I read the recent discussions and proposals for changes in the mortgage industry (from Jeff Wirsing and Brian Brady) with great interest.  One doesn't have to agree with any or all of the proposals to appreciate the effort and thought that went into their articles.  While I'm not a direct participant in the mortgage market, I have some thoughts on the matter.

It's important to think about the unique nature of real estate in peoples' lives.  To varying degrees, buying a home is a combination of purchasing a consumer durable and an investment vehicle.  Consumers have a number of conflicting forces pulling at them.  Typically, homebuyers are looking to buy the most house they can "afford" at the lowest "cost."  The quotation marks highlight the subjective nature of these considerations, as well as the fact that consumer preferences change over time.

The changes in the mortgage industry over the last decade skewed traditional definitions of affordability and cost.  Consider the changes in the industry's product mix; for example, 15-year loans were supplanted by interest-only and negative-amortization products.  The former required higher monthly payments but allowed homeowners to build equity more quickly; the latter effectively postponed equity building to allow for lower monthly payments, at least early in the life of the loan.

This change must be taken in the context of steadily (and after 1997) rapidly rising home prices, which created a great deal of complacency for both homeowners and lenders.  In addition to increasing the amount of outright speculation, homebuyers were content to allow home price appreciation to take care of equity building.  Why worry about paying down your loan and building equity when you are making 10-15% a year just by sitting on the couch?  In fact, this created the incentive for borrowers to borrow as much as possible to buy the most expensive house, taking advantage of the wonders of leverage in a rising market.

At the same time, lenders looked at credit performance numbers without accounting for the fact that, as real estate prices rose, delinquent borrowers could sell the house at cost (or at a profit), which kept the number of defaults relatively low.  Before the big blowup in 2007, keep in mind that the 2000 vintage was viewed as the standard of bad lending practices and poor performance.  Yet while delinquencies were universally high, actual losses were very low.  (If memory serves, the total losses on 2000-vintage prime jumbo loans were 0.05%, or five basis points-infinitesimally small.)

In this light, I'd argue that the real estate and lending industries effectively merged early this decade, creating (with apologies to the ghost of President Eisenhower) a "real estate/mortgage complex."  As I see it, mortgage performance became ever more closely tied to home prices, and real estate appreciation was increasingly fueled by the availability of so-called "affordability" products, which ultimately distorted affordability.

I partially agree with Jeff's statements that "...several market participants chose to turn a collective blind eye on the convergence of the events leading up to this financial tsunami."  However, I believe that all participants collectively chose to ignore the evidence of gathering problems, and also declined to address the unpleasant possibilities resulting from a nationwide decline in real estate prices.  The initial weakness in housing led to rising delinquencies and defaults, which led to a vicious cycle of catastrophic home price declines, the near-collapse of the financial system, a foreclosure pipeline that equals about half of annual home sales, and a deep and protracted economic contraction.

Jeff is correct that the market is bereft of leadership.  In part, this is because most of the industry leaders from the earlier era have been acquired, dissolved, or discredited.  (Despite running one of the biggest residential lenders, Ken Lewis is not about to step into the role of "industry spokesman.")  At the same time, both Congress and the Administration are happy to pin the problems on lenders and/or Wall Street, without acknowledging the roles played in the disaster by both consumers (i.e., voters), and regulators, particularly the ones they undermined.  (I'm thinking specifically of the GSEs, or what the Phantom of the Opera called "a disaster beyond your imagination.")  The leadership void is not necessarily a bad thing, since the earlier generation of "leaders" led the industry to disaster.

Ultimately, confidence-building is a two-way street.  From the consumer's perspective, borrowers need to be comfortable that the loan terms to which they are agreeing are fair and competitive, and that they fully understand the product's provisions.  In this regard, some of the laws and regulations instituted over the past few decades have muddied the process.  (The last time I refinanced my loan, I had little idea of what was in all the papers, paragraphs, and clauses I was signing or initialing.  I held my nose and signed anyway.)  There should be a commitment, on the part of the industry, to clarity and simplicity in loan product provisions and pricing, with a commitment to work toward comprehensive and comprehensible disclosure documents.

In turn, lenders (and the investors that ultimately buy the lender's loans in loan or security form) need to be confident that the information they are receiving is accurate and complete.  Misstatement of vital data (such as income and debts) is fraud and, from a legal perspective, should be treated as such.  This will help provide the transparency sought by the ASF's Project Restart.

A combination of better and simpler disclosures from lenders, combined with the assurance of complete and accurate information from borrowers, would go a long way toward repairing the damage to the lending industry inflicted by the mortgage crisis.  That said, I'd have more confidence that workable changes could be imposed if I heard an intelligent and rational discussion from our elected leaders, rather than the empty rhetoric and finger-pointing to which Americans are currently subjected.