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Confronting the Credit Crunch

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By Maria Patterson

At the height of the real estate boom in the mid-2000s, brokers began realizing that to sustain business for the long-term, they would need to climb aboard the “one-stop shopping” bandwagon. At the center of the full-service real estate model? A mortgage operation. Adding a mortgage component was not only a way to meet consumer demand for a simpler transaction but, more importantly, a vehicle for driving ancillary income and improving profit margins. As this business model met with mounting success, a mortgage operation quickly went from ancillary to core business for many real estate firms. Today, however, as the industry battles back from the housing crisis and the economic recession, and struggles to meet the challenges of a credit-crunched mortgage environment, the question becomes: How can brokers reinvent their mortgage operations and help get buyers into homes?

According to Jeff Mandel, chairman & CEO of Rancho Cucamonga, California-based credit counseling firm ApprovalGuard, “Markets are diametrically different today. The credit market shakeout is severe; product contraction is significant. To get your agents to embrace your mortgage division is difficult.”

Given these current circumstances, Mandel emphasizes that finding the right mortgage partner has taken on an elevated urgency. “Two-thirds of every mortgage application today doesn’t qualify, so finding the right partner is critical,” explains Mandel. “Are you getting deals done? Are you optimizing profits? There is a tremendous push right now for financial literacy and educating your customers.”

Peter Galbraith, president of sales for a real estate company in Tulsa, Oklahoma, explains that the biggest difficulty with the mortgage business today is a sense of “perceived paranoia” on the part of lenders.

“When a lender reviews a borrower’s file, it seems that our clients have to over-verify their employment, assets, etc.,” he explains. “We have taken much time educating agents to the fact that stricter lending guidelines apply to all lenders. Our in-house lender is not making things any more difficult in getting clients to the closing table.”

In order to sustain and successfully build their respective mortgage divisions in the current economic and real estate climate, brokers must direct their focus toward consumer education. How many consumers actually understand the credit process, for example? In today’s climate, agents must be prepared to educate consumers on the steps that need to be taken to qualify for a mortgage…if not now, then in the near future.

Dan Kruse, president of a real estate company in Wisconsin, launched a new joint venture (JV) mortgage operation about 10 months ago, at press time, reporting that the new relationship is proving successful even in today’s difficult lending environment.

“We have positioned our company as a stable organization during a time of chaos,” says Kruse. “Both our company and the bank our JV is associated with have been around for many years. We have emphasized this to the general public and are seen as a group that knows how to handle difficult times and situations both in lending and in real estate sales. The JV platform has given us the ability to service the total needs of our buyer clients. It has also served as an education tool for those unsure of their options during this market.”

According to Mandel, success in today’s mortgage environment must entail change for brokers. “We have been very transaction-oriented and need to get back to a relationship mindset. We need to become trusted advisors and, as an industry, help consumers navigate the market—not just how to get them into a home, but how to help them stay in a home and eventually move into their next home.”

The Economic Climate: A Realistic Assessment
Not surprisingly, there is a significant correlation between unemployment and mortgage deficiency. As of press time, the unemployment rate was 9.1%, with more than six million considered long-term unemployed—in other words, out of work for 27 weeks or longer. As of this past spring, foreclosure filings were hovering at about 100,000 per month, with almost three million imminent defaults on the horizon. Those statistics clashed with an 8.5-month supply of new homes on the market.

According to Mandel, “19.8% of prime mortgages are now delinquent and there’s more pain to come. Everyone points fingers at everyone else—but we’re all accountable. We have to ask ourselves, ‘how are we helping our customers fight against some of these housing and economic trends?’ What education are you providing them with?”

“It’s more of a state-of-mind adjustment rather than a short-term strategy,” says Galbraith. “We are considering this the ‘new normal market’ for sales and mortgage guidelines. The quicker we can adjust and understand our market, the quicker we can put together a business model that is profitable in this environment.”

According to Kruse, education must take place throughout the entire mortgage process. “We look to our qualifying loan officers to educate the consumer and stay in constant communication with our agents so the ‘surprises’ during the transaction aren’t really surprises to anyone.”

The Credit Factor
According to Mandel, the average consumer currently possesses about four credit cards and four additional different lines of credit, including mortgage and car loans. The good news is that this number is down from an average of about 13 different forms of open credit per consumer as little as two to three years ago.

“However, the average consumer still gets a bill and says, ‘What can I afford to pay today?’,” Mandel explains. “Further, there are common misunderstandings about the priority and impact of which debt to pay—pay the credit card payment or pay the house and car payment?”

