can read Larry’s thoughts here on FlippingFrenzy.com most weekends.
- - - - - - - - - -

Last weekend–in my guest blog entry here on Flipping Frenzy titled “Taking the Foreclosure Crisis Personally,” I posed the following question:

Would it not be better to freeze a [interest] rate for a homeowner who has been paying at that rate rather than foreclosing and kicking the person (and his or her family) out on the streets? In the extreme, would it not be better to cut the rate in half rather than foreclose

Now, U.S. House of Representatives member Barney Frank (Massachusetts) has outlined a $15 billion plan to buy distressed mortgages from lenders, saying the “cascade of foreclosures will continue” without government action. Frank, who chairs the House Financial Services Committee, is also said to be working on another plan to provide as much as $20 billion in loans and grants to purchase foreclosed and abandoned homes at or below market value to stabilize home prices.

While I do not agree with some of his proposals, I do agree with this (courtesy of National Mortgage News Online:

Under Rep. Frank’s plan, the existing holder of a mortgage would be required to write down the loan to a level the homeowner could afford. The write down requirement would not apply to investor-owned and second homes.

Just as I was saying last week, let the banks and lenders take action on their own, give back some of the windfall profits they made, reduce the rate of foreclosures, and allow more people to keep their homes. Logically, what choice do they have? Kicking people out of their homes and writing off the debt is not a sustainable strategy. Keeping performing loans on the books and maintaining property values makes a heck of a lot more sense.

Win-win versus Lose-lose; that the decision we’re faced with. And with an estimated 1.8 million new foreclosures projected for 2008, what are government and the private sector waiting for?

With a recession looming (I believe it’s already here but the so-called “experts” say it’s too soon to tell), the dollar weakening in world markets, and inflation threatening the basic survival of the average American family, I say corporate American needs to actively participate in the downturn as much as it did in the upturn.

If the lenders/mortgage note holders want to offer solutions to borrowers, they can. To Bank of America–which itself is facing billions of dollars in loses to foreclosure–and to the other financial services organizations that members of Congress (like Barney Frank) have been talking to about the crisis, why must it take an act of Congress for you to make such an easy decision? Each and every day you wait, thousands of people lose their homes and face the prospect of a very uncertain future.

What solutions do you–the readers of Flipping Frenzy–have? Maybe we can compile them in the Comments area of this blog entry and send them to Rep. Frank!

- - - - - - - - - -
Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc.

Larry’s commentary is his and his alone and does not necessarily reflect the views or opinions of the management of FlippingFrenzy.com. You can read Larry’s thoughts here on FlippingFrenzy.com most Saturdays or Sundays.
- - - - - - - - - -

As mentioned in the recent post, “Rally Is on to Stem Foreclosure Epidemic,” the government, mortgage lenders, and consumer advocacy groups are scrambling to come up with all sorts of solutions to stem the rising tide of foreclosures in the United States and resuscitate a flagging economy. Unfortunately, all of these fixes tend to be stopgap measures designed to make their proponents look good rather than offering real long-term solutions to suffering homeowners.

I say that we need to take this foreclosure crisis personally. By that, I mean that we need to toss out all the traditional policies and automated foreclosure systems and put people in charge of solving this very human crisis. We need to replace the collection robots with living, breathing, caring people. We need to give management back the decision-making powers based on their knowledge and knowledge of the situation. Throw away the policies and procedure manual that might read like this:

“…upon a 90 day default from a borrower, no remedial action shall be taken by our firm and the file is to be immediately turned over to our attorneys for foreclosure action regardless of any extenuating circumstances that may exist with a borrower which would otherwise have us rethink and possibly restructure our loan with them.”

No, this isn’t a real policy quoted from anyone’s manual, but it’s a pretty good depiction of how the system currently operates. In fact, I was told by one lender when attempting to work out a loan for a client, “They will have to bring the account current before we can even begin to discuss anything.” That’s just mind boggling — a Catch 22 if there ever was one. “Well,” I replied, “if they could do that they wouldn’t be delinquent nor need my services and we wouldn’t be having this conversation.”

