The bulk of this blog is donated by Barbara Roach, Principal Broker and  veteran of the Portland real estate market. In addition, to all of her personal contacts with her associates, Barbara sends out weekly e-mails in a Q&A format keeping them informed of changes in laws, procedures, market conditions, etc.

First, my thoughts:

Thank God for the veterans. They have perspective. If the mortgage brokerage and lending fields had been controlled by veterans who had worked through the cycles of the ’70s, ’80s and ’90s they may have acquired some perspective. They might have remembered there were once S&Ls and why they are gone. They may have remembered that parts of FIRREA addressed the need to have qualified appraisers who would appraise properties based on their current value rather than the expectation that current value was irrelevant because the value would shortly be much higher anyway. They would have realized that real estate prices do not always go up. That lenders who make risky loans have a greater chance of failing. That the sale of bad loans to investors will cause investors to stop buying loans, which will cause bad lenders to fail.

Veteran real estate brokers have the perspective of, ”here we go again.” They realize that prices do not usually escalate at double digit rates, and it generally takes three years to break even, after paying acquisition and sales expenses. They are aghast or bemused at articles online and in print in which certain property owners are bemoaning their fate, as they will only be able to sell their home for a $30,000 profit after owning the property for three years. Or, as in one recent article, the owner may have to drop his price to the price he paid in 2003.

They also realize that the mantra is “buy low, sell high” (not the reverse). Those homebuyers who jumped into the market in the past three years, bought high. Those who bought high without equity will either walk away from their property or be forced from their property. They will experience foreclosure unless they can get bailed out in a short sale. 

Veteran agents know the market will eventually right itself and those who buy today should realize a profit. For those not forced into a sale or purchase, the current market presents an opportunity to actually “buy low” and later “sell high.” If they sell their property for $50,000 less than they could have realized a year ago, they can probably acquire a replacement property for $50,000 less than it would have cost back then (or for even less if the seller has a real need to sell).  

So, without further ado, here is a portion of Barbara’s Q&A.

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Subject: Friday Q & A   A Market Forecast You Can Share

Q.     I have so many things “percolating” right now. If all that is brewing starts to break loose, my 2 ^nd half of the year is going to be a great improvement over the first. Is this true just for me or is this a solid sign of better things to come on the horizon for our industry in our marketplace?

A.     Of course there are segments of the population that are in trouble but they amount to less than 4% of our population in our marketplace. Not that I have a crystal ball or am smarter than the average person, but I have been in real estate since 1978 and do have some experience with changing markets and their causes. I saw this coming four to five years ago. I could not understand how in the world anyone could think prices would possibly continue to escalate at the rate it was going. The message was clear. The market would either burst or prices would outpace our clients’ ability to purchase.

As we know, most of the people caught in the foreclosure or short sales were:

flippers and investors, including some who made offers on condos while under construction in The Pearl, expecting to flip them for a profit when completed.

builders who, with an attitude of “build them and they will come,” forgot all about location, location, location and built “no curb appeal, overpriced product in horrible locations.”

land developers who overpaid for bare land and didn’t consider it would take three to five years to develop.

buyers who willingly overpaid and over extended themselves. In some cases, if one lender turned them down, they shopped until they found someone to give them a “liar’s loan.”

homeowners, enticed by solicitations in the mail telling them to refinance and spend their equity on some fun, who used their homes like ATM machines, until mortgage exceeded the home’s value.   

On the positive side, 96% of the purchasers and sellers who want the joy, pride and security of home ownership are not affected by the negatives. For them the market is great. They have plenty of inventory to select from. Greed is no longer driving prices up. They have the security of knowing if they buy a home today, planning to live there for three to five years, it will go up in value. They are still able to get a loan at relatively low interest rates. 

