My Recommendations for Responding to the Mortgage Crisis

1)Let the free market correct the excesses.

There will be many that will try and create legislation that they think will cut out the excess of the mortgage boon. I don't think there is anyway around a plethora of regulations and laws that will act to limit mortgage products based on previous excess and abuse. For the most part, the legislation will be misguided, unnecessary, and in many cases either overkill or counterproductive. Thus, while it is inevitable, it is also unnecessary and for the most part counterproductive.

Right now, the free market is shaking out not only the bad loans but the bad borrowers. The mortgage market continues to be dicey and unpredictable however we are seeing an evolution that stresses full verification of all income and assets and a new and increasing skepticism of appraisals. The poor performing loans of the past are no longer available. No money down loans are now available only to the very highest credit scores and with good debt to income ratios, as well as a healthy amount of liquid assets (whether they be money in the bank or other things considered liquid like retirement accounts)

Other loan products like Option ARM's and interest only loans have also become scarce. The market is in the process of transforming itself. Gone are the days of loose and irresponsible lending, and the market itself is taking the mistakes of the past to create a new environment that learns from them.

As these loans are shaken out, the borrowers that used them to qualify for property they couldn't afford will also be shaken out. While it is also unrealistic to expect the politicians to sit back and let this happen, it is in the end the best policy. These borrowers shouldn't be in the market. They are not responsible enough to own property and the loans they received were irresponsible as well. Trying to bail them out, or freeze their rates, or anything else, will only delay the inevitable. The best thing that can happen is for these borrowers to be removed from the market place as quickly as possible. That will only happen through market forces.

Nothing that legislators will want to do that will substitute, supplement, or in any other way act in lieu of the market will help. The market is doing the best it can to figure out a new mortgage paradigm after the crisis. The only thing we can all do is stand back while it all gets shaken out.

2)Make the business paperless.

There is too much paperwork going through each stream of the business: the appraisers, the title companies, the banks, and the mortgage broker. By the time a loan has been closed, the typical mortgage broker has an encyclopedia's worth of paperwork. People wind up drowning in paperwork. To end this the business must make a concerted effort to go paperless. (where paperwork is scanned and saved to disk, harddrive The whole entire business must become paperless and I wouldn't mind that coming in the form of a mandate. This is easily done, and many banks, title companies, and brokers are already doing it. I don't mind legislation mandating this and I can see some sort of staggered system that allows the transition to be smooth. It is an absolute must though that the business get rid of all the paperwork and be able to scan everything to disk.

3)Get rid of much of the unnecessary disclosures.

There are dozens of disclosures that serve no purpose besides making the signing process much more complicated and time consuming than it is necessary. My "favorite" is the Equal Credit Opportunity Act Disclosure.

It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction-- (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant's income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under the Consumer Credit Protection Act.

In other words, the bank and broker can't discriminate against the borrower for anything but credit worthiness (like skin color, sex, etc.) Now, of course, this is a disclosure that is signed at closing so it stands to reason the borrower didn't get discriminated at all. There are dozens of relatively worthless disclosures like: right to receive an appraisal, credit score disclosure, and even frankly the net tangible benefits disclosure that serve no purpose but to create a paperwork process that winds up being way to time consuming and overwhelming for the borrower.

The initial disclosures should be limited to the application, the TIL, the Good Faith Estimate, and any documents that will be necessary to satisfy any verification procedures. The closing documents could be cut down significantly and then the borrowers would be in a better position to read the important ones.

4)Encourage better training of mortgage brokers.

The main problem with the mortgage business is the obscenely poor training that most mortgage companies. I was lucky to have a more senior mortgage broker train me. Most of the time at mortgage companies, training is haphazard and lacking. There is rarely a formal training program that is provided by mortgage companies. Most mortgage companies will hire brokers with little discrimination. Because brokers are almost always paid strictly in commission there is little to lose for the mortgage company to hire someone.

I don't believe this is something that can be legislated, however it can be encouraged in other ways. I think that the SBA should create a special small business loan designed strictly to help mortgage companies improve their training program. I could also be in favor of cutting the capital gains tax on any investment that would target creating and expanding training programs for mortgage brokers. While the details would still need to be worked out, we must do something to encourage mortgage companies to provide better training for their brokers.