Where is the logic? A lender forecloses, incurs thousands of dollars in legal fees, earns no interest, pays thousands of dollars to prepare the property for sale (in addition to holding costs, including property taxes and insurance), sells the home for well below what was owed them, and pays the listing agent a commission. They take the write down, diminishing the value of their own company and reducing their operating income. As a result, they have to lay off a good portion of their personnel to compensate. (GMAC had to lay off 15% of its automotive finance unit due to collection problems. Citigroup recently laid off 20,000 due to their mortgage shortfalls. Employees of Merrill Lynch faced similar layoffs, as did employees at other lending institutions.)

Would it not be better to freeze a rate for a homeowner who has been paying at that rate rather than foreclosing and kicking the person (and his or her family) out on the streets? In the extreme, would it not be better to cut the rate in half rather than foreclose? Any contractual obligation can be renegotiated by both parties. If the lenders/mortgage note holders wanted to offer solutions to borrowers, they could.

Look at the benefit of the extreme — cutting the rate in half.

Say someone is paying 8%. Due to extenuating circumstances, such as an expensive family illness or company layoffs (see “Homeowners Aren’t the Only Ones Hurt by the Mortgage Meltdown“), the person is unable to make the monthly mortgage payments.
If you were the lender, would you rather have:

1. A non-performing loan that will cost you tens maybe even hundreds of thousands of dollars if you foreclose.
2. A property physically deteriorating, as vacant foreclosed homes typically do.
3. A further reduction of the property value and neighborhood value.
4. A loan returning zero percent income prior to, during, and after the long foreclosure process that can last for 12 months or more.
5. A loan that loses value for the investor in the mortgage-backed security (MBS).
6. Moreover, most of all, creating a homeless situation for an American family.
7. A LOSE/LOSE situation for EVERYONE.

1. A well maintained property, maintaining value.
2. A property maintaining the value of the neighborhood.
3. A loan that is no longer a complete write off but is still producing income.
4. A return to the investor in the MBS, albeit smaller. Isn’t something better then nothing?
5. No cash expense and loss to the lender.
6. A steady stock value of the lender.
7. A family that remains in its home.
8. A WIN/WIN situation for EVERYONE.

This solution is not for everyone. The speculative “investor” earning $25,000 a year who purchased 10 properties while living in an apartment (true story) should not be saved. Investors in general, who purchased for little or no down payment with the intent to “flip” and got caught up in this crisis, BY NO MEANS deserve a break. However, to the owner occupant, with qualifications, I say why not?

We don’t need legislation or political maneuvering. The government can’t and shouldn’t bail out mortgage lenders and homeowners. The people who created this crisis are the best people to resolve it, and “people” is the key word; this crisis requires people working together to develop rational, practical solutions. Our country has always prided itself in coming together when times are tough. Now, times are tough. Corporate America, you are part of the citizenry and should “come together.” Your profit motives brought this crisis on, and the fallout is destroying you as well. Do you not see the potential for self-preservation?

There is more to this story and additional solutions. More is coming. Stay tuned.

- - - - - - - - - -
Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc.

Larry’s commentary is his and his alone and does not necessarily reflect the views or opinions of the management of FlippingFrenzy.com. You can read Larry’s thoughts here on FlippingFrenzy.com most Saturdays or Sundays.
- - - - - - - - - -

Below is the first (and sadly the last) email message I ever received from Richard Whitworth (it arrived in December 21, 2007). Even though it is a solicitation for MORsystems, after reading the copy, as reprinted in italics below, I felt compelled to excerpt it here as it exposes much of the causes to what has been called the “mortgage meltdown.”

As regular Flipping Frenzy readers know, I have written several articles on this topic and will write even more. It is probably one of the greatest economic disasters in this country’s history, and history may record it along with the Great Depression of 1929.

Richard Whitworth said the following, and I have added my comments below each of his. I admire his ability to see what is and report what he saw and knew. We need more like him, and with his passing this great country of ours loses an important voice.