I heard a statistic yesterday that 33% of homeowners in our market place own their home free and clear. How can this be bad?  Economically, Oregon is still faring better than the nation as a whole and remains better off than the state’s historical lows over the last three decades. Oregon had the nation’s sixth lowest rate of delinquent loans in the first quarter of 2008 and the sixth lowest foreclosure rate, according to the Mortgage Bankers Association report released Thursday. Of Oregon’s 635,000 outstanding mortgages, about 3 percent, or about 19,000 loans, were at least 30 days past due. About 6,000 Oregon loans, or .93 percent, were in some state of foreclosure.

Compared to the first quarter of 2007, the delinquency rate is up about three-quarters of a percentage point and the foreclosure rate has more than doubled, but Oregon’s mortgage troubles are still far better than after the 1980s timber recession and the 2001 dot-com bust.

Finally, projections provided by Dr. Laurence Yun, Chief Economist and Senior Vice President for the National Association of REALTORS® are that 2009 will be a good year for real estate in the Pacific Northwest and that the Portland area should see 30% appreciation between now and 2013 (5 year forecast).

Barbara J. Roach CPM, QSC ®, Principal Broker/Branch Manager, Prudential Northwest Properties, 9600 SW Barnes Road Ste 100, Portland, Oregon 97225, Office:  503-292-9393

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This is a continuation of our series offering advice to those starting their real estate career, from brokers active in the Portland market.   

Lynn Murphy (Principal Broker, Windermere)  stresses the need to take the time to develop a list constituing a sphere of influence. The fact is the person considering entry into the career, or actually studying to complete the courses for entry, should begin preparing the list immediately and not wait until after he receives a license.   

As stated by Lynne:

“The desire to succeed means nothing without the will to prepare! 

Compiling a sphere of influence is the first step new agents must take.  This list is of contacts is your future, and your source of referrals.  You need names, telephone numbers, email addresses and mailing addresses.  Those agents unwilling to put the time and effort into developing a realistic and complete list are usually the ones who are not successful.  This list is comprised of people who know and trust you and with whom you need to be in touch in order to grow your business and succeed.  Your list should contain  more than about 100 names, so the task of compiling it should not be daunting. 

Some new agents come from other professions and have a built-in clientele, but if you are not one of them, you need to compile a list of family, friends, people you interact with on a daily basis or are involved with in other ways, such as hobbies, sports or like interests.

Marketing to your sphere, whether it is a friendly telephone call or a mailing with pertinent information about the market, will help them think of you first when it comes to real estate.”

Marlene Wellin (Vice President of Operations, Principal Broker, Coldwell Banker Mountain West Real Estate) provides the following advice.

“We tell all our agents it’s time to prospect. It’s all about activity, door knocking, mailing, holding open houses etc. 

And service.  What our agents do that some may not do so well is follow up and stay in touch with past clients.  We tell our agents to always say “Thank you for recommending me to anyone who may need my real estate services.” 

John A. Spitzer (CRB, Principal Broker –John L Scott). Like Lynne, John stresses the need to work on the shpere.

“My tip for a new agent would be to develop an Excel spreadsheet for their sphere of influence.  Their sphere of influence should include everyone they know including friends, family, church, children’s school, athletic club, doctors, associations, volunteer groups, past employment etc.  The Excel spread sheet should be set up with columns for first name, last name, address, city, state, zip code, email and phone number. From this sheet you can do mail merges for post cards, newsletters, email etc. You can also transfer an Excel spreadsheet to any contact management software an agent might purchase in the future.  After each mailing, you should follow up with a phone contact to each person on the list. If you do this along with holding open houses, floor time etc. to develop additional contacts, you will be doing more than many agents and will prosper in this market.” 

The secret is that there is no secret. There is a market. Sales and purchases will occur. Today’s market will consist of some buyers looking for deals on short sales or sales of foreclosed homes, while other buyers are looking for their dream home,  an investment property, etc. as they always have.  While sales have slowed from the level that was inflated by flippers and acceptance of hitherto unqualified buyers, the market is active. The question is, as always, price. When sellers and buyers find the comfort level for price, a sale will occur.  With financing affordable, serious buyers and serious sellers will make sales happen. 

