From the Front Lines: A mortgage banker’s view
Declining property values and how they will affect your practice. Also, what you can do about minimizing that effect.
It doesn’t take much research: Pick up almost any newspaper or tune in to any online chatter, and you’ll be reading about the growing mess left behind in the wake of the emergent mortgage and credit-market crises. It is my belief that we have yet to experience the bottom of the diminishing value of housing, or the effects brought on by the depth and enormity of the mortgage losses to investors, lenders, and homeowners alike.
Starting the new year , we have a mortgage panorama with approximately 80% of the existing home loans at the prime credit level, 14% at subprime credit, and six percent near prime credit (referred to as Alt-A) (2).
As reported in Reuters on December 4, 2007, loan-performance data published by Banc of America Securities detailed that during 2008, nearly $500 billion of adjustable-rate mortgages will reset in the United States. Furthermore, according to the Federal Reserve Bank-Dallas, there are four months this year alone when there will be spikes in the volume of interest-rate resets; March, June, August, and October. Each is approximated at $50 billion.
Similarly, the inventory of existing, unsold homes on the market rose from a four-month supply in 2004 to an approximate 11-month supply by the end of 2007. Likewise, the number of days on the market for home sales in general has been increasing in many areas of the country. This data points toward dismal real-estate sales and an increasing standing inventory of homes listed for sale.
Ruth Simon, in “Rising Rates to Worsen Subprime Mess,” posted on November 24, 2007 on FreeRepublic.com, notes borrower delinquency, default, and foreclosure activity are climbing monthly, with 1.44 million homes potentially entering foreclosure in 2008. Additional foreclosures increase bank REOs (real-estate-owned), which typically become listed for sale at market or lower-than-market values — the institution hoping for a quick sale to stop the financial drain experienced in a foreclosure.
On the surface, this information points toward the strong possibility of widespread declining property values during the coming year.
As an attorney, how does this affect you and your caseload?
A famous hockey player made his niche in sports by his ability to “play the puck where it’s going to be, not where it is.” Contemplate this concept as part of the financing strategy of your case.
The two major fronts I see impacting your clients, viewed as borrowers, are:
For legal professionals who see a client’s residence or real estate as a primary source of obtaining settlement funds to complete proceedings, now is the time to do some homework. It may well be prudent for each of us to consider real estate as a commodity with a fluctuating (declining for the time being) value. Convincing your client of this new reality may take some doing.
If your client’s real estate has a potential to enter the playing field of your litigation or other action, it will likely be to your benefit to consult with a mortgage-banking professional at the earliest stage of your case.
First, you will now find a majority of banking institutions require a bank appraisal to determine property value for a lender and are not allowed to use a court- or attorney-ordered appraisal. However, consider that as an attorney, in some cases, you may be able to use a bank appraisal. Would you not be wise in using or — at the very least — having knowledge of the actual bank-appraised value during your negotiation and strategy sessions?
Additionally, if lending-qualification criteria continue to tighten up, the ability of your client to access funds from his real estate may be constantly changing. You and your client need to know factual and accurately analyzed credit, income, debt, and lending-capacity information before the onset of negotiations, settlement discussions, discovery, or court proceedings.
Best yet, most prominent mortgage bankers and brokers will not charge you or your client for this service, other than appraisal fees. Still, choose wisely and investigate your mortgage professional’s experience, credentials, and reputation before enlisting assistance.
Past meets future
Before jumping too far into the future, it is important to understand the past.
Numerous loan officers joined the mortgage industry during the subprime-mortgage boom in recent years and remain untrained in basic prime-lending guidelines. Other mortgage professionals were trained and educated, some before the subprime and mortgage securitization underwriting debacle, in the basics of mortgage banking and prime lending.
Long ago and far away, as the story goes, the foundation of mortgage-lending guidelines thrived on the age-tested rule of thumb referred to as the “three Cs” and defined as credit, capacity, and collateral. By prudent application of these three simple concepts, along with an occasional dose of “common sense underwriting”, loans were both approved and denied.
I believe it is highly probable that we will all see mortgage lending reverting back to these simple concepts very quickly. Déjà vu all over again!
How much ahead of your opposition will you be, armed with reliable and credible knowledge of the ability of your client to access funds and to fulfill financial expectations, which are being negotiated for settlement purposes? Your knowledge gained may well lead to discovery of your opposition’s Achilles heel.
So where does this leave us?
It is my opinion that any cases potentially involving a client’s real estate should be researched using the services of an experienced mortgage professional to examine, at the very least, your client’s credit, capacity, and collateral. The commonly held assumption that your client has equity so money will be there is no longer valid.
As to hindsight, I have decided to let mortgage-lending wizards, with far greater prowess than mine, sort out who is to blame for past lending excesses which are now impacting the credit markets. However, I believe it is time for some preventative measures to be instituted with the view toward stabilized credit markets and availability of mortgage loans to all who qualify for and want to pursue the realization of homeownership.
Even attorneys and judges are scrutinized and their actions, or lack thereof, subject to disciplinary review. In turn, I believe the mortgage-lending field should be upgraded to a profession containing rules and best practices, communicated uniformly so that all loan originators, brokers and bankers alike, may follow the same well-illuminated path, with consequences brought to bear for disregard of same. Future mortgage professionals, both banker and mortgage brokers alike, should be aware of and held to the same standards.
Cautious use of the crystal ball
My overall predictions for the future of mortgage lending, if I were so inclined to make them, would include:
Simply stated, it is now even more compelling for you as an attorney to be armed with as much knowledge of your clients’ borrowing capacity before entering settlement or other negotiations. Save time and energy on your part by having a mortgage-lending professional obtain sufficient real-time facts about your client’s ability to fulfill any commitment involving his real property.
If that real property might be conscribed into service to provide case or settlement-funding, it is more important now than ever before that you investigate and determine the availability of necessary capital to fulfill any negotiated or adjudicated commitments.
We will all, most assuredly, be navigating through uncharted financing waters for some time. Be secure in the knowledge that you have taken all appropriate steps to include this forethought, on behalf of both your client and yourself.
Len Rossine is a mortgage banker providing consulting and lending services with Countrywide Bank. Mr. Rossine has been appointed by the NJSBA Board of Trustees as a provider of mortgage-loan services and lending benefits to members of the state bar. This article has previously appeared in New Jersey Lawyer‘s “Focus on Banking Law”, on January 28, 2008.