Richard Whitworth: We are in a credit crisis brought on by a lack of confidence–so what’s next? The crisis has exploded beyond Wall Street, driving the dollar to record lows–and now it appears to be sending the prices of commodities, especially oil, to historic new highs. The results could be extremely destructive for the economy in general. The subprime crisis and the ripple effect in commodity and foreign exchange markets raise the odds of a recession.

Larry Rubinoff: The crisis truly has exploded beyond Wall Street and well beyond the mortgage industry. Little is reported on the effects it is having in world wide economics and finances. Recession is now being reported by major economists and Wall Street firms, yet I believe that we have been in a “silent” recession for the past six months. Major banks worldwide (Deutche Bank, UBS and HSBC to name just a few) have been impacted by what has happened here. You can add French banks, Australian banks and even the Chinese government investment fund.

Richard: Estimates from various sources show that the subprime mess will ultimately cause $250 to $500 billion of losses. It is inevitable that more players will have to revalue at least a portion of assets that are presently held. Another important point — the majority of these collateralized debt obligation or “CDO” assets do not reside in institutions; they are scattered through various pension funds, insurance portfolios, hedge funds, etc. Those losses haven’t even been addressed yet.

Larry: Mr. Whitworth makes some very good points here. I feel his estimates of losses to be conservative at this point in time, although it may not have been when he authored this. All players will eventually have to revalue and report their asset positions and write downs, but until it all comes out in their reports, we will not know the actual extent of the damage. We know that Fannie Mae delayed their reporting, and when delay was no longer an option, they reported write downs of almost two billion dollars with much more to come. Freddie Mac also will report billions in write downs and the so called safe, government-supervised buyers of conventional loans are racking up their losses as well. This is not and has not been just a sub prime crisis as we are being led to believe.

Mr. Whitworth referred to losses in pension funds, insurance portfolios, hedge funds, etc. which are now beginning to surface, but losses to stockholders of public corporations have not even been addressed or factored in yet. Just on example of stockholders’ losses would be American Home Mortgage, trading at over $42 per share and whose stock value went to 34 cents in one day after they ceased operations and closed all of their offices nationwide. They were one of the leading mortgage lenders at the time, not in subprime and in business for over 10 years as a real estate investment trust (RIET). There are many more examples of this in the over 200 mortgage companies that ceased operations since the end of 2006. This loss of equity has yet to be calculated into this crisis.

Richard: The banks are not forthcoming with any detailed information on their true positions, making it difficult for anyone to assess what the future really holds. Uncertainty is holding the financial and real estate markets in a huge vacuum, where it is difficult to function normally.

Larry: So true. Banks are not forthcoming and are hiding not only from the public and their depositors but to their stockholders as well. The uncertainty is not only making it difficult for us to “function normally” but making it difficult to function, period. This will only cause a prolonged resolution to this problem. Until we admit to it, how can we begin to resolve it?

Richard: So let’s see if we can get a clearer picture of the players, and the mistakes made by some of the most powerful institutions in America. How did the banks begin purchasing huge amounts of high-risk mortgage debt and bonds that most investors and analysts thought the firms were selling to their customers?

Larry: Here, Mr. Whitworth raises one of the most relevant questions.

Richard: Instruments of Doom: First on the list of instruments involved; the collateralized debt obligation, or CDO, a type of investment vehicle that buys and sell Bonds. Wall Street banks typically do not actually operate CDOs; instead, they create CDOs for their clients, take a fee, and then move on.

Larry: CDO stands for collateralized debt obligation, a security created for sale by investment houses. These CDOs were typically secured with mortgages on American real estate, which has always been considered to be one of the safest investments in the world. So, did Wall Street have a very beneficial, economic, self enriching motive to create and sell these?

Richard: This is the main point of departure and the critical mistake made by the Wall Street banks–greed and fear set in, and they began to change their normal mode of operation–they became huge investors in the funds they generated. A very risky move — more on this as we move ahead.

Larry: Probably more greed then fear. Let’s hear more.

