It's likely (and appropriate) that 90% of your professional attention is on originating loans. But federal regulatory oversight has already significantly altered the mortgage marketplace, and you would ignore its potential to threaten your  livelihood at your own peril.

In this new article, I attempt to provide some perspective on how much more complex mortgage lending has become since the enactment of Dodd-Frank, and why loan originators  need to stay informed about this particular elephant in the room.

I think you'll find that much of the information in this article can be shared with your colleagues, clients, and Realtor partners, and that doing so will help them all better understand why the job of helping people finance their home purchase has gotten so much more frustrating and difficult in recent years.
You can read the full article here.

In a news conference last week, Fed Chairman Ben Bernanke explained his theory behind committing the Fed to expanding the money supply in order to purchase an additional $40 billion per month in mortgage-backed securities:

“If house prices are rising, people may be more willing to buy homes, because they think that they’ll, you know, make a better return on that purchase. One of the main concerns firms have is that there’s not enough demand.”

So, if I understand Mr. Bernanke correctly, he is saying that in an environment of rising home prices (which will be rising largely due to an inflationary Fed policy designed to lower mortgage interest rates even further than they already are) people will be more willing to buy homes because they think the value of those homes will continue to increase, so that when they sell that home, they will get a better return on their purchase. Sounds like deja vu all over again.

This is not much different from the thinking that gave us the Homebuyer Tax Credit – an earlier brainchild from the good folks at Central Planning, Inc. You'll remember that the tax credit gave buyers the equivalent of an extra $8000 with which to buy a home. But since sellers and other market movers were also aware of this $8000 boon(doggle), the artificially increased "demand" -- instead of resulting in people having more money to spend on a home -- instead resulted in homes costing more. Look at the data: during the height of the Homebuyer Tax Credit, home prices rose. As soon as the tax credit ended, home prices dropped like a rock.

We can expect this policy to help keep interest rates low. Will they go much lower than they already are? That depends on whether banks will pass those lower rates on to borrowers. Personally, I'm skeptical. Banks already have avoided fully passing on lower rates to borrowers because, from their perspective, they have more business than they can (or are willing to) handle. We may see rates go down a quarter to a half a point, but I doubt it will be much more than that.

Will there be a resurgence of refinance applications? There will certainly be a lot of inquiries from consumers, but it would take a fairly significant reduction in rates (below where they are today) in order for a refinance to make much sense to a borrower who already has a 3 1/2% loan.

Besides, mortgage rates aren't really the problem – for either purchase or refinance customers. To paraphrase James Carville, "it's the restrictive credit overlays, stupid." Banks and mortgage companies continue to be rather bearish on the idea of doing more mortgage loans.

And from their perspective, you can understand why. During the last decade, they responded to pressure to lower lending standards, which helped give us the housing boom and bust. Then, they got blamed for it – and the government, in an effort to offset the cost of taxpayer bailouts of Fannie and Freddie, pursued an aggressive policy of forcing lenders to buy back loans that had been made in good faith. Once burned, twice shy.

Moreover, as Jack Micenko, an analyst at Susquehanna Financial Group (quoted by the Wall Street Journal) said, "Will lower rates make banks less risk-averse? Unlikely, because it's even harder to get paid for that risk."

Action Plan for Originators.
We may or may not like or agree with government policy or the unwillingness of banks to take risks with their shareholders' money. But those decisions are beyond our ability to influence much anyway.

Here's what we can know with some certainty:

• Interest rates will continue below for the near future, probably for at least the next quarter or two.
• The release of shadow inventory by asset managers will probably continue to be disciplined, and designed to produce maximum return for the owners of distressed properties. That, and continued Fed policy of low mortgage interest rates, will put upward pressure on home prices.
• There are people who will benefit (or at least can benefit) from this set of conditions. Loan officers should focus their marketing efforts on these people/groups. (See the video of last week's seminar, New Opportunities for Mortgage Originators.)

The Fed on Thursday said it would spend $40 billion each month buying mortgage-backed securities  until it saw a sustained upturn in the weak jobs market.

Of course, the Fed will not be using taxpayer money to buy bonds. Instead, it will expand the U.S. money supply and electronically credit banks with more funds. To understand how this works, imagine that you wanted to buy shares in an investment, but you don't have the money to do it. Instead of borrowing money against your line of credit to buy into the investment (which would be risky enough on its own), you decide to hack into your bank and credit your account with the money to buy the shares. The only difference is that if you were to do this, you would be locked up as a thief. No one's going to be putting Mr. Bernanke behind bars for this.

Almost immediately after the announcement, ratings firm Egan-Jones cut its credit rating on the U.S. government to "AA-" from "AA," adding that quantitative easing from the Federal Reserve would hurt the U.S. economy and the country's credit quality, that issuing more currency and depressing interest rates through purchasing mortgage-backed securities does little to raise the U.S.'s real gross domestic product, but reduces the value of the dollar. This increases the cost of commodities, which will pressure the profitability of businesses and increase the costs of consumers -- thereby reducing consumer purchasing power.

I can't really disagree with that.

