Market trends in the mortgage industry shows that a fuse on a second “mortgage bomb” has already been lit with consideration to Alt A Mortgages and Option Arm Mortgages. Their increase in popularity has a direct connection to the fall in real estate prices over the past few years. As the equity in the market dropped, lenders offered borrowers deals that were too good to be true. Lenders tended to overlook the borrowers income verification as well as their foundation for repayment. In essence, it let people qualify for loans which they could never repay in a normal market.

But hindsight is 20/20 isn’t it?  At the time, people didn’t want to get left behind.  It was the “greater fool” theory in action.  I think most people knew that they were overpaying for property but with the frenzy that was going on it was tough for people to see the forest through the trees.

One of the “features” of these loans were adjustments and/or resets.  Meaning, that payments can jump drastically, especially for people that were paying interest only or as some did, paying even less than the intere st owed.  This is called negative amortization and it was a key aspect of the Option Arm.

The Option Arm loan program had been around since the early 1980’s (remember Home Savings of America?). The Option Arm had a lot of bells and whistles for prospective borrowers. These bells and whistles often made borrowers overlook the fact that were assuming the risk of rising interest rates because the loan is an adjustable rate mortgage. But interest rates have been in a multi-generational downward trend, keeping the actual rates for these borrowers low.

So what caused Option Arm loans to rise in popularity after 20 years of being a small piece of the pie? Well two reasons. The first is that Option Arm loans do not verify the income of the borrow. “Stated Income” thus holds as the qualifying factor for the loans. Many over the years have referred to this practice as qualifying for “Liar Loans” and with the market cost dramatically increasing, the Option Arm has become quite popular.

But the second reason for the increase in Option Arm loans is a direct result on how brokers adjusted the loans margin. Lenders placed a higher value on the loan based on the margin that the loan came with. Loan officers were paid more in commission if they sold the loan with a higher margin rate. Since many homeowners don’t understand the full complexity involved with margins, the sharks in the loan market had the upper hand. Everyone offered the same “start rate” so all the offers seemed very much the same. But these sharks (mortgage brokers, loan officers, and employees of banking operations ) would simply increase the margin to gain the maximum in commission.

RESPA documents were (and still are, in my opinion) woefully inadequate. So borrowers took these loans without really understanding how they worked. Fortun ately, most of the loans are tied to short term interest rates such as the MTA – the 12 month moving average of the 1 year t-bill which has been below 1% since November of 2008. The worst of these loans went out with a 3.5% margin, so the reset rate for these loans will be low.  Most people will be okay as long as short term interest rates remain low.

Unfortunately, when the economy ultimately picks up, these loans that are locked into a Option Arm will see their payments rise. And this is where the “mortgage bomb” detonates. In an economy based on consumer consumption, we might see holders of Option Arms keeping their stimulus money in safe place to prepare for these increased rates.

Social Media and the government fail to see the true crux in the foreclosure epidemic. The culprit of the Great Real Estate Depression is a drastic reversal that mortgage lending models have experienced.

 The surge in the housing market stemmed from the greed of easy money.  Lenders were abash in capitol and were willing to extend it to who ever asked.  No money down and 100% financing? Sure we can do that! You’re not able to verify employment?  O that’s not a problem, just tell us what you make and we’ll believe you! Is your credit less than average, don’t worry we’ll lead a blind eye.  We know once you get into your payments you’ll be able to make them, if not, how about less then interest?

ARE YOU FREAKIN KIDDING ME? Well unfortunately, no, I’m not.  This was the state of the industry up until 2007-2008. I should know.  Lenders visited my companyevery day of the week, pleading with us to help get these loans out to a voracious marketplace.  And I won’t lie to you… we offered them.  Everyone did.

But in a quick reversal, today’s housing implosion was caused by lenders going to the other extreme. Today, you can’t get mortgage financing unless you have impeccable credit, sufficient and provable income, and verifiable assets.  Some would say common sense underwriting, but not me.  Today, lenders have effectively cut off half of the market.

 Real Estate is merchandise and like any other product; subtract half the market and watch prices fall.  It’s a simple computation.  If you’re looking to sell your home, just forget about those buying with a lower then 620 credit score.  And forget most of the self employed from being qualified; they typically cannot show the income for the mortgage they wish to buy.  Buyers then only have Fannie Mae, Freddie Mac and FHA as options; so besides the required down payments all three of the lenders have similar requirements.  So if you are denied by these lenders: so sorry; no loan for you!

 Think that’s bad? O it gets worse.  With all the homes racing into foreclosure, those properties returned to the lender are being grossly mismanaged.  Very few are occupied or even have a for sale sign.  Potential home buyers are less interested these days in purchasing a rescued property with the great deal homes up for sale. Additionally, investors are unable to qualify for homes due to the homes current state and market value.  This leads to a eventual decrease in the property’s price further depreciating the neighborhoods value.

 And if that wasn’t enough, these homes don’t qualify for assistance from the FHA financing commission.  In the current marketplace, the FHA’s requirements to obtain financing are more lenient than it has ever been.  But the FHA does have fairly strict guidelines for property standards based on lender owned homes.  With all the free money handed up by Dear Mr. Obama, we need regulations put in place to get the foreclosed properties in order! Instead of the strict guidelines put in place by creditors, these homes need their Loan Modification to be handled with care and attention.   Being in the industry since the early 80’s, I’ve never seen the market this strict.

What can we do? Reach out to your congressman. Tell him or her that we need regulations that will force lenders to start doing the right thing with their foreclosed properties. We need them to be more agreeable to modification requests.  We need policies that will require lenders to modify loans when the numbers clearly indicate that a home can be saved with a temporary payment reduction.

I know that as much as I rant about this, most people will not contact their local representatives.  So I have decided to draft my own proposals.  I plan to put my proposals into the hands of every congressman and senator in Washington. If you agree with my views, won’t you join me?  I’d like to include as many signatures as I can get with my proposals. If you provide your contact info, I’ll send you the proposals and when we’re ready to go, I’ll ask for your signature.  But it’s completely up to you… you can read my proposals before deciding to be a signor.  But I believe what I present will make sense and you will want to join us.  I’ll keep in touch with you until then.