Richard: Here’s how a typical CDO backed by subprime mortgages works. The game begins when a client comes to a Wall Street bank and requests financing for a CDO that will hold, for example, $2 billion worth of bonds backed by subprime mortgages. The banks also created a variety of bonds backed by the interest and principal payments the CDO collects. Wait — there’s more… the bankers also create tranches of securities with different interest rates and levels of risk.

Larry: OK now, let’s see if we can understand this. The “game,” and it was a game even Las Vegas could not duplicate, had a structure most could not understand or comprehend. The client went to Wall Street and wanted to finance a CDO, a financial instrument, which was comprised of bonds, another financial instrument, which was backed by mortgages, yet another financial instrument that had first or second lien positions on real estate. Whew! Do you get it? Let me see if I can explain it. Credit for credit backed by credit backed by more credit backed by an asset that was financed for more than its value. In other words, at the end of this pyramid there was very little compared to what was pledged all the way up the line, all paying interest to someone that owned any part of it. Down at the bottom of this pyramid were the homeowners who were paying some pretty high interest on property they could not afford, but they were sold on the fact that homeownership was a tradable commodity, not a necessity of life called shelter — a place to live and raise your children, retire, and pass on to heirs. The game, as Mr. Whitworth calls it, is the game of Monopoly. We all played it, not with real money or real property. The only winners in the game of Monopoly were Milton Bradley, the creators of the game. Who were the only winners of the real life version of Monopoly?

Richard: The banks then peddle their wares to hedge funds, pension funds, money market funds and other investors. The appeal to investors is simple: The CDOs pay better rates than corporate issues with identical credit ratings–which brings me to the rating agencies.

Larry: Hedge funds would borrow up to 20 times the money invested. Barclay Bank of England is suing Bear Stearns for their $400 million investment into one of their hedge funds. This is yet another example of borrowed funds used to loan to other borrowers who would loan to other borrowers. Getting confusing yet or are we beginning to see a clearer picture?

Richard: Here’s another genius move made by the banks–many of those instruments offered, in essence, guaranteed returns. The refund policies, technically known as “liquidity puts,” were crucial. Those guarantees allowed the credit rating agencies to bless the investments with AAA ratings. An example of the idiocy of this particular move: The two now defunct Bear Sterns hedge funds relied on guarantees from Citi to raise $10 billion from money-market investors for three CDOs, well derrr!!

Larry: “Guaranteed returns?” Guaranteed by what? Do I need to tell you that the only two things guaranteed in life are death and taxes, and I’m not too sure about taxes when it comes to the top 5 percent. Now, let’s look at the rating agencies — Fitch, Moody’s, and others. Oh, if they rate something good, then it must be good, right? Were they part of this, and are they complicit in some of this fraud? For the past few months, they have been downgrading to negative ratings almost everything they gave AAA rating to. Didn’t they know how all of this was structured? If they are so called financial experts and when “they speak, everybody listens,” then they knew and understood much better then you and I about the house of cards they were rating.

Richard: The rating agencies may be the main culprit in the game. They were extremely lax in their initial ratings on subprime mortgages — none of those offerings ever deserved an AAA rating. Never mind that now with the cat out of the bag, they are still slow to downgrade subprime paper and securitizations.

Larry: They were not lax they were negligent in their fiduciary responsibility knowing the extent to which their evaluations are relied upon as accurate and factual. We believe they do the research and let us know what they find. What research did they perform and what do they make from all of this?

Richard: This should not be a surprise to anyone, because the ratings agencies also prosper from the rising tide of credit issuances. Moody’s, Fitch, and S&P literally ignored the erosion in the credit quality of the offerings and basically elected to give the issuers the ratings they asked for. Amazing that issues that were rated AAA just months ago are now being re-written at junk bond status. Sadly, the rating agencies are great at passing the buck when things go wrong, and they will probably sneak by any SEC scrutiny.

Larry: Well public, let’s not let them get away with this. Everyone needs to bear the true consequences of their actions. They should be held accountable.