For new licensees, another fact to consider is that there is less competition. When the market is hot, the ranks of licensees will swell; when the market cools, many leave the business, creating room and oppotunity for new licensees, who do not have to readjust to an entirely different way of marketing real estate, and who may be better able to accept the training provided for the realities of the current market.      

In the next few blogs, we’ll take a look at what some brokers in the Portland, Oregon area are advising new real estate licensees in today’s challenging real estate market.  The brokers providing advice represent the gamut of brokerages from large to small. 

Kalim Qamar, Principal Broker, owner, US MetroRealty

Realtors and real estate companies that develop proven systems will succeed in both high times and low times.  In today’s market most of us Realtors are surviving using all-time proven systems.  These systems are not new. They include regular contact with Sphere of Influence (SOI), FSBOs and Expireds. Here at US Metro Realty we provide state of the art technology savvy systems to help our agents implement the proven systems to succeed.

It is not just a myth that most agents have no people/sales skills. The days when properties were selling the day they were listed have long gone. Agents need to sharpen their sales/people skills to succeed in today’s market. Almost everyone who wanted a home in the past five years bought one, and even those who did not want, and should not have bought one, did in the hopes of turning it over for a quick profit.  Truly most of these people are now in trouble. Real estate agents with sales skills, problem-solving skills and awareness of the market will succeed.

Ned Stafford – Principal Broker, Coldwell Banker

“Dress Up, Show Up and Never Give Up” is my mantra for success. A broker must dress professionally, go to the office every day, view homes daily, know the market inside and out, and contact someone everyday in hisd/her sphere of influence and remind them this is a great time to buy. Interest rates are at historic lows and inventories are at historic highs - a perfect combination for getting an excellent buy.

And, the broker should maintain a can-do, energetic persona at ALL times.

Today we end our discussion about RESPA changes.

What sounds like a pretty good idea is being seen by many of the key players in real estate and mortgage lending businesses (i.e., Realtors, title companies, mortgage bankers and mortgage brokers and others) as flawed. Here’s the industry buzz on these changes.

1. According to Ann Schnare’s report to NAR “The Estimated Costs of HUD’s Proposed RESPA Regulations” (http://www.alta.org/respa/NAR_RESPAreport.pdf) most of any savings achieved through enhanced disclosures will be absorbed by additional costs in the loan process.

2. According to the CEO at The American Land Title Association (ALTA) http://www.alta.org/printtemplate.cfm the requirement to have the closing agent read and interpret a closing script will increase closing costs and will occur too late in the process to help consumers, the proposed GFE is too long and complicated to allow for easy comparison to the HUD-1, and the results of other reforms could enable larger entities to price smaller title companies and settlement providers out of  business, which eventually with lead to higher costs. A more complete explanation of ALTA concerns is contained in http://www.alta.org/images/PDF/08-04-14_RESPA_ListofIssues.pdf3. The National Association of Mortgage Brokers (NAMB) sees the reforms as favoring mortgage lenders at the expense of mortgage brokers, by requiring disclosures of fees for services provided by mortgage brokers but for the same services when provided by loan officers employed by the lender. For their talking points see http://capwiz.com/namb/issues/alert/?alertid=11326376  4. The Mortgage Bankers Association (MBA) on the other hand, supports revision of the GFE to explicitly disclose mortgage broker charges and complement the Board’s proposed mortgage broker fee agreement, but they too do not like the proposed GFE or the closing script. See http://www.mortgagebankers.org/files/News/InternalResource/62680_DavidKittleRESPATestimony.pdf 

Are these concerns valid or are they just the normal resistance to change, commonly expressed by people affected by change? That is for HUD to decide. Compared to the proposals in 2002, these have met with much less criticism, so it is likely that some or all may be adopted in one form or another.

