Spoken like an true originator

By: PAUL JACKSON
July 15, 2008 9:45 AM CST

Remarks earlier this week from Secondary Marketing Executive editor Phil Hall have left us wondering how much he really understands about the industry he covers. To wit, from an op-ed published on their own Web site:

I believe that someone (whether within the federal government or in the leadership ranks of the industry) needs to raise the possibility of putting a temporary national moratorium on foreclosures into place. This moratorium could last anywhere from six to 12 months, which would allow all responsible parties to work overtime in getting this mess settled…

If the federal government is willing to rush to the rescue of IndyMac, Fannie Mae and Freddie Mac (not to forget Bear Stearns, of course), then it can easily rush to the rescue of all parties trapped in the foreclosure miasma. It should be stated that a temporary moratorium does not mean the absolution of the borrowers who are in peril (mostly by their own doing, it should be stated).

Instead, the temporary moratorium will allow the industry to work with borrowers to come up with a fair solution for all parties involved.

Wow. Really? We’ve heard the same misguided arguments from consumer groups for at least a year. But we didn’t expect to see that sort of nonsense coming from an alleged industry rag.

I can only surmise Hall’s temporary lack of reasoning is the result of stress from seeing the industry he covers vanish — Secondary Marketing Executive, after all, is a bit of a misnomer for the rag’s audience. The pub isn’t really a secondary mortgage market publication in the true sense of the word (i.e., covering MBS, bond yields, GSE issuances, collateral and vintage performance); it’s much more of a publication targeting ad buys from originators that sell their loans into the secondary market.

Which may explain why his idea is one that only an originator could support - after all, a moratorium is no skin off a lender’s back, right?

The awful truth is that a moratorium is flawed logic on nearly every front, including origination, regardless of what consumer groups and one apparently deluded trade rag editor would have you believe.

We’re not facing a flood of so-called “preventable foreclosures.” The vast majority of troubled borrowers can’t be helped, short of changing the nature of our housing and the mortgage markets altogether (and abrogating a few contracts in the process as well). Many borrowers never could afford their loans from the very start — witness the excessive defaults in Alt-A absent any meaningful reset volume, for example. Still other borrowers are finding that they can’t qualify for a needed refinance, or that a lending program needed to keep their payments at an artificially low level no longer exists.

There’s enough blame to go around on this, and lenders deserve more than their fair share of it from frustrated borrowers and consumer groups, but putting the brakes on foreclosures won’t help most troubled borrowers, nor will it serve lenders, servicers or investors — and it most certainly will hurt those innocent bystanders now looking to purchase a home; had Hall ever worked in the industry, he’d probably know that.

But I’m guessing that he’s never spent time in or around the trenches of a servicing shop actually working with REO or foreclosures. Had he done so, he’d understand that a moratorium will not only increase losses for investors and put servicers in the tenuous position of draining more cash in the form of advances — it also undermines a lender’s ability to seize secured collateral when a borrower defaults, which will reverb back into the origination market that Hall so clearly lives in.

Ask yourself this: will a lender be more or less willing to lend when it believes that its ability to expediently repossess collateral in the event of a borrower default is impaired? I think most readers being honest with themselves know the answer.

I’ve said repeatedly that the solution to this mess is not to try to prevent it — such an approach will only prolong the issues now plaguing our housing markets, and quite possibly make things even worse. The solution should be to use whatever federal funds we have available to instead make sure our regulatory structure doesn’t allow this to happen again, and to help borrowers — as many borrowers as possible land — on their feet.

Think of private-party mortgage lending like an airplane that soared to 35,000 feet during the recent housing boom: paying for passenger parachutes seems to make much more sense than any attempt to put out flames on a plane that has since lost its wings. Fiddling with our nation’s property rights system in the misguided name of “protecting the American Dream” is the flip side of the so-called “Ownership Society,” and just as likely to lead to the same disastrous results.