Richard: Back to the Banks…as the fees kept rising through the good times, the banks got greedy; they began buying big chunks of AAA paper themselves and loading the debt onto their own books. Even when the markets began to sour–foreclosures, home prices dropping, etc., the banks continued on their buying binge. All of a sudden, they found that they needed to feed those CDOs in order to keep the game alive. That was the kiss of death for Merrill’s CEO, Stanley O’Neal, and for Citi’s CEO, Charles Prince.

Larry: Well, I’m not so sure that it was the “kiss of death” for the CEOs. How much did they get in severance? Did I hear over $150 million for one? But even more important is that they were rolling the same dollar back into their balance sheets over and over again. They bought the paper they sold, got the deposits from all of the cash-out refinances, created more loans, sold more loans, helped create more CDOs, bought the CDOs, and so on in a never-ending circle–no real dollars in this game, all paper, all credit, all bookkeeping entries from money that was borrowed from the borrowers who borrowed from other borrowers who borrowed…

This could be the greatest Ponzi scheme in the history of the world, and the perpetrators have the nerve to blame it all on mortgage brokers.

Richard: Wall Street banks are now holding tens of billions of dollars in risky securities on their own books. At this point in the game, it is difficult to assign an actual value to them. The banks are changing their estimates of the value of these assets as frequently as they change their underwear.

Larry: They are holding paper. If these companies are public and under the regulation of the SEC, then the SEC should call for a major independent accounting that the SEC would oversee. Let’s account for what is actually there, like real cash values. The more I read and write, the more I want to play this game of Monopoly. Can I pay? Somewhere even if everyone loses, the house wins. My game, my house, I win!

Richard: The SEC is on the attack, requesting real numbers and information from Merrill and other banks on what they knew at the time they were telling investors and the public that all was wonderful and they were in control of the situation.

Larry: My message to the SEC is this: Don’t request, demand! You are our regulatory agency that we have charged with the responsibility of keeping things honest. Are you still on our side?

Richard: Bottom line, the subprime story is far from over… it will likely take a few years for the whole thing to shake out.

Larry: No this story is nowhere near being over. The problem will take more years to discover and many more years to fix. This cannot be done overnight, cannot be done by blaming and destroying an industry (mortgage brokers), and is so international in scope that the whole world needs to come together on this one in order for it to be fixed.

From Richard’s Office: Sadly, this is Richard Whitworth’s last economic report that you’ll receive. He was in a fatal motorcycle accident 12-8-07. Since he nearly finished this report the night before, we needed to share it with you. Thank-you for your support.

Larry: I wish to express my sympathy to the family, friends, and business associates of Richard Whitworth. I am sure he will be missed by all and by me as well. This one writing of his that I was privileged to have received showed me his true character as a person, a business man, and an American.

God bless you Mr. Whitworth. May you rest in eternal peace.

Larry Rubinoff

[Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc. Larry’s commentary is his and his alone and does not necessarily reflect the views or opinions of the management of FlippingFrenzy.com. You can read Larry’s thoughts here on FlippingFrenzy.com most Saturdays or Sundays.]

There has been a lot of talk, news and rumors lately about the state of the mortgage industry. Some of what is being said is effectively “bashing” the industry and in particular “mortgage brokers” in the subprime market. I think it is time to look at the realities and ramifications of what is happening.

To understand the subprime industry, which I prefer to refer to as non-conforming loans, we first need to examine the difference between conforming and non-conforming loans:

• Conforming loans adhere to guidelines set by Fannie Mae and Freddie Mac. They typically require a larger down payment and are offered to borrowers who have good credit histories, solid income, reasonable debt-to-income ratios, and a couple months worth of payments in savings.
• Non-conforming loans do not adhere to the guidelines set by Fannie Mae and Freddie Mac. They are designed to allow borrowers who are at a greater risk of defaulting on a loan to borrow money to purchase a home. Borrowers who take out non-conforming loans typically pay a premium in the form of increased interest and points.