 Come back next week and I’ll share some ideas you need to know … about succeeding in a down market.

This week we continue to look at proposed revisions to RESPA.  Those of you in the mortgage lending business probably have some insight into what has been proposed and have heard from your organizations about what may be good, bad and ugly about the reforms.   Many of you who are real estate agents could care less about the loan process as long as your clients’ get loans and the loans get processed. But, you may need to be aware of what is going on so you can at least understand what your loan originator friends might be mumbling about and perhaps be able to join in the mumbling. If adopted as is, these changes mean that those of you who accompany clients to closing, may have to sit and listen to the closing agent read a 45-minute closing script.   So what are the changes about? The rule proposes RESPA changes to:

• standardize the GFE form to make it easier to use for shopping among settlement service providers. See the proposed form at http://www.hud.gov/offices/hsg/sfh/res/200803/5180GFE.pdf
• have the first page of the GFE clearly summarize loan terms and total settlement charges so the form can be used to comparison shop among loan originators.
• provide more accurate estimates of costs of settlement services on the GFE.
• improve the disclosure of yield spread premiums so borrowers understand how they can affect their settlement charges.
• facilitate comparison of the GFE and the HUD–1/HUD–1A Settlement Statements. See the proposed HUD-1 at http://www.hud.gov/offices/hsg/sfh/res/200803/5180HUD1.pdf
• require a closing script be read and provided to borrowers at settlement, to assure they are aware of final loan terms and settlement costs.
• clarify HUD–1 instructions. 
• clarify HUD’s current regulations concerning discounts.
• expressly state when RESPA permits pricing mechanisms benefiting consumers, such as average cost pricing and volume-based discounts.

For an explanation of the proposed rule see http://www.realtor.org/GAPublic.nsf/files/respaqa.pdf/$FILE/respaqa.pdf

Later this week, we will finish up our look at RESPA changes by seeing what those most affected have to say. Could anyone be against informing consumers so they can understand what is happening in the biggest financial transaction they might ever make?

Well, HUD asked for comments and even granted an extension of time so it could get more comments, and those in the businesses most directly affected by the changes did, indeed, have something to say.

Once again (the last failed attempt was in 2002) HUD is proposing to reform the Real Estate Settlement Procedures Act (RESPA) in order to protect consumers from unnecessarily high settlement costs.

Over the next few days I will outline some background and impacts of HUD’s proposed regulations to reform RESPA. The proposed regulations can be accessed at http://www.alta.org/images/PDF/08-03-14_HUDProposedRESPA.pdf 

RESPA was enacted over 30 years ago to make consumers more knowledgeable about closing procedures and aware of closing costs in their residential mortgage loan transactions. But, today consumers are still not very knowledgeable and still generally not able to effectively negotiate favorable closing costs.

So here’s what HUD provides as principles behind the proposed reforms:

• Borrowers need loan terms and settlement cost information early enough so they can shop for the most suitable mortgage product and settlement services.
• Cost disclosures need to be as firm as possible to avoid surprises at settlement.
• The mortgage loan settlement process can be improved with simplification of disclosures and better information.
• If consumers are able to shop for loan services, pricing competition will increase leading to lower prices with less need for regulatory enforcement.
• Borrowers need an understandable disclosure of key final loan terms at closing.
• HUD will vigorously enforce RESPA to protect borrowers and ensure that honest settlement service providers can compete on a level playing field.

Later this week we will look at some of the specifics of the reforms.

Today, license exams are written by professionals.  The “tricks” of the past are pretty much things of the past. 

Remember the following rules? 

“When in doubt, pick the longest answer” - there will not be a longest answer. 

“Watch out for ‘must’, ‘always’, ‘never’” - these words are not used.  

“If ‘all of the above’ or ‘none of the above’ is a choice, pick it” - they won’t be choices. 

