ussmex

Blame Game Redux: 8 More Things to Blame for This Crisis

A comment from the trenches...
We all understand that residential mortgage underwriters relaxed their standards, making it easier for people to speculate and leverage to the hilt. I work in the industry and can assure you that, as you would expect, that particular trend has reversed itself.

I recommend two additional changes that, along with more stringent underwriting guidelines, would help prevent the type of froth we've seen in the last few years:

1) As much as possible, remove the human element from residential appraising. 90% of the data needed to determine the market value of a home is online, or in county records, or contained in existing appraisals. Outfitted with the right software, a computer could do 90% of an appraiser's job. The extent of human involvement, at least in non-rural areas, should be limited to snapping interior and exterior photos to prove that the home is whole, properly maintained, and not a risk.

A legitimization of automated appraising would not only improve a mortgage customer's experience, but it would significantly reduce the gaming of the system by corrupt appraisers and loan officers. With people involved there are as many potential appraised values for a given home as there are personalities and levels of ethics. To this day loan officers are still looking for appraisers who know how to "push value" and get away with it. Lenders increasingly use automated valuations to check an appraiser's work. We need to advance the automation to the point where it's providing the bulk of the analysis.

2) Reduce and simplify the closing documents a mortgage customer is required to sign. Most refinance signings happen in the evening at the customer's home. If you had experienced a taxing day at work and a mobile notary arrived at your door with 50-100 documents for you to sign, what are the chances that you miss one of the crucial details in the loan's terms? For example, what if your loan officer had repeatedly assured you that the loan featured no penalty for pre-payment. What if the loan Note said the same thing, but buried in the stack of documents was an Addendum to the Note that established a 3-year pre-payment penalty? What are the chances that you would notice it? I can tell you from experience that the current system allows unscrupulous loan officers to manipulate borrowers. The three-day right of rescission on all refinance loans is supposed to treat this problem, but it's not working. Most of the homeowners that called me in the last few years to refinance out of pay-option ARM loans (negative amortization) didn't truly understand their loan and weren't aware of their pre-payment penalty (usually six-months of interest or up to 3% of the unpaid balance). Many of them had been told the loan was a 30 year fixed and had been enticed out of much more stable loans with the teaser payment. At one point I was receiving at least one of these types of calls on every working day.

I recommend eliminating the signing requirement on all closing documents aside from the Note, the Deed, the estimated settlement statement, and a one or two page summary document that states, in clear, simple sentences, the terms of the loan and how it functions. I know I'm leaving out a few other key docs, but basically everything else should be put to the side for review at the borrower's leisure during the rescission period.

George Soros submitted some intriguing commentary in the Wall Street Journal suggesting that we fashion our mortgage market like the one in Denmark. Perhaps one of the "maverick" presidential candidates would like to tackle that. From what I remember George W was friends with the guy who ran Ameriquest, arguably the most crooked large-scale home lending operation the country has ever seen. I don't ol' W will have much to offer as a fix.