To further compound the challenge, the outlook for young adults is grim. The percentage of college graduates with derogatory credit is 48%, reports Mandel. “We have a tremendous gap when it comes to providing financial literacy and education in our high schools and colleges,” he explains. “Most individuals learn how to manage their credit through trial and error. They think just paying their bills on time should provide them stellar credit ratings. However, it only represents about 35% of what makes up an individual’s credit score.”

That said, today’s credit crisis presents an important opportunity for real estate professionals to step in as a guide and resource.

“We have a fiduciary responsibility within the industry to help people get into homes they can continue to afford,” says Mandel. “We must help consumers understand the reality of the risks of homeownership, whether it’s about home value volatility, job security, income fluctuations, additional debt requirements, etc. We need to let them know how it will affect their credit and their realistic ability to comfortably afford their home.”

Kruse’s mortgage operation is taking a proactive approach in consumer credit guidance. “We look to the mortgage division to work with our clients that need help improving their credit,” he explains. “The idea is to create a game plan on how to improve their credit and establish a timeline of when they will be ready to purchase. A key factor is making sure our real estate agents are fully informed on this ‘road map’ to recovery so we’re ready to help the client when the time is right.”

New Opportunities for Brokers
After attending a meeting of the Housing Policy Council in Washington, D.C. this past spring, Brien McMahon, chief franchise officer of mortgage insurance firm, Radian Guaranty Inc., reported that today’s major lenders have one predominant question: “How do we get to REALTORS®?”

According to McMahon, the Housing Policy Council revealed a renewed urgency among lenders to connect and pursue business via the real estate channel.

“Lenders became focused on refinance business over the past two to three years and moved away from the real estate business,” he explains. “Now, they’re trying to get back to the point of sale and there are some leading lenders out there that don’t know how to do it. They are ready to partner with the real estate market, but they just don’t know how.”

For most lenders in today’s mortgage market, volume is dramatically lower and competition has intensified. However, in order to effectively court real estate partners, lenders must become creative and play a role in helping a real estate brokerage grow its business long-term, as opposed to just providing mortgage financing.

“Best-in-class service and products are key to any JV, however, probably as important are the people involved,” says Kruse. “Our mortgage division has been hugely successful from the beginning because of the individuals we have at the center. Without quality people, it would not work.”

The Impending Impact of Legislation
McMahon stresses the need for a call to action among the real estate community to become involved in the matters currently up for debate in Washington.

“Congress is all about the QRM (qualified residential mortgage) right now,” says McMahon. “We must lobby and get involved and drive the changes. If we rely on Congress to do this, we may not get the answers we want.”

Part of the forthcoming Dodd-Frank Act, the premise of the QRM is risk retention. According to Galbraith, the QRM legislation has the potential to put us back in a dangerous situation.

“I think it will put the groups that were once classified as ‘too big to fail’ back into the same category,” he explains. “Giving three or four banks an advantage to meet QRM guidelines will essentially kill smaller lenders or make it hard for them to compete on a level playing field.”

According to McMahon, the steps being taken on Capitol Hill and through the Dodd-Frank Act will potentially shut one-third of the nation’s potential home buyers out of the market by making it impossible for them to qualify for a mortgage.

“There are 270 different parts of the Dodd-Frank Act—lending will never be as we once knew it,” says McMahon. “We all must lobby for the best outcomes. Washington and the lending community are looking to our industry for guidance.”

Moving Forward in Today’s Mortgage Environment
According to Mandel, a successful mortgage business in today’s environment must center on helping and educating consumers as a trusted advisor. “Do you know how many loan modifications through HAMP re-default within six months?” asks Mandel. “Fifty to 60 percent. Why? Because we’re not helping to educate consumers. If we don’t effectively educate buyers on the choices available to them, then we’re just playing a shell game—we’re just delaying the inevitable.”

Today’s market presents brokers with a significant opportunity to guide home buyers toward financial literacy. McMahon also advises brokers to keep a close eye on upcoming changes at FHA.

“There are lots of changes when it comes to FHA lending,” he explains. “These are very significant changes. FHA currently makes up about 30 percent of the mortgage business and mortgage insurance (MI) represents five percent. We need to start flipping that back the other way. FHA has come out and said, ‘We want to reduce our mortgage business by 40%.’ If we’re not training our agents about MI, they will keep selling FHA. It just comes down to education. In order to stay ahead of all these changes, you must educate your agents.”

Becoming active and vocal in changes to mortgage regulation will be a critical role for brokers and real estate professionals to play. “How the changes to regulations shake out right now is critical,” says McMahon. “The more voices that are heard, the better impact we have on the decisions that are made. We need to do our part to increase home purchases right now, not decrease them.”

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