Finding the Benefit in Net Tangible Benefit

For a number of years the broker was top of the mortgage world totem pole. This penultimate position allowed some brokers the ability to inform the appraiser how much the subject property was worth and to tell the borrower(s) how much money they earned each year. Small fibs grew to stretching the truth, which morphed into white lies, that finally parlayed themselves into outright fraud.

While the majority of brokers out there stayed away from this daisy-chain to disaster, the allure of 3+ points on the back of an option-ARM was too much for many to pass up. Lender's underwriting guidelines had lapsed into quick once-overs of the file and the, as already written, insatiable Wall Street demand kept the spigots open and fundings flowing. As the spreads, and therefore profits, on loans became larger and larger, it became easier and easier to turn a blind eye to what was happening.

Value became detached from reality and merely a number that was dictated by which program paid the most YSP to the broker. The appraisal process turned into an equation of: VALUE = (CashOut + Closing Costs + Payoffs) / Max Program LTV.

The income side of the equation wasn't too far off from the above. Taking program's a max DTI allowed, subtracting a few points for a margin of error and then backing into what the borrower needed to be making to qualify. These SISA loans didn't become known as 'Liar Loans' for unmerited reasons.

As was bound to happen, these bad apple loans have begun to rot in the securities into which they were bundled. Many of these notes have begun to go bad and the borrowers are being sent default notices rates far surpassing historical averages. Remembering that home-ownership is the 'American Dream' and that foreclosing on that dream is never a pretty picture, things have started to get ugly. Homeowners have begun to fight tooth and nail to keep the roof over their heads, lawmakers have started to devise bass-ackwards plans to save these over-indebted individuals and families, and most importantly, the vulturous lawyers have begun to circle overhead.

The unpleasant odor of impropriety and fraud has created a breeding ground for lawsuits and a much ballyhooed rallying cry of 'save the American Dream'. Much has been written about the misdoings and legal rumblings that have already started. Read the Counting the Subprime Lender Lawsuits blog here, or any other of the myriad of articles that a Google search will produce.

The question now becomes, what to do about all of this. Aside from the points described in the previous post, we here at GMC, for some time now, have been using a Net Tangible Benefits Form. This form is devised for the sole purpose of flushing out the true purpose of the loan to each of our borrowers. It's used to paint us a picture and common sense outline of why the deal makes sense, and why, at the end of the day the borrower is better off for having us originate the loan. We want to ensure that their truly is a benefit, save for lining the broker's and our own pocket books. Reducing a borrower's current rate, saving a home from foreclosure, using equity to buyout an existing bankruptcy, taking cashout to reduce overall monthly debt obligations - these are just some of the benefits we're able to offer to our borrowers and some of the benefits we double check to make sure exist on every deal.

This NTB form goes hand-in-hand with our employment verification, as one is near meaningless without the other. It's great to save a home from going into foreclosure, but not great if that borrower is then unable to afford their new payment.

We want to make sure the borrower is better off after signing on the dotted line. We want to ensure that we protect all parties in the transaction. We want to make sure that we're here going forward and that we're putting our customers, brokers and the end borrowers alike into a better situation then before they came to us. After all, who wants to be sued anyhow?