So the rule is to not look for tricks and wind up tricking yourself.  The professionals are trying to eliminate the advantage for ‘”good test takers.”  They want to know if you know enough about the subjects being tested to earn a license. 

To assure they get it right, your license exam is likely to have some (usually about five) questions that are being pre-tested.  You are told if this is the case, but you will not be told which questions are the pre-testing ones. These questions do not count in compiling your score. 

But, do not assume that because a question covers an item with which you are not familiar, that it is one of these questions. The purpose of the pre-testing questions is to see if they are valid. 

The exam writers analyze whether too high a percentage (perhaps over 95%) get the question correct, so the question does not really accomplish its purpose.  Or the persons who do well on the exam do not do well on the question, so there may be problems with the wording of the question. If the question is good, with the people scoring high on the “real” questions getting it right and a large percentage of those who do not do well on the rest of the questions, getting it wrong, one day it will be part of the exam bank that will count.  And neither you nor I will ever know when that day has come.  

One of the items covered in real estate prelicense courses is the Sherman Antitrust Act. 

While mention of the Sherman Antitrust Act might (or more probably does not) bring memories of Rockefeller and Carnegie and others who developed monoplies and trusts in order to eliminate competetion, this and other antitrust laws today are used to fight anti-competitive activites wherever they may arise, including in your local real estate marketplace. Most licensees understand that these laws prohibit brokers from talking about commissions charged clients with brokers in other firms, and prhibit licensees from suggesting to prospective clients that there is a standard commission or that those brokers who charge less than the standard commission cannot offer adequate service. 

This does not stop all brokers or their affiliates from attempting to deter other brokers from discounting their fees, by threatening to concentrate their efforts or steer buyers toward transactions for which higher commissions are available. The term “steering”, in this context, refers to action taken by a broker or agent to avoid cooperating with a particular competitor; for example, when a broker purposely fails to show his client a home listed by a discount broker even though the home matches the buyer’s stated preferences. Because listing brokers depend on cooperation from rivals, brokers may deter discounting by steering buyers away from discounters’ listings and reducing the probability that homes listed by discounting brokers will sell.

Legal? Moral? Ethical? Fattening?The Federal Trade Commission (FTC) and Department of Justice (DOJ) have responded to allegations of steering in two distinct ways, depending on whether the steering was unilateral or involved an agreement among brokers.

They have taken antitrust actions against collective activity of brokers to reduce the availability of information about properties listed by discounters.

The FTC has sued to prevent MLSs from discriminating as to the listings that are made available on the Internet.

 The DOJ has sued to prevent the National Association of Realtors from establishing rules against VOWs that limit the ability of a broker’s client to see via the Internet all the listing information formerly screened by the broker. They will continue to monitor the cooperative conduct of private associations of real estate brokers and bring enforcement actions where appropriate. They have not pursued enforcement action where steering behavior appeared to be merely the result of a single firm’s or licensee’s unilateral decision not to cooperate with a particular competitor. Therefore, despite antitrust restrictions, a licensee is free to be as cooperative or uncooperative as he wishes. However, if he does choose to be uncooperative, he will have to deal with issues relating to his fiduciary duty to a client, any duty imposed upon him by state statute or regulation to a non-client, contractual obligations arising from an employment or agency agreement, the Realtor Code of Ethics, if he is a member, and his conscience.          

As you begin your ProSchools’ real estate Prelicense course (we offer courses in Oregon, Washington, Hawaii , Colorado & Tennessee) leading to a career in real estate, keep in mind that your goal is to get into real estate and MAKE IT.  The course and the test are minor road blocks. You can easily complete the course and pass the test if you aim beyond those achievements. 

To help get focused on the career, you might venture to:

http://homebuying.about.com/od/realestatecareers/

Here you will find some good information about interviewing brokers, as well as other useful information, including sales tips.  If you click on Real Estate News at that site you will find some of the major real estate news sources.  