The federal government is somewhat responsible for creating a market for non-conforming loans. Its purpose was to make it more affordable for lower income families to purchase homes. After all, homeownership is one of the primary forces behind a healthy economy: The government spurred the creation of the non-conforming mortgage loan market through the following two actions:

• Subprime was actually created back when the GI Bill of Rights was created, which resulted in the VA loan at 100% financing. While VA loans are not considered subprime, any time you have 100% financing, it falls outside of the limits of conforming loans.
• Next came FHA in the 1950’s—an effort by the government to help low-income and not so credit worthy borrowers who had little or no cash available to buy homes. It stretched the debt-to-income ratios, lowered cash-down requirements, allowed less then perfect credit, and eased qualifying requirements.

The dreaded “Neg Am” loan (negative amortization loan) was created by FHA back in the early 1980’s when we had double-digit interest rates. They created the 7-1/2 percent Neg Am adjustable with no caps.

Around 1992, Congress asked the banks to come up with alternative mortgage programs to allow once again more low income people and minorities to own homes. They did so by offering incentives to the banks as well as some penalties. The banks responded, but they could not finance the programs through their banking operations, so they set up subsidiary companies to offer these loans. One of the early subprime lenders was Ford Motor Credit along with Chase and others. In no time at all, I witnessed literally hundreds of new companies/lenders emerge from banks around the country that I had never even heard of.

At that time, these programs were truly subprime; some had interest rates up to 16 percent for those with truly bad credit. These loans were called B/C loans. You might think that B/C is an acronym for Bad Credit, but B/C really referred to the credit grade. Conforming loans generally carry a rating of “A,” while non-conforming loans can carry ratings of B, C or D. These non-conforming loans were attractive to investors who could purchase high-risk investments that promised a high rate of return, kind of like junk bonds. Many private mortgage companies began to form to meet the increased demands for securities backed by non-conforming mortgages.

The large banks got in on the action, too. Bear Sterns, for example, markets non-conforming loans under its name as well as subsidiaries such as EMC. Merrill Lynch markets under its name as well as other subsidiaries like First Franklin, their latest acquisition and one of the largest subprime lenders in the country. Countrywide, a major California bank, and HSBC, the world’s third largest bank, market through subsidiaries. Lehman Brothers, JP Morgan Chase, Wachovia, GMAC and a host of other large banks are also involved in the subprime market.

In the midst of the current mortgage meltdown, many of these banks and the mortgage brokers and loan officers who have sold their products are being labeled as “loan sharks.” Don’t be misled. The people involved in the mortgage industry did not conspire to rip off homeowners. The mortgage industry was simply trying to supply people with mortgage loans to meet their needs and supply investors with mortgage-backed securities that were in high demand. The government was trying to encourage homeownership, consumers needed money to purchase homes, and lenders and investors wanted to profit. It was supposed to be good for everyone.

Unfortunately, the media is generating a lot of negative press about the mortgage industry and everyone involved in it. Mortgage brokers and loan officers have been cast as the villains, selling products that placed consumers in jeopardy simply to score some quick cash. The truth is that everyone involved is responsible for what happened, from the consumer on up to the federal government, and now we are all paying the price. Make no mistake, lenders, brokers, loan officers, and everyone else who earns a living on mortgage loans are feeling the pain.

Sure, we have had real abuses in our industry and some real incompetence as the industry grew too fast too quickly, but that occurs in every industry. Every industry, including real estate, has a few bad apples that cast a shadow on the entire group. What I am saying is that the current mortgage meltdown was not caused by a massive conspiracy of mortgage brokers, loan officers or even some lenders. It was caused by a system failure. Failed economic policy capitalized on by our largest financial institutions (Fannie Mae and Freddie Mac included) to increase profits, stock values, salaries, bonuses and commissions. In one word, GREED.

Is the country in a real foreclosure mess? Yes, there are more foreclosures now and will be even more in the future. Is this as disastrous as published? Not necessarily so. Reports are being released that 12% of the market is in this sub prime trouble and that many people are in jeopardy of losing their homes. Is this altogether true? Foreclosures have been happening as far back as the first loan was ever made with the property as collateral. There have always been thousands upon thousands of foreclosures in this country. Even those good credit people that got all those low interest rate conforming bank loans lost homes in foreclosure. The press would have you think that only the sub prime borrowers are losing their homes due to unscrupulous mortgage brokers.

