Who Can You Trust With Your Home Loan?

Who can you trust with your home loan? When you consider the financial and social impact of purchasing a home, that's a great question. So much has happened to home owners in the past two years this may be a good time for some strategic reflection.

The reports about nationwide foreclosure are just astounding. According to RealtyTrac.com, foreclosure activity is up over 55% in the first half of 2007!

Bankruptcies are now being pursued at the prime lender level. According to the Inman News service, American Home Mortgage Investment Corporation, a publicly traded real estate investment trust, and the nation's 10th-biggest residential mortgage lender, has filed for Chapter 11 bankruptcy protection.

Estimates suggest more than sixty subprime lenders have either sought bankruptcy protection or suspended lending operations.

More financial dominoes are poised to fall as the one trillion dollars in Adjustable Rate Mortgage's (ARMs) are set to adjust in each of the next two years.

What we are witnessing is the "cause and effect" of selfishness and greed in the mortgage lending community. Instead of following sound business practices that protect the borrower and the lender with appropriate underwriting, the desire for more profits has thrown things out of balance.

For many lenders the desire for commissions, fees, or profits, whichever is most appropriate, simply overtook their better judgment. Their actions have created a "crisis of conscience" in the lending community.

Think about it. The creation of products like "Stated income loans", "Adjustable Rate Mortgages", "Interest Only Loans", and "Negative Amortizing Loans" demonstrate a certain degree of creativity. However, in the hands of financially inexperienced borrowers, the improper use of these tools has resulted in financial disaster for too many home owners.

As a matter of fact, it became too common for many lenders to actually encourage borrowers to apply for home loans they had very little chance of ever repaying. To make matters worse, many of the loan contracts contained pre-payment penalties.

These penalties would have to be paid even if the borrower wanted to get out of the contract and into something more suitable. This is a major part of the "crisis of conscience" I refer to. Since the loans were created and then sold to Wall Street as mortgage backed securities, the rest of the dominoes have not yet fallen.

You see these securities are part of pension funds, hedge funds, mutual fund families, Real Estate Investment Trusts (REITs), and similar investments. The results of these activities become real once the write downs and write offs have been completed. For many investors the results will be not only disappointing, but devastating.

Here's another hit by the sub-prime market's collapse. Investors in a 10-month-old Bear Stearns (BSC) hedge fund are learning the hard way about the danger of investing in risky bonds with borrowed money. The investment firm's High-Grade Structured Credit Strategies Enhanced Leverage Fund, as of April 30th, was down a whopping 23% for the year! This is a preview of things to come.

Based on what has just happened, is it just me or is there something really wrong with the name of that fund?

Let's not forget about the conscience of the borrowers. They are not without blame. A home loan for many people is the largest investment they will ever make. Better buying decisions must be made that are based on deductive reasoning as well as emotion. Professional help with contract reviews would also be very helpful.

My barber gets credit for sharing a very simple but potent example of what should happen between a financial counselor and a borrower. He was a Vietnam war veteran. After the war he decided to take advantage of the VA Bill that allowed him to get a 100% home loan in return for his service to this country.

He and his wife finally found what they were sure was to be their "dream home". Just use your imagination to get an idea about what a dream home looks like.

When they met with the VA counselor to discuss buying this home, things became much more realistic. For example, my barber was advised that only he was a war veteran, so only he was eligible for the special home loan funding.

Consequently it made a lot more sense to find a home that could be purchased with his income, not their combined incomes. Further, when he reviewed the financial data the counselor asked if the couple intended to have any food in the house. In addition, if there was to be food, how would it be prepared? Of course you can see how this was developing.

Once you add in the other utilities and the taxes and insurance, what you thought was to be your mortgage payment falls way short of your actual mortgage expense.

As a home owner you should also put some money away for emergencies and the so-called "rainy day". In this land of opportunity there should also be a comprehensive investment plan.

This counselor did exactly what needed to be done to prevent the very problems that are so prevalent today. His actions demonstrated the best way to overcome a "crisis of conscience". Just do the right thing for the borrower and the lender when creating a home loan. In a win-win situation, there are no losers.

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