Why does the Fed need to buy mortgage-backed securities? Maybe it's because the yield on them is so low that investors don't consider the risk-reward ratio to be prudent. The Fed is betting that this will keep mortgage interest rates low (it probably will, for now), and that low interest rates will stimulate more homebuyer activity, which will stimulate the economy and create jobs.

But rates have been low for some time now, and demand has remained flat. See the video my latest online seminar, New Opportunities for Mortgage Originators.

In my last post, I used an analogy to demonstrate the idea that our national housing market is sick.

The question I would now like to explore is whether mortgage professionals can play a positive role in healing our ailing housing market.

When they consider the systemic problems of the current housing market, most loan officers would come to the understandable conclusion that these problems are well beyond their ability to fix:

• Depressed home values, keeping traditional Sellers and holders of distressed inventory from putting homes on the market.
• The difficulty of getting buyers approved for financing in today's regulatory and, some would say, paranoid underwriting environment.
• Concerns about the state of the economy, keeping prospective home buyers from committing to buying a home.

Fans of the Star Trek franchise will be forgiven for being reminded of Dr. Leonard McCoy's frequent rejoinder to Captain Kirk: "Dammit Jim, I'm a doctor, not a _________!!!"

The whole thing looks like a big, tangled ball of yarn. But sometimes if you pull on the right end from the right direction, you can create order out of chaos.

Let's start with the supposition that the current market represents a very good opportunity for people who would like to own their own homes. Let's further suppose that many of these people are currently inhibited from pursuing that opportunity because of their concerns about home values, their ability to be approved for financing, and their concerns about their own financial stability in the face of our troubled economy.

The case can be made that the currently depressed value of homes is, in fact, a feature – not a bug – if your goal is to buy a home that will increase in value over the years. When values are depressed, you can make a better deal. Add to that the fact that mortgage interest rates are currently at historic lows, and the opportunity becomes even more attractive.
Furthermore, mortgage loan underwriting, which most informed people would agree is more stringent today than it has been in many years, is itself a protection against taking unnecessary financial risk – for a prospective home buyer. We have a hard enough time qualifying people who can actually afford the home they want to buy; it is even less likely that we could gain underwriting approval for someone who is on thin ice financially, and would be taking an unreasonable risk if they were to try to buy a home.

So a case can be made that if you want to buy a home, you should at least look into it. You have very little to lose – other than a little of your time – and even if it turns out that now is not the time for you to buy a home, you will at least have learned something from the experience – including some kind of action plan that would put you where you want to be in the future.

Now, if we can accept this supposition, who would be in the best position to help prospective homebuyers overcome their fears and inhibitions – and take positive, productive steps forward?

Realtors? While Realtors are generally well informed about their local markets, are able to give good advice to homebuyers, and are capable of making the arguments in my supposition, the problem they would experience (and in fact are experiencing) is that their arguments tend to be seen as self-serving. In other words, while you and I would say that their advice that now is a very good time to buy a home is, in fact, good advice, consumers would tend to view it skeptically.

Politicians? OK, now you're just being silly.

Mortgage professionals are in a unique position to make a reasoned, balanced, objective case for the idea that, assuming you are financially ready to buy a home, now is as good a time as we have seen in many years for you to take steps in that direction.

Mortgage professionals are also in a unique position to be able to predict, with greater accuracy than just about anyone else, whether or not your efforts to obtain financing will be rewarded with success.

Mortgage professionals – particularly if they take the time and trouble to educate themselves about their local real estate markets – are in a unique position to credibly give potential home buyers and objective analysis of the likely effects that buying a home would have on a family's finances.

And finally, because mortgage professionals are seen as being more objective and neutral (perhaps because they do in fact sometimes say no to a prospective borrower). As long as loan officers do not present or position themselves as "salespeople", they are more likely than anyone else to be seen as credible, even authoritative, by people who are considering the purchase of the home.

We know that there is a significant amount of pent-up demand in our real estate market, composed of millions of people who want to own a home, but are afraid to take the plunge for a variety of reasons, most of which are based on unexamined fear and misinformation.

If every loan officer in the country were to help just one person/family each month to recognize that they can, in fact, afford to buy a home, and that it is in their best long-term financial interests to do so, it would immediately increase the number of home sales in the United States by a staggering 25%.

Home values today are stuck at levels roughly 30% below where they were at the peak of the housing boom – and they are stuck there for the very simple reason that there is way too much inventory (including shadow inventory that has not yet hit the market), and because not enough people are buying homes. Increase the number of homes being sold, and values will begin to recover. The overall economy will begin to improve. And while no one in their right minds wants to return to the Wild West days of Franklin Raines, Barney Frank, Chris Dodd, James Johnson, and Angelo Mozilo, one can even hope that an economic recovery would result in a return to prudent – but not paranoid – lending standards.

Thus, the ball of yarn becomes untangled.

Repeat after me: "Let there be an economic recovery, and let it begin with me."

Have you ever talked to your car, or your computer, pleading with it to start or to run, or begging it not to let you down? This behavior is called anthropomorphizing, and we do it in an effort to relate to a concept or an inanimate object. And it can sometimes be a useful exercise.

