Why Its Different This Time........ an Ode to Mortgage Lenders and Borrowers
"Those who don't learn from history are doomed to repeat it"--George Santayana. If you are over 30 years old, this statement is more than a proverb, but rather a testament to experience. For those of us who were in the mortgage industry in 2007, we have an opportunity to ensure we learn from history.
I'm talking, of course, about the "new" age of mortgage lending, aka Non-QM, Alt A, Near Prime--it has many names- all of which attempt to stay clear of the stigma associated with the subprime debacle of 2007/2008 and beyond. This industry is comprised of folks who are creative, tenacious, and committed to growth and prosperity. The new loan programs which are quickly becoming generally available are a testament to those qualities. But I'm sure there are many folks out there scratching their heads, wondering how we could have so quickly forgotten the lessons of just 10 years ago. Well, I assure you, we haven't.
Why will this time be different, you ask? Well, for one, we now work under the most scrutinous set of laws and regulations ever enacted- even more so than Sarbanes-Oxley-called Dodd Frank. I'll spare all of you the pain and suffering of enumerating. Rather, I'd like to provide a more logical, common sense approach to why this time will be different. After all- while smart people find ways to circumvent the spirit of intended rules and regulations, truly wise people "don't outsmart their own common sense"--Lee Brice.
Bad things happen to good people. In this context, credit worthy borrowers sometimes fall on hard times. It happens, payments get missed and defaults occur. Defaulted mortgage loans are not what ignited the 2007 mortgage meltdown. Rather, the defaults in connection with the lack of legitimate collateral was the true culprit. See, we are not in the business of writing personally guaranteed loans. The 16000 documents signed at the closing table is all the proof you need these are no ordinary signature loans. However, for several years preceding 2007, that's exactly how we treated them. Too many people knew it and too many people said, "well that's someone else's problem". Borrowers who knew they borrowed more than their home was worth and amounts they could not afford to repay, loan officers who encouraged them and appraisers who justified it all- and lets not forget the fixed asset industry with the ridiculous appetite for yield. Everyone "outsmarted their own common sense"- resulting in what it did.
So, let's look at the new lending world. Credit history is just that-a look at your history. But its not always a great predictor of the future. The new programs look forward, rather than back. They look at a borrower's ability to repay (an actual law requires this as well), the stability of the employment or source of income, and most importantly, they look at the security for the loan. They really look. Why- because those taking the risk associated with making these loans now fully understand the risk is on them- the risk is not something that can be passed on with the assignment of the note and security instrument. Even borrowers- who typically are borrowing no more than 65-75% of the value of their home, realize that if they default, they stand to lose real dollars in equity in their property through a foreclosure process. How many people do you know would be willing to walk away from a 200k down payment the placed on their primary residence? There wont be any strategic walk-a-ways with those chips left on the table.
So, while I could go on and on, let me wrap up by encouraging you to embrace the new era- take a real look at the lending and borrowing opportunity these new programs provide, and most importantly- be part of the solution in ensuring why its different this time.