One of my favorites is RealtyTimes.com.  For the agent-to-be this site has a wealth of information to help get started.  At the site, under “Search Realty Times” type in “new agents” and you will find a number of articles addressed to you.  If you move your mouse to ”About Realty Times” and click on ”Our Columnists”, you can see the columnists who write articles for the site.  Explore each of the columnists to  see which have articles that are of most interest to you.  Blanche Evans and Patti Brotherton should be especially worthwhile for the starting agent. 

At http://realtytimes.com/rtnews/nlpages/20000412_realtor2.htm you can find out what a real estate agent does all day.

As a new agent-to-be, you might find the following article of considerable interest:

http://www.mortgagenewsdaily.com/11112004_Choosing_A_Real_Estate_Agent.asp

This article is addressed to potential buyers and sellers, advising when they should want the experienced agent and when they should want you - the new agent.  The points presented can be invaluable in making your presentations when you are getting started.  http://www.mortgagenewsdaily.com/ is also a very good web site for current real estate news.

http://www.inman.com/default.aspx is a great source for news relating to the real estate market as well as the industry. 

Once you obtain your license and join the National Association of Realtors, go to their website and click on “REALTOR magazine”, find “Selling” and go through the excellent courses on personal marketing, property marketing, etc.  In particular, note the heading “For rookies”.  Go through the program.  Look through their related articles, and through the field guides.  You need only one usable idea from any of these sources to become successful, and save time, money and energy.    

Below are excerpts from ”Remarks by Governor Susan Schmidt Bies At the National Credit Union Administration 2007 Risk Mitigation Summit January 11, 2007″. They help put into perspective some of the problems leading to the defaults that in turn have led to current credit crunch. 

“Nontraditional Mortgage Products
Last September [2006], the federal banking agencies, including the NCUA, issued guidance on the risks associated with nontraditional mortgage lending. Supervisors are concerned that current risk-management practices may not fully address the entire set of risks inherent in nontraditional mortgages–risks that could be heightened by current market conditions. Nontraditional mortgage loans are those that allow borrowers to defer repayment of principal and, in some cases, interest. Over the past few years, there has been a large increase in nontraditional mortgage products, including interest-only (IO) loans, for which the borrower pays no loan principal for the first few years of the loan, and payment-option adjustable-rate mortgages (option ARMs), for which the borrower has flexible payment options–and which could result in negative amortization. These types of mortgages are estimated to have accounted for about one-third of all U.S. mortgage originations in 2006, compared with less than one-tenth just a few years earlier. Nontraditional mortgage products have been available for many years; however, they have historically been offered to higher-income borrowers. More recently, nontraditional mortgages have been offered to a wider spectrum of consumers, including consumers who may be less able to afford the jump in monthly payments common in these types of mortgages and may not fully recognize their embedded risks. Subprime borrowers are more likely to experience an unmanageable payment shock during the life of the loan, meaning that they may be more likely to default on the loan.

Supervisors have also observed that lenders are increasingly combining nontraditional mortgage loans with “risk layering” practices–such as by not evaluating the borrower’s ability to meet increasing monthly payments when amortization begins or when interest rates on adjustable rate mortgages rise due to indexing or at the end of a “teaser” rate period. We are also seeing more frequent use of limited or no documentation in evaluating an applicant’s income and assets. Although some lenders may have used elements of nontraditional mortgage products successfully in the past, the recent easing of traditional underwriting controls and the sale of some types of nontraditional products to subprime borrowers may generate losses on these products greater than has been observed in the past. Additionally, information from other sources seems to indicate that more borrowers are purchasing real estate with no equity down payment by using simultaneous second liens. The greater prevalence of risk-layering practices and sales of nontraditional mortgage products to nonprime borrowers have occurred in the past few years as competition for borrowers and declining profit margins has prompted lenders to loosen their credit standards to maintain loan volume in a slowing environment.

