Solving the mortgage crisis

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An all-star cast of lending experts gathered Thursday and today at UC Berkeley to ponder the excesses that created the mortgage meltdown and what safeguards to build into the home-lending system going forward.

The 20-20 hindsight part was easy. Brad Blackwell, national sales manager for Wells Fargo’s mortgage operations, recalled having been taught four things to check about borrowers when he learned the business 25 years ago: ability to repay, willingness to repay, commitment to the transaction (meaning a down payment or equity in the deal) and quality of the collateral, the property securing the loan.

Some “very, very bright analysts” developed models suggesting that the last factor alone was sufficient, Blackwell said, and so it seemed as long as home prices rose. By the peak of the housing bubble, many lenders (not including Wells, he said) had tossed out the old rules.

Stated-income loans waived the ability-to-pay rule. Subprime loans to borrowers with proven records of missing payments waived the willing-to-pay rule. And 80-20 piggyback loans and other forms of 100% financing tossed the commitment rule out the window.

“If you look at what happened,” Blackwell said, “you had stated-income subprime mortgages at 100%” of the property’s value.

Of course, using pools of those loans to back complex securities is what initially caused the blowup. Paul Jablansky, a hedge fund manager who has consulted for congressional Democrats on the mortgage crisis, estimated that more than 40% of securitized subprime loans were headed for foreclosure over a five-year period, with total losses of $400 billion.

Jablansky helped create the plan backed by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and Sen. Christopher J. Dodd (D-Conn.), who heads the Senate Banking Committee, to have lenders write down the principal balance on troubled loans so they can be refinanced into loans guaranteed by the Federal Housing Administration.

Having the feds team up with mortgage companies on loan workouts is a popular theme these days. Here are a few other suggestions by participants in the two-day mortgage meltdown symposium, sponsored jointly by real estate experts from UCLA and UC Berkeley:

Blackwell: Offer a simple menus of loans to avoid confusing borrowers. “A monthly adjustable negative amortizing loan is not something many consumers understand.”

Paul Leonard, Center for Responsible Lending: Make buyers of loans legally liable for fraud and errors committed by loan originators.

Audience member: Require mortgage originators to retain a financial interest in all securities carved out of their loans, so they share in any losses.

Today’s sessions include Federal Reserve Chairman Ben S. Bernanke, appearing via satellite and providing his views on the future of mortgage lending.

Click here for some presentations from the conference.

--E. Scott Reckard