Cyclical Market Affects Legal Perspective as Well

Simply put, the current crisis is another showcase of "the market working," Charles A. Lovell, the chair of Partridge Snow & Hahn LLP's creditors' rights practice group, told MSN.

As the market readjusts going forward, he hopes what the current crisis will bring about is a higher awareness of its cyclical nature, problems deriving from market history lessons not learned and doomed to be repeated.

"You have lenders who make bad decisions and then get punished, and then 10 years later we got new lenders making bad decisions, even though the same people are not necessarily in the business. If you can keep institutional knowledge in the lending industry so people do good underwriting all the time, then I think it evens it out," he said.

"Legislators need to understand history, too, and not overreact to problems. Some regulation is necessary, but to overregulate is to kill an industry."

However, he recognized the fact that "there is so much public pressure" that legislators will continue to intervene. One example of the adverse effect of a government intervention he said is going to be increased cost. For instance, in Massachusetts new foreclosure requirements are almost doubling fees, including increases in legal advertisement costs which may go up to almost $3,000.

At the same time, the mortgage market is currently facing an unprecedented volume of foreclosures and defaults, which slows down its ability to respond fast.

"The sheer volume increase poses a lot of challenges for lenders and their counsel. It reflects a lot of the bad lending decisions and the bad borrowing decisions of the last few years," he said. "There's plenty of blame to go around for the mortgage crisis, but it is not on one side of the fence. Clearly there were mortgage brokers and originators who oversold people their ability to either own a home or get a large loan. At the same time many borrowers were complicit in this" by going to a closing with inaccurate income or other data, which led to borrowing decisions that were based on unrealistic expectations thinking real estate market values will increase for ever.

"I've got a lot of gray hair. I've seen a lot of economic cycles," he added. "And the same thing happens roughly every 10 years. This one has been exacerbated by some bad products out there and people taking them."

He agrees that the current one is "a pretty bad" crisis. Each cycle, however, is a little bit different, he said, recalling how if in the late 1980s people were into buying multifamily houses, in the late 1990s there was the Internet bubble, and this time around very bad products. For instance, a 2/28 adjustable-rate loan with a very low initial rate that balloons in two years points to a basic flow in the system, he argued, since it allows uneducated borrowers to make some very bad decisions. "Again, it's both sides of the fence." He said lenders should educate borrowers on such products and borrowers should be smart to accept what they cannot afford.

He warned this situation has impacted the whole lending industry because in addition to blaming the industry for the crisis, "instead of letting market forces work this out," legislators are "trying to solve an immediate problem immediately," even though the market has already indicated it can work itself out of a bad situation. In his view Countrywide is one such great example. Bank of America is buying out Countrywide's risk and three to four years from now it most probably will pay off for BoA, he said, but if the government intervenes in situations like this requiring to stop all foreclosures, "that kills the economy and puts the good lenders out of business as well as the bad lenders, because you cannot put a stop to the market like that without tremendous repercussions," he said.

As to how relevant business size is when trying to survive in a troubled marketplace, he pointed to recent data showing it is not necessarily the bigger ones who survive. "It's the ones who kept their underwriting standards up that are going to survive.

"The ones who didn't fell prey to the exotic loan attraction, and securitizing those and selling those to Wall Street. If you just go back to basic sound underwriting you just don't have the problems that we have right now," he said. "What we're getting now is sort of a swing of the pendulum. A number of years ago lenders were punished for redlining, or not lending in certain areas."

Yet, by responding with bad products that were sold to everybody they are now rightly being punished for giving loans to people who probably should not have qualified. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/