Financing Houses

Housing's New World of Cautious Lending

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http://www.fool.com/investing/general/2007/06/11/housings-new-world-of-cautious-lending.aspx

David Lee Smith
June 11, 2007

About 60 days ago, I mentioned to my Foolish friends that my wife and I had put our Florida home on the market in favor of relocating to the Carolinas. At the time, I noted that the Southwestern part of the Sunshine State, where we were trying to attract a buyer, was essentially the epicenter of U.S. housing weakness. As a result, we expected a long siege among the ranks of those with "for sale" signs adorning their front yards.

But lo and behold, we received a contract on our home the day it hit the market. We're therefore in the latter stages of arranging for a mortgage in our new location. Our loan-to-value ratio will be less than 40%, meaning that we won't encroach upon the now famous -- or perhaps infamous -- world of subprime loans. Yet despite having excellent credit, we're being confronted with more mortgage-granting hurdles than has been the case with any of our prior homes, most of which carried 80% or higher mortgages.

  Toll Brothers (NYSE: TOL) CEO Bob Toll was spot-on last month when he observed that subprime woes are affecting the entire housing "food chain." Indeed, I believe that, somewhat quietly, there has been a material strengthening in U.S. mortgage-lending standards for all borrowers. And while that strengthening clearly is justified, it just as clearly will slow the recovery of the housing sector.

That takeaway also would seem logical from a Monday Wall Street Journal article about Sheila Bair, the aggressive and still relatively new chairperson of what the Journal called "the once-sleepy Federal Deposit Insurance Corp.," the entity that oversees federally regulated banks. Apparently, Bair urged Congress earlier this year to hold Wall Street investors and mortgage service companies accountable for the expanding subprime quagmire. Such blame placement makes those in the mortgage "food chain" even more circumspect than they have been.

It also seems that housing's lift-off is anything but imminent. Last week, Meritage Homes (NYSE: MTH) joined other builders such as Pulte (NYSE: PHM), Hovnanian (NYSE: HOV), and Toll in declaring that the future had become too murky to permit the issuance of financial guidance for this year. At the same time, an economist from the typically rose-colored-glasses-adorned National Association of Realtors noted during the week that home sales "probably will fluctuate in a narrow range in the short run, but gradually trend upward." That, my Foolish friends, is tantamount to doom and gloom for the Realtors' group.

I've stated that I believe Fools can make money by very slowly building positions in the better builders and exercising considerable investor patience. I continue to believe that approach will work, but with each passing week, the words "slowly" and "patience" gain additional currency.

Building on related Foolishness:

•     The Housing Slump's Third Phase  
•     Housing Schizophrenia  
•     Haunting Results at Home Depot  

  Meritage Homes is a   Stock Advisor   selection. Find out why with a free 30-day trial.

  Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your questions or comments. The Motley Fool does have a disclosure policy.

Home Loan Borrowers Doomed To Fail – Mortgage Industry Professionals

 Date: Friday, September 29, 2006 @ 07:30 AM EDT
Topic: Credit and Finance

       

Seattle , WA (08/30/2006) Home Loan Borrowers Doomed To Fail – Mortgage Industry Professionals “Loan Officers” Not Required Formal Training or Licensing: Federal & State Governments At Fault

“Why is it that a teenage Burger King employee receives more formal training than a loan officer in this country?” demands Consumer Advocate and International Mortgage Reduction Expert Harj Gill.

Most borrowers would be shocked to learn that the person who financed their mortgage did not undergo any formal training, examination, or certification.

In fact, only 6 States require that a loan officer pass a basic test to be certified. Another 15 only require training of between 10 to 14 hours, and the rest have absolutely no training or certification requirements at all.

These are frightening statistics when you consider that the mortgage industry generated a total of $1.8 trillion worth of activity in 2004, with 68% of home loans originated by mortgage brokers who these loan officers work for.

With record numbers of borrowers buying and refinancing their mortgages, the last few years have seen mortgage companies turn into nothing more than assembly lines.

Loan officers, who’s schooling consists of “in-house” on-the-job-training, churned out loan after loan, most of them exotic (i.e., ARMs, Piggyback loans, and Pay-Option-ARMs), without knowing or considering the long term ramifications for their clients.

Mortgage brokers holding the license were only interested in ensuring these loans complied with regulated guidelines.

“Unfortunately, just because a loan fits compliance guidelines doesn’t mean it’s the right one for the borrower,” points out Consumer Advocate Gill.

This lack of product knowledge has seen almost 50% of borrowers financed into exotic mortgages (FDIC) and who now suffer the consequences. For example, according to Standard & Poor's, first-lien mortgages connected with piggyback loans have a 43% greater chance of going into default than stand-alone first mortgages of comparable size.

Right now millions of borrowers with ARMs are about to throw away thousands of dollars by refinancing their mortgages as over $1.3 trillion worth of these loans are readjusting.

“Insanity is an understatement,” says Consumer Advocate Gill, “if these borrowers go back to the unqualified, untrained, and unknowledgeable loan officers who failed to give them proper guidance in the first place.”

“Doctors are required to pass an exam to be certified. Realtors are required to pass an exam to be certified. Even your local manicurist has to pass an exam to be certified.”

“Why is it that when it comes to the single most expensive investment of your life, there are no such compliance measures in place to protect consumers?” he demands.

“I represent over 60 million homeowners that have a mortgage and millions of these families are facing default or foreclosure because of these lax standards.”

Consumer Advocate Gill contends the mortgage industry is happy with the status quo because they have profited to the tune of the billions of dollars from it.

“That’s why we have to force changes at the legislative level that will put into effect laws requiring proper training and certification for loan officers,” he insists.

Mr. Gill has already started a grassroots consumer movement and is urging homeowners to sign his petition at the Consumer Information Center that he can present to Federal and State legislators.

He says, unless we put pressure on lawmakers, the institutional abuse is going to continue and families will continue to suffer.

Meanwhile, he has created his own set of Consumer Protection Criteria for professionals that want to join his list of Approved Loan Officers and Real Estate Agents. These criteria not only require absolute disclosure about fees and commissions, but also require loan officers to explain the ramifications of different loan products to their clients.

Consumer Advocate Gill is inviting all lenders, loan officers, mortgage brokers, and realtors that share his platform of Educating, Empowering and Protecting consumers to join his grassroots movement.

“I’m already getting business from people who saw my name being listed as an Approved Loan Officer on the Consumer Information Center ,” said David Young, a loan officer from Cleveland Street Mortgage, Inc.

SOURCE American Mortgage Educators, Inc. 08/23/2006 /CONTACT: American Mortgage Educators, Inc., 800-605-4718/ CO: American Mortgage Educators, Inc.