My Solution to the Lending Mess---An Open Letter to The Nation's Top Banks

Dear Top 25 Residential Lending Banks---

As you know, we are in a mess.  A downright mess. 

Foreclosures are at an all-time high in many areas.   Most housing markets are depreciating.  Millions of homeowners are facing the recast of their adjustable rate mortgages.  They cannot refinance out of them so they will watch their payment skyrocket and reluctantly join those already in foreclosure.

For those of you who can survive it, and most of you won't, this is going to cost you billions.  It's also going to create a new low for an industry that, although its had its downs before, has mostly been vibrant and alive for decades....the real estate industry.  

As I write this, I am looking at a list of the Top 25 National Residential Lenders for the 1st Quarter of 2007.  Three of you are already gone.  There are rumors that three or four more of you are going soon.

This is going to last years and take you all out unless someone offers a reasonable, sensible solution. 

Here is mine.   It's not new and I know you have thought about it but now I am involving my friends at ActiveRain, the most powerful real estate community in the world.  

We are demanding that you do something and do it now.    You can no longer bury your head in the sand and say "this will all turn itself around,"  "the market will correct itself,"  and "things will be better soon."

Just ask American Home Mortgage, who was # 14 on this list before yesterday. 

It is time for you to offer every borrower who has an adjustable rate mortgage that will recast in the next three years, whether they are currently late or not, a note modification.  

You made a mistake.   We all made mistakes.  We offered 100% financing, on interest only loans, to people who never would have been able to even get a loan with 10% down a few years back. 

Then to top it off we lured them in with the false hope that this payment would last forever, or at least long enough to where if it adjusted too high "they could always refi."  

You were wrong to offer it.   We were wrong to sell it.  This is how we make it right. 

You re-work all of these loans to new 30 year terms.  You let these borrowers keep their current rate for at least five more years, and then it can start SLOWLY adjusting yearly.  

After five years, it will increase .250% every year for the next 10 years and then be fixed for the last 15.   If someone rides it out all the way, you will pick up an extra 2.5% from where they are today and that should be a nice profitable loan for you. 

However, you know as well as I do that they won't ride it until the end.  They will stay in the house for seven years, like they have always done historically.  Or they will refinance in three, like they have always done.  And guess what?  They will turn to you again for these new loans!

Its certainly much better than the $50,000-$150,000 that you will lose per home if it goes into foreclosure.

Just ask Fremont, #22 on the list.

I know note modification is the hot topic at your board meetings right now.  I know you are holding back on rolling this out currently because many of the packaged notes you sold in bulk to large institutional investors don't allow for note modifications.

I also know that opponents of note modification point out that the average borrower who had his note modified in the past, was still late on his mortgage. 

However, it's time for you to be men of business.  Men of industry.  Men of honor.  

Abraham Lincoln once said, "You cannot escape the responsibility of tomorrow by evading it today."

Now I know this idea won't be easy to implement.  It will take additional staff that you no longer have because you have suffered cutbacks as a result of this mess.   It will take too much organziation.   The task is far too cumbersome and challenging.  There is no way possible to pull this off. 

I disagree.  We are here for you. 

Give every loan officer, every mortgage broker, and every mortgage banker the ability to "sell" this solution, just as we sold the problem. 

You go back to the originating broker with the customer list, their customer list, and you give them strict compliance instructions on how you want to be represented and what can or cannot be done.   

And then you offer a small commission on each file that is successfully modified.   I am sure .500% of the loan amount would have loan officers lining up to help you in today's market.  This commission is added into the borrower's loan, like closing costs are on a refinance, and you are done.

The borrower gets to stay in his home and keep fulfilling his dream of homeownership.  You get to collect the interest payments that you deserve to get for the committment you made to loan him the money originally.  And you also get rewarded by your investors who don't have to worry about your stock dropping 40% in a day like Beazer Homes did today.

You will also have created goodwill among your client's.  You will have created goodwill in the industry by which you make your living.  

Most importantly, for your company, your employees and their families, you will have been profitable and survived. 

Unlike New Century, #15 on the list.

Sincerely,

A Concerned Mortgage Professional