Historically, mortgage finance has been a world of interesting dichotomies; buttressed by creativity versus tradition, cash versus credit, tangible assets versus intangible assets. Today, it exists as a world of curiosity and repulsion as the financial markets attempt to recover from an onslaught of defaulted mortgage loans that have spread throughout our nation like a cancer.

While mortgages exist at the heart of American life, few of us truly understand the meaning behind mortgage terms or the mystery surrounding the current mortgage disaster. Specialized terms such as: “sub-prime,” “collateralized-debt-obligation,” “mortgage-backed security,” “short sale” “Fannie Mae” and “Freddie Mac,” float through the air without a cleared-for-landing runway in our minds.

Even for those of us working in industries which commonly use these words, the complexity of issues surrounding the mortgage meltdown can be overwhelming. We wonder to ourselves…how did this happen and how do I keep it from happening to me?

Breaking down a controversy so complex can be challenging. I like to think of it within the framework of a modified ancient parable: Joe and Tom each wanted to build a home. Both men cared a lot about location, but for different reasons.

Joe was a very deliberate man, determined to create a shelter that would stand the test of time. So, Joe made sure that he got his foundation right. He built his place on a large piece of bedrock, using steel girders for the base and durable construction materials for the rest of the structure.

Tom, on the other hand, was an enthusiastic risk-taker who wanted a fabulous view of the Pacific. And, he wanted his home fast. So, he built his place on the sands of a gorgeous beach, using wood beams for the supports and light weight building materials.

Five years later, a horrific, week-long El Nino hit the LA basin and wouldn’t you know…Joe’s house was the same on day eight as it had been on day one. Tom’s house, on the other hand, became a boat travelling quickly into the Pacific…

So, what is the point of this parable and how does it lend insight into the mortgage crisis. The specialized terms that we mortgage brokers use will be no more relevant to the average American two years from now than they are today. The names of closed banks, shunned CEO’s and bad investment firms will pass away. But, the foundation of what makes for a good mortgage investment will stand firm as it has for the past nearly one-hundred years. In the mortgage world, there are four “C’s” which are critical to approving a borrower for a loan.

These are:

Credit History
A report which defines a borrower’s use of credit.

Current Income
Amount of income earned, length of employment and job security.

Capital
Cash-on-hand, in the form of liquid and semi-liquid assets.

Collateral
A security or guarantee, usually in the form of a non-liquid asset, used as a guarantee on a loan

While a borrower does not need all four of these elements to successfully qualify for or hold a mortgage loan, a combination of these elements generally displays a good foundation for a mortgage. Many of the loans made to Americans between 2002 and 2005 did not reflect a good balance of these elements. This fact, combined with the use of “creative” mortgage products and the softening of the mortgage market, has contributed to our current crisis.

For information to help you strengthen your borrowing portfolio and in order to keep yourself protected as you consider home-ownership, Laurie is co-hosting a credit seminar in Pasadena on Sat. May 17th.

If you are interested in attending, please email:LLUNDIN@EARTHLINK.NET.

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