Let's pretend that the Housing Market is a person. We'll call it "HM". People like you who work in the mortgage industry care a great deal about HM, because he is the source of all of your business – one way or another. When HM is healthy and happy, you do well. When he isn't, your life tends to go about the way it has been going for the last five years. So you really want things to go well for HM.

The good news for HM is that home prices have shown some modest recovery this year. But the bad news is that the number of home sales is declining. Home sales are very important to our friend HM, because they have a lot to do with his self-esteem and overall sense of well-being. It's sort of like the way you would feel if you looked at your 401(k) and realized it is now worth a lot less than it was five years ago.

HM cares a great deal about his girlfriend, Consumer Confidence. In a sense, if she's happy, he's happy. But unfortunately, she's not very happy – consumer confidence has been dropping like a rock. At this point, our friend HM has got to be worried that his girlfriend is about to break up with him, maybe even permanently.

The Housing Market is basically your meal ticket, so you really want to help "him" (and in the process, help yourself) – but you're not sure what to do, because let's face it, our pal HM has a lot of problems!

Home values are still roughly at 2001 to 2003 levels (pre-bubble).

Home sales are at record low levels in spite of the fact that inventory remains high (despite some claims to the contrary), prices are low, and mortgage interest rates are also at record low levels. Ordinarily, you would expect this to bring home buyers out of the woodwork to take advantage of these classic Buyers Market conditions, but that hasn't happened. That's because consumers are worried about their jobs, their finances, the economy, and the possibility that home values have not yet hit bottom. No one wants to own a declining asset.

25-35% of all the home sales in this country are distressed properties (foreclosures and short sales). Those homes sell for  less than comparable non-distressed properties. Potential Sellers are afraid to put their homes on the market because they will lose too much equity. This results in far fewer move-up buyers. The housing market today consists essentially of first-time buyers and investors, and many of the people who would ordinarily be first-time homebuyers have decided to rent instead, for the reasons I stated in the preceding paragraph -- and because, to the degree there is a shortage of inventory, it's at the lowest end of the price range -- the kinds of homes many first-time buyers look for.

And, as if all of that were not bad enough, we are still looking at an enormous "shadow inventory" of delinquent mortgages, estimated at between 4 to 5 million homes – a huge backlog of inventory that hasn't even hit the market yet. At the rate that homes are being sold today, this would add more than a year's supply to our already bloated national housing inventory.

So one way of looking at our friend HM's predicament (and yours) – would be to say that he has an absolutely massive case of constipation. If you want to help him, and yourself, and frankly, the whole country – you need to be bringing the laxative, and lots of it.

Next: "But I'm just a loan officer, not a doctor!)

From The Wall Street Journal: "After a year-long investigation, the Justice Department said Thursday that it will not bring charges against Goldman Sachs Group or any of its employees for financial fraud related to the mortgage crisis."

In a statement released today, the Justice Department said “the burden of proof” couldn’t be met to prosecute Goldman criminally based on claims made in an extensive report prepared by a U.S. Senate panel that investigated the financial crisis.

By sheer coincidence, According to Federal Election Commission figures compiled by the Center for Responsive Politics, Goldman Sachs' political action committee and individual contributors who listed the company as their employer donated $994,795 during 2007 and 2008 to Obama's presidential campaign -- the second-highest contribution from a company PAC and company employees.

This should probably come as no surprise in light of what happened with Angelo Mozilo and Countrywide Mortgage. According to the NY Times, in June 2009, the Securities and Exchange Commission filed civil fraud and insider trading charges against Mr. Mozilo and his top lieutenants. In October, Mr. Mozilo, whose "Friends of Angelo" program benefited some of the most powerful politicians in Washington and became a national scandal, agreed to repay $45 million in ill-gotten profits and $22.5 million in civil penalties as part of a settlement with the SEC.

This fine represented a small fraction of Mozilo's estimated net worth of $600 million. Countrywide will pay $20 million of the $67.5 million penalty because of an indemnification agreement that was part of Mozilo's employment contract. The terms of the settlement allowed Mr. Mozilo to avoid acknowledging any wrongdoing.

In February 2011, the U.S. dropped its criminal investigation into the facts behind that civil settlement.

According to The Wall Street Journal, $7 trillion in housing value was wiped out in the crisis. That is more than half of the entire gross domestic product for the United States in 2006. It is an average loss of equity somewhere between $70,000-$90,000 per American household.

To at least some degree, the entire mortgage industry has been blamed by politicians and elements of the media for the housing bust and the mortgage meltdown. If you are an originator, you have probably personally experienced this scapegoating at one time or another in the last five years. While the industry as a whole was not entirely blameless in the matter, the real villains of this crisis included politicians from both parties, executives at Fannie, Freddie, and FHA, the leadership at a relatively few mortgage companies like Countrywide, and investment banking firms like Goldman Sachs. It would behoove everyone working in the mortgage industry to educate themselves about what really happened. I would especially recommend the following two books: Reckless Endangerment, and The Housing Boom and Bust. You can click on the images below for more information, or to order these books from Amazon.com.