The industry trends I have just described, taken together, were what led the Federal Reserve, NCUA, and the other banking agencies to issue guidance on nontraditional mortgage products last September. The guidance emphasizes that an institution’s risk-management processes should allow it to adequately identify, measure, monitor, and control the full set of risks associated with these products. It reminds lenders of the importance of assessing a borrower’s ability to repay the loan, both now and when amortization begins and interest rates rise. Nontraditional mortgage products warrant a bank having strong risk-management standards as well as adequate capital and loan-loss reserves. Further, bankers should consider the impact of prepayment penalties for ARMs. Lenders should provide enough information so that borrowers clearly understand, before choosing a product or payment option, the terms of and risks associated with these loans, particularly the extent to which monthly payments may rise and negative amortization may increase the amount owed above the amount originally borrowed.

Subprime Mortgage Lending
The agencies’ guidance on nontraditional mortgage products did not specifically address mortgage lending to subprime borrowers–although, as noted, nontraditional mortgage products are sometimes offered to subprime borrowers. Both lenders and supervisors are aware of the benefits of subprime lending to homeowners, and both have an interest in ensuring that the market remains viable over the longer term. To ensure that viability, it is important to maintain sound underwriting standards and product terms as well as sufficient consumer protection practices. Therefore, subprime mortgage lending continues to be an area that supervisors monitor closely. While overall mortgage delinquency rates remain low by historical standards, they have been increasing in recent months, especially in the subprime sector. Performance deterioration is most notable in the more recent vintages. Many industry observers believe the poor performance of more recently originated subprime loans is due primarily to looser underwriting standards, including limited or no verification of borrower income and high loan-to-value transactions. Subprime lending has certainly created homeownership opportunities for borrowers with weaker or less certain credit histories. But because of the increased risk profile, lenders need to be especially diligent in maintaining prudent underwriting standards and in promoting manageable loan terms and sufficient consumer disclosure practices. Further, as part of an ERM process, as lenders design more complex products they need to identify ways to clearly communicate the product features and risks to their customers.Subprime mortgages typically carry higher interest rates than prime loans. It is not uncommon to find margins of 600 basis points or more on adjustable rate subprime loans after the expiration of a teaser rate. Not surprisingly, some borrowers are unable to keep up with their mortgage payments once these payments fully adjust. In some cases, if alternative financing cannot be found, borrowers may be forced to sell their home or enter foreclosure. And given prepayment penalties, home price appreciation slowing significantly and capital market investors becoming more conservative, some borrowers may be having more difficultly in refinancing to avoid foreclosure.Supervisors are discussing what can be done to ensure that these types of loans are being originated in a safe and sound manner and that consumers are being provided with clear and balanced information so that they can fully understand the terms and risks of these products. Subprime loan underwriting, when done prudently, should reflect all relevant credit factors, including the borrower’s ability to service the debt. In the current environment, risk managers should review policies governing the use of loans with limited or no documentation and simultaneous-second mortgages. Lenders that do not account for tax and insurance burdens in assessing borrower qualifications should understand the associated risks. It may even be prudent to escrow tax and insurance payments to ensure that the collateral is adequately protected from physical casualty losses as well as tax liens, or the lender should inform borrowers what should be set aside to meet the periodic insurance and tax payments on their homes if these payments are not already included in their total monthly mortgage payment.”

Of course, even these warnings did not convince many lenders to change their ways. It took the refusal of investors to continue buying the loans to bring the concept of “prudence” back to loan originating and underwriting.  

It appears that it is true that “history repeats itself”, yet “we learn from history that we do not learn from history” and that “those who do not learn from history are condemned to repeat it”. (I love those thoughts).  

Those who only considered current trends (such as increasing home prices) and made or got loans based on anticiapted future increases in value of the secured property did not learn the lessons of the 1980s when loans were being made on that basis, contributing to the demise of the S&Ls, and prompting passage of FIRREA, requiring licensing and certification of appraisers who appraise properties securing federally related loans.