The market ran wild in the last few years and we all made money–the real estate agent, the seller, the contractor, the lumber mills, the appliance manufacturers, the plumbers and plumbing supply industry, the lawn guy, and let’s not forget all of the municipalities whose tax bases have doubled, tripled, and more.

Yes, we are all in for a correction. This happens in the stock markets around the world, but you never see them close down. It happens in the retail markets, but retailing never ends. And now it is happening in our industry but real estate and mortgages will never die and disappear.

We are in a correction period–one that will overall be good for each of us and for our economy. We have lost most of the real estate investors/speculators out there, but many of them never should have been in the game to begin with. In fact, I think most of these investors are the ones that account for the increase in foreclosures. Yet, we still have non-conforming loans, and I do not expect them to go away. 100 percent financing, stated income, high debt to income ratio programs, no doc programs, no money down programs, and other non-conforming mortgage loan products are alive and well. They will simply carry more restrictions going forward.

Here is a list of lenders that have gone out of business or eliminated divisions or departments.

(Don’t misunderstand, not all of the lenders above closed down due to fraud or mismanagement. Many were good viable companies but became victims of the “meltdown” as well. This list is from www.lenderimplode.com)

All of these programs are good if used correctly in the right situation for the right borrower with their full understanding and education. These programs all fill a need, even the 2/28 that is now being touted as the worst mortgage program in the world. It is a second chance mortgage, a temporary mortgage, a starter mortgage, a mortgage that the borrower/buyer should know is only good for them for the 2 years of fixed interest, but, if they abuse their credit, make late mortgage payments, or overspend in other areas during these two years, then the blame is theirs. For those whose jobs are lost or who have major economic and personal upheaval in their lives beyond their control, they would have the same problem with any mortgage. Steps are now being taken by Congress and even by the lenders themselves to help out in these situations. You will see new lower rate financing available, no-interest soft seconds available and more.

There is still a market, people are still buying and selling and refinancing. New buyers are being created each day by virtue of our kids reaching home buying age and, for here in Florida, we are still getting 1000 new people a day moving here, and the baby boomer migration has not even started yet.

Are we (mortgage industry professionals) the bad guys? No we are not. We fueled the economy with the tools made available to us. Without us, most of the sales would not have occurred, and real estate agents throughout the country would not have made money. Whether we work for a bank, a private mortgage broker company, or private lender are here to continue to offer the products made available to us. This, in turn, makes buyers available to the real estate industry and keeps the “circle of life” going in our industry.

We will see some changes in the industry to prevent the mistakes that have occurred over the past few years, but otherwise, business will go on as usual. Real estate in the United States has been and will continue to be one of the best and safest long-term investments in the world.

* * * * * * * * * * * * *
Get Engaged: To leave a comment for Larry Rubinoff or to comment on this entry, please click on the “Comments” link below.
* * * * * * * * * * * * *

Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc.

When you apply for a loan, who takes your application? What role does that person play? Who does the person represent–you or the lender? What’s the difference between a mortgage broker, a loan officer, a loan originator, and a lender? For many consumers, the answers to these questions are a complete mystery.

First, let’s examine the title and the role that each of the various people play in providing mortgage loans:

