Lenders too slow to modify mortgages

Who is going to take the loss?

That is the overriding question now facing the mortgage industry, according to Dylan Kramer, president and CEO of America's Mortgage Choice, a medium-sized mortgage broker based in Oakbrook Terrace.

Until that question is answered, Kramer believes it will be difficult for the housing and mortgage industries to move forward.

"Things are not going to get better until someone books the losses we have experienced," he said.

"Is it going to be the banks that made risky loans? Is it going to be the consumers who took out loans they couldn't afford to repay? Or is it going to be the government. and hence the taxpayers, who absorb those losses?" Kramer asked.

For the past two years, lenders have been pinning their hopes on the market turning around so they don't have to book those losses.

"So they have delayed making loan modifications and have put off the day of reckoning," Kramer said.

"I think that the fair thing would be for banks and consumers to work it out between themselves and leave the taxpayers out of it."

What is the current state of the mortgage market?

"I think that we are in a little better shape than we were in late last year. The drop in interest rates that we have seen over the last three months has helped a lot of people to refinance to cut their payments or to shorten the length of their loan."

Is it still difficult for a qualified buyer to get a mortgage?

Kramer acknowledged that the process to get a mortgage is more complex, even if you are a qualified buyer.

"We have been seeing a tremendous volume in refinancings but even those loans are being gone through with a fine tooth comb."

The lenders, he said, are asking questions about income, appraisals and even the stability of condominium associations, if that is a factor.

"The problem is that for years we worked under the originate-to-distribute model, which means we generated loans to then have them packaged and sold. That model is severely impaired right now because investors don't trust the loans that are being generated."

So the model for lenders right now is a originate-to-hold model in which they look at the loans as if they are going to have to keep the loan up to 30 years and they want to make absolutely sure that the borrower will be able to repay them.

"This is actually the healthier model, but it isn't easy."

What do you suggest someone attempting to get a mortgage do to be more attractive to a lender?

Kramer suggested that anyone who has less than 20 percent as a down payment explore FHA financing because it can offer cheaper monthly payments than private mortgage insurance-backed financing.

In addition, the FHA has added a streamlined refinancing program for its mortgage holders. If rates drop, as long as the borrower faithfully made payments for the preceding 12 months, he can get streamlined refinancing with no appraisal of the property required.

Having enhanced cash reserves in case of a job loss or other financial problem is also helpful.

What changes have been made in mortgage lending procedures to prevent future mortgage difficulties?

The fact that lenders are looking at underwriting loans as if they are going to have to hold them for the term of the loan is a good thing for the market, Kramer said.

Lenders are also looking at appraisals with an eye on the future. Instead of just looking at recent sales of similar homes in a given area, they are looking at new listings to see if the area is experiencing dropping property values.

"They are now looking at where the market is going, not just where it has been, because they want to know if property values are dropping.

"People are also taking advantage of the drop in interest rates to either lower their monthly payments or to lower their total indebtedness by keeping the same monthly payment, but shaving years off the life of the loan."

The most popular loan right now is a 20-year fixed rate loan, he added.

"And home equity loans have slowed to a trickle. Three or four years ago we wrote lots of them and had about nine lenders who wanted to purchase them. Today no one wants to purchase home equity loans, and the few companies that will do them will not allow any third party origination. We have to send clients directly to them."

How will President Obama's mortgage and stimulus packages change the overall mortgage situation?

"In the long run, the stimulus package will probably help, but it won't be this summer."

As for Obama's housing package, Kramer said it is a "good start" but doesn't go far enough. The $8,000 tax credit on the purchase of a new or existing home is much more valuable than a tax deduction would be because with the credit, the purchaser will figure out his or her tax liability and then subtract $8,000 off the top.

"But you have to have willing buyers for that to work and people are still fearful that the market will experience further drops and they will end up upside down on their mortgages. So they are holding back."

And there is little pent-up, first-time buyer demand, Kramer said.

"The lending guidelines were so loose during 2005, 2006 and early 2007 that they got buyers into the market a couple of years earlier than they normally would have. They accelerated the present at the expense of the future and those are the people who are now struggling with upside down mortgages.

"And those people are probably friends with some renters who might otherwise be looking to buy about now. But hearing horror stories from their friends isn't convincing them to buy, that's for certain."

Do you have any suggestions for the politicians?

"We need a plan that allows people who played by the rules and bought houses they could afford to benefit from the stimulus and housing packages. Those people are justifiably angry to see irresponsible people get all the help."

He suggests the following: Encourage banks to refinance the loans of people who have faithfully paid their last 12 mortgages payments down to 4 percent interest with no appraisal necessary.

The government should then offer tax credits to the banks that do these refinancings of good loans which they could use against the losses they incur by writing down struggling loans to an interest rate of 4.5 percent.

That way the people who have played by the rules get a benefit, too, in the form of a better interest rate than those who did play by the rules, Kramer said.

What do you see in the future of the mortgage industry?

"The economy will get slower before it gets better. I think that we will see more interest rate and housing price drops before things start to bounce back in early 2010."

Once someone takes the necessary losses onto their books, the market will start to see the bottom and slowly rebound, he said.