The last few days have been dramatic in the financial markets: gold and oil at record highs, the US dollar at record lows, rumors of bank failures and Federal Reserve taking dramatic actions.  All of these represent a climax in the story of our markets, our economy and our industry that has been unfolding over the past year.  However, for those of us in the mortgage industry there was an even more important event in the last few days: the release of the “Policy Statement on Financial Market Developments” from The President’s Working Group on Financial Markets.  The mortgage industry as we have known it will soon no longer exist. 

The “Working Group” is comprised of representatives from the Department of the Treasury, the Board of Governor’s of the Federal Reserve System, the Securities and Exchange Commission and the Commodity Futures Trading Commission.  Assembled by President Bush is August 2007 the Working Group’s objectives are:  

Our objectives…are improved transparency and disclosure, better risk awareness and management, and stronger oversight. Collectively, these recommendations will mitigate systemic risk, help restore investor confidence, and facilitate economic growth. 

While these objectives seem like a natural statement from a group many speculated was put together simply to give the impression that the Administration wanted to “look like it was doing something”, the recommendations in their “Policy Statement” of this week are actually advocating revolutionary changes in our financial markets.  Given that the effort is lead by Treasury Secretary Henry Paulson, former head of the largest and most sophisticated of Wall Street investment bankers, Goldman Sachs, it should not come as a great surprise.  No one in America has had as clear a view of the inter-relationships between the various components of the puzzle: retail financial services, institutional securities operations and governmental financial market controls.  Henry Paulson sees a crisis, and the Working Group he leads has responded. 

http://www.ustreas.gov/press/releases/reports/pwgpolicystatemktturmoil_03122008.pdf 

Let me focus on three highlights from the “Policy Statement”: 

1.         It’s All About Risk Management 

The inability to identify, quantify and mitigate risk in the credit markets is the over-arching problem that must be addressed.  With the collapse in the credit markets triggered by “a breakdown in the underwriting standards for subprime mortgages” it is no wonder that mortgage origination reform is a primary target of this statement.  So government reform is coming in the form of revisions to the Truth in Lending Act (TILA) and the Home Ownership Equity Protection Act (HOEPA) as well as more stringent originator licensing standards.  Mentioned as well is that, “State and federal authorities should coordinate to enforce consumer protection and disclosure rules evenly across all types of mortgage originators.” This means some form of Federal regulation of mortgage brokers. 

2.         Beware the Damn Break Upstream 

As important as the disclosure and process changes that will impact mortgage originators, they pale in comparison to the underwriting and compliance changes that will flood downstream from market participants upstream: lenders, rating agencies, investors and market regulators.  As an example:  Overseers of institutional investors (for example, the Department of Labor for private pension funds; state treasurers for public pension funds; and the SEC for money market funds) should require investors (and their asset managers) to obtain from sponsors and underwriters of securitized credits access to better information about the risk characteristics of such credits, including information about the underlying asset pools, on an initial and ongoing basis. 

In a nutshell this means, that despite our actual, government mandated compliance requirements, the practical underwriting and compliance requirements imposed on originators by these other market participants are likely to be even more burdensome. 

3.         Lipstick on a Pig 

The expression of putting lipstick on a pig refers to the practice of trying to make something unattractive seem attractive when the underlying nature of the item in question has not changed.  Loans of varying (sometimes poor) quality were largely packaged as AA or AAA rated investments.  According to the Policy Statement: Nearly all of these mortgages were packaged in residential mortgage-backed securities …and a very large share of the total value of the securities issued was rated AA or AAA by the credit rating agencies. Obviously, the recommendations concerning the rating agencies have to do with “the level and scope of due diligence performed on the underlying assets.”  What this means for us is clear:  a further move in the direction of differentiated underwriting and pricing.  Pigs will be treated as pigs.  But DNA testing will be required on all loans. 

The impact of all this is unfolding before our eyes, yet this policy statement gives us a good idea of what the mortgage industry will look like in the near future.  The question is therefore raised, “Is the traditional mortgage originator viable in the future.”  I believe the answer is clearly no.  Fewer qualifying borrowers, reduced income per loan, more stringent licensing, more sophisticated and costly compliance and underwriting requirements and more complex consumer financial needs all point to the need to redefine the concept of mortgage loan originator. I’ll leave that discussion for later, but as the “Policy Statement” allows us to peer through the fog at our future; we can begin to make out the shape of something vastly different from what we have known. 