• Lender: The lender is the person or institution that ultimately provides the money used to purchase the property. In the past, this was typically a bank, credit union, or savings and loan (S&L) that loaned out money that was deposited by its customers. Now, the term “lender” can also be applied to investors who purchase securities backed by mortgages.
• Mortgage broker: A mortgage broker is a person who acts as a middleman between the lender and the borrower. The mortgage broker typically has a selection of mortgages from a variety of lenders to offer to clients. The primary job of the mortgage broker is to match the borrower to a lender whose guidelines fit the borrower’s situation. The broker takes your loan application, gathers essential documents (such as tax returns and paycheck stubs), structures the loan, and then presents it to a lender. If the borrower accepts the terms of the loan as offered by the lender, the borrower is then dealing through the mortgage broker with the lender. The mortgage broker is paid on commission that can come either from the borrower, the lender or both, but the broker is expected to help borrowers secure mortgage loans that best meet their needs and are affordable. Mortgage brokers are also called loan officers, although loan officers are not always brokers.
• Loan officer: A loan officer takes your loan application, gathers essential documents (such as tax returns and paycheck stubs), structures the loan, and then presents it to the lender that they work for. A loan officer is “usually” an employee of a bank, savings and loan, or other lending institution. The loan officer is also paid a commission that can come from either the borrower, their employer/lender, or both, the same as the mortgage broker.
• Loan originator: Anyone who takes your application and advises you on your mortgage loan is a loan originator, even if the institution for which the person works allows them to “broker” the loan to another lender and even if the person is a licensed mortgage broker. The term “loan originator” is a more generic term for mortgage broker and loan officer.

Note: Mortgage brokers, loan officers, loan originators, and all salespeople, for that matter, who achieve long-term success are dedicated to serving the needs of their clients. The people who cause problems are the ones who typically enter the industry for short-term gain.

Although loan originators may, in some circumstances, (this can vary by state) have a fiduciary responsibility to the lenders who supply the products (mortgages) they sell, to be successful, they need to provide their clients (the borrowers) with affordable mortgages that best meet their needs and qualifications. When they achieve this goal, everyone wins–the lender, the borrower, and the loan originator.

Borrowers often become confused, because well-intentioned “experts” provide them with the wrong advice. These “experts” often offer misleading suggestions such as the following:

• “Go to the loan officer not to the broker”
• “The broker can serve you better then the loan officer”
• “Go to your bank not the mortgage broker”

The fact is that titles matter very little. A mortgage broker who has access to a diversity of mortgage loans may be able to give you a much better deal than your local bank is offering. A highly qualified loan officer may be more knowledgeable than a particular broker. As a consumer, you need to pick the individual whom you trust and with whom you feel most comfortable. Ask friends, family members, and colleagues for recommendations. Interview at least three loan originators and check their references. Don’t worry so much about the person’s title.

Too often in our society we rely on a person’s title alone to indicate competence. This is not a useful approach with all professionals whose services you seek.

You also have the right to seek legal advice during the entire process and be represented by an attorney (whose competence you have verified, as well). You need not only take the word of the lender, loan officer, loan originator or mortgage broker. Caveat emptor! (Buyer beware!)

* * * * * * * * * * * * *
To leave a comment for the author: Please click on the “Comments” link below to leave a comment for the author or to share your opinion.
* * * * * * * * * * * * *

* * * * * * * * * * * * *
Editor’s Note: The following commentary is provided by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc. Mr. Rubinoff’s opinions are his and his alone and do not necessarily reflect the views of Flipping Frenzy’s proprietor or editors.
* * * * * * * * * * * * *

As we look forward to a new year and reflect back on the one just past, we must ask ourselves, “What ever happened to our American way of life?”

The email headline for Originator Times on the December 26, read: “Mass Layoffs, Rampant Fraud, and More - The Top Stories of 2007.” Indeed, a very frightening headline.

The “Mass Layoffs” referred to put many innocent, hard working people out of work. (Read my November 21st guest blog entry, “Homeowners Aren’t the Only Ones Hurt by the Mortgage Meltdown” here on Flipping Frenzy). These are just some of the casualties of this crisis. This fraud for greed is what has hurt so many honest, hard working Americans.

“Rampant Fraud” as the Originator Times headline reads, oozed from every level of our society–from the naive to the highly educated to knowledgeable corporate executives. The extent of the fraud committed has no equal in our history. It was truly “Greed Gone Wild,” an epic we will be watching for years to come.

I believe we are winning the war on fraud. I still believe that the majority of us in the real estate industry are good, hard working, honest people. But for those relative few who have harmed the whole, I advocate the best way to fight this is to make the guilty pay stiff penalties and then publicize it, as the Originator Times does in the following article:

ABN AMRO To Pay $41 Million For HUD Fraud

Office of the Comptroller of the Currency announced a more than $41 mil