I originally wrote this a year ago. I found it amazing that is is still accurate a year later.
I recently read Dr. Seuss’ book titled “If I Ran The Circus” and thought what if I ran the mortgage circus. First some history. According to the book there is a vacant lot behind Sneelock’s store. Morris McGurk was a young man with big ideas and he thought that this was a great place for a circus. Location, location, location. So off he went with a little imagination and a lot of help from acrobats, jugglers, and clowns from many faraway places to run the circus. Wow, acrobats and jugglers should be easy. Every real estate office in every town has jugglers, and every mortgage company still in business has acrobats. Clowns have to be the easiest. They all seem lately to congregate in one place called Washington DC. That must be the District of Clowns. They don’t dress like clowns. They dress like the rest of us and only come out to be seen around election time.
First, if I ran the mortgage circus, I would go “from there to here, and here to there, funny things are everywhere.” Dr. Seuss. I would meet real estate jugglers from every town to ask them what they could do to keep people in their homes and restore confidence in the marketplace. I would ask these professional jugglers what do home buyers want. How could we sell a short sale property in a shorter period of time to help the seller and the buyer (and in turn the banker)? How can we manage the flow of inventory hitting the market so that prices do not fall for no real reason.
Next on the way to building the mortgage circus I would visit mortgage acrobats. They appear ordinary on the outside. Modest sorts. But on the inside where it counts these professionals are magicians in a pinch, mind readers, time travelers, and more. They move from file to file while jumping through hoops set in their path by the clowns. All the while repeating “I love my office and its location. I hate to have to go on vacation.
I love my furniture, drab the grey, and piles of paper that grow each day!
I think my job is really swell, there’s nothing else I love so well.” Dr Seuss. I would ask these acrobats what do you need in order to put more people in homes? What do buyers need in order to feel comfortable making the biggest decision in their lives? How do we not sell them too much house so we don’t repeat the last mistake?
And now let’s send in the clowns. Defined as; A buffoon or jester who entertains by jokes, antics, and tricks in a circus, play, or other presentation. b. One who jokes and plays tricks. Here is where the problems begin. A buffoon with no knowledge of what the jugglers and acrobats do plays tricks on them by setting obstacles in their way. They tighten the lending rules and change the rules without notice. They seem to like the chaos. They thrive on it. The chaos seems to justify why they have jobs.
I almost forgot I run the circus not the clowns. “Sometimes the questions are complicated and the answers are simple.” Dr. Seuss. So here we go, as we travel back in time. The problem that created the crisis was not the “sub prime” meltdown. In my opinion it was a myriad of conditions. The first problem was creating a “credit score”. The credit bureaus are not even able to tell us how they work or how they are affected. How accurate could your score be if when they remove a derogatory account because they made an error and your score stays the same? Are you kidding me? So we took this score as if it were the only factor involved in qualifying for a loan. Oops, sorry it used to work that way. So you had one tradeline and an 800 score we didn’t care if you had a job or money. We were happy to lend you money. Next was greedy lenders that lent money to anyone who met the credit score criteria. Then came the loan officers that worked for the lenders. Not a care in the world that the borrower who could barely afford one home but sold him on a more expensive home because with an interest only payment at 6% less than the market they could afford more monthly. Never a thought about what happens when tomorrow comes. We can’t blame just the credit scores and loan providers. We need to look at the borrowers as well. They willingly borrowed more than they knowingly could pay back. All of this greed was based on the presumption that the real estate values would always rise.
Now, moving forward, “You have brains in your head. You have feet in your shoes. You can steer yourself any direction you choose. You’re on your own. And you know what you know. And YOU are the one who’ll decide where to go…” Dr. Seuss. Maybe we should rely on people (not machines) to analyze credit to determine if the borrower actually has shown the propensity to repay a debt. Call me crazy but looking at the person not a number is what we should all want. “They say I’m old-fashioned, and live in the past, but sometimes I think progress progresses too fast! ” Dr. Seuss.
A loan is still a loan. It comes in pieces like a puzzle. So if you think “this mess is too big and too deep and too tall. We can’t clean it up! We can’t clean it up at all!” Dr. Seuss. Then I am glad I run the circus. I would look to see what I learned from the jugglers and the acrobats. I would change the rules (remember I run the circus so my tent my rules). I would pressure the banks to do two things. I would make them reduce loan balances on all of the homes they have a loan on. I would have them write down the balance of the loan to at minimum of 100% of the new value. I would allow for the banks to raise the balance owed if the property sold for more than the estimated value. If the owner was behind on payments because they borrowed more than they could afford I would have the banks sell the home for it’s current value at a loss if necessary (short sale). However the bank will be required to accept a reasonable offer. I would further require the banks to loosen their lending rules. Not open the flood gates but loosen their current rules so that reasonable people can borrow money under reasonable terms. There needs to be a balance somewhere between what we did in 2003 and what we are doing in 2011. We need to address the unemployed by extending a loan to them if again they have shown a propensity to pay their bills. The idea is to keep more people in their homes and limit the foreclosure problem from causing the values to fall further. I remember when the banks did not want to foreclose. We need to have the municipalities participate in helping reduce closing costs. Reduce transfer taxes and government related costs so that the closing costs are not more than the required down payment. When the cities wanted to increase homeownership they provided tax abatements. Not a bad thought right about now. Again make it easier to afford the home not necessarily easier to finance the home.
None of this will work if the borrowers have no confidence in the marketplace. Remember I run the circus. We need to stop selling bad news and promote good news. “If things start happening, don’t worry, don’t stew, just go right along and you’ll start happening too.” Dr. Seuss