–David J. Coster

I had no choice. Those four words say it all. Why did I found the Home Asset AdvisorAcademy? I had no choice.

Time is a great teacher they say, and with wisdom comes obligation. The past fourteen years have given me great insight into the intersection between the mortgage industry and the greater financial services industry. Some of my lessons have been painful: the bankruptcies of mortgage.com and American Home Mortgage. But more importantly, these fourteen years have provided clarity with respect to the importance of the home asset to the effective pursuit of financial planning, and to the desire of many bright and caring professionals within the mortgage origination industry to connect the dots.

The mortgage origination professional, long a second-class citizen in the greater nation of financial advisors, has an opportunity to fill a gap in the financial services industry that allows the vast majority of our citizens to travel through life without the benefit of financial planning. Through a commitment to regular, comprehensive, financial assessment and suitable utilization of the home asset, a mortgage origination professional can become a foundational financial advisor-a life changer, a difference maker. This advisor I call the Home Asset Advisor. They don’t “do” mortgages, they don’t “sell money”, they don’t simply “provide access to financing”; but rather, they offer personal, client-centered financial advice linking the home asset to other financial planning issues. They in fact “Build Financial Foundations”.

In the middle of my fourteen year mortgage industry career, I branched out and began working with senior Americans on estate planning. Two clients stick out in my mind. I’ll call them Mr. and Mrs. Smith. The Smith’s were in their early 70’s and within five minutes of my sitting down in their living room, I was informed that Mrs. Smith had terminal cancer and only had weeks to live. As if that was not enough, Mr. Smith had just been diagnosed with prostate cancer. They had invited me to their home to see if I could help them prepare for Mrs. Smith’s impending death and to discuss Mr. Smith’s need for additional income.

The couple depended on Mrs. Smith’s income working part-time as a maid at the local military base, Social Security and Mr. Smith’s small pension to make ends meet. Mr. Smith had been wounded in the Korean War, not severely enough to draw disability, but severely enough to limit his work choices throughout life. They had no savings, no investments, and she had no insurance-health or life. They did however own their modest three bedroom home free and clear. They had no other debt.

The Smith’s were desperate; uncertain how Mr. Smith could make ends meet after Mrs. Smith’s death. They couldn’t get life insurance, they had no assets other than their home. They didn’t even have the funds to pay for Mrs. Smith’s burial. No one had ever offered to help them before. But they had heard me speak at a seminar-where they went frequently for the free lunch-and took me up on my general offer of assistance, thinking I would find a way to say no. What could I do? First, I cried, then we prayed, then I went to work.

I called a local attorney friend and got his firm pro bono to draw up a living trust, living wills, medical and financial powers of attorney. Next I started the process to apply for a reverse mortgage on their home. Finally, I contacted a local veterans group which raised money to cover the cost of Mrs. Smith’s burial. Am I proud of what I did to help…you bet…seeing the peace in the eyes of a very sick woman whose only concern was for her husband was quite a reward. But since that time seven years ago, I have often reflected on how Mr. and Mrs. Smith’s lives might have been better if someone had listened and provided some basic financial planning advice along the way. What I do know is that I changed their lives and made a difference, even in such a brief time.

Were the Smith’s my ideal clients…of course not. But there are millions of similar Americans with stories to tell, financial problems to be solved and financial goals to reach. Millions, who because they are not ideal targets for “wealth management” services are ignored by the broader financial planning industry. Approximately, 70% of these people have one thing in common-they own their home. Home Asset-Based Financial Planning is a concept which time has come. Home Asset Advisors are desperately needed.

Our industry and our society are at a crossroads. Bad habits have been developed. Bad results have been achieved. A revolution is needed to expel the bad and to lift up the good. Over the past fourteen years, and in particular over the past 7 years, I have witnessed a spark in many mortgage professionals that I want to fan into a flame. Join me in this battle. I had no choice, do you?

–David J.Coster