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« How We Had Fun on the Fourth Third | Main | Overheard »

Sunday, July 08, 2007

Comments

Since we are now in the midst of a crisis which was caused by subprime mortgages, I wanted to share with you a new and innovative idea that may offer a solution to this crisis. Previously, I had submitted comments to the Federal Reserve Board regarding the Subprime Lending Crisis. I presented them at the FRB hearing on HOEPA on June 14 in Washington, DC where the current crisis was discussed.

I also will be giving a presentation to the Third Annual SUBPRIME ABS conference to be held in Las Vegas on Sept. 19-20, 2007. The Press release appears below.
IMN Announces Third Annual Subprime ABS: Where Are We Heading?

LET'S NOT REACT TO AN ACCIDENT, LET"S PREVENT ONE:

The key to the subprime crisis is the borrower, and no one has approached a solution from this direction. It seems that all we have been doing is watching helplessly while the subprime defaults and foreclosures threaten our economy with disaster.

This is a critical time. Everyone seems to be helplessly reacting to this crisis, whereas, we should be proactively involved in trying to lessen the impact of default and foreclosures by helping the borrower monitor his/her financial health. This way, the borrower will be guided to “stay-on-track” and avoid financial harm. A by-product will also be an improved credit score for the borrower. This is a win-win situation for all involved.

By way of introduction, I have been involved with research in the subprime crisis and its impact on the lending community. I attended the Federal Reserve Board hearing on HOEPA on June 14, 2007, and I submitted two comments which suggested a solution to this crisis. As an educator for the past 30 years as well as a practicing CPA and Consultant for 30 years as well, I have approached this issue from a unique perspective. I would like to suggest a "proactive" solution. Let’s not be “reactive”, let’s be “proactive”.

There is something that can be done, and it requires that we recognize the key player in this drama: THE BORROWER. The financial health and financial literacy of the borrower will have a major impact on the situation. I suggest a new and innovative approach using Artificial Intelligence to help monitor the financial health of the borrower and enable the borrower to be better able to payoff the mortgage and be prepared for “payment shock”.

It is not enough to consider the borrower’s income as the sole factor in determining qualification for the loan. There are other factors that should be considered such as spending patterns, other debt, credit card balances, and other variables that are unique to each borrower. This can be accomplished using AI as a tool to not only help the borrower qualify for the loan, but it can also be used during the most critical period, the years of paying-off the loan, to monitor the financial health of the borrower. My two comments to the Federal Reserve Board spell out my solution.

The key to any mortgage is having the capacity to payoff the loan, not just simply qualifying for the loan. What good is lending to the borrower, who is lacking in financial literacy, if he/she unknowingly will be making the wrong borrowing and spending decisions which will result in loan default? I believe that the subprime borrower will welcome this guidance because at this time, this borrower is helplessly failing in record numbers!

I believe that both the borrower and the lending community will benefit. This can be accomplished by providing the borrower with an impartial evaluation of the borrower’s ability to afford the loan and it will help monitor the borrower during the course of paying off the loan. The borrower will have greater confidence in the loan decision, and the lender will gain confidence in the borrower’s ability to qualify and repay the loan. This process will lower the probability of delinquency, default, and foreclosure. The analysis will also provide an opportunity for “due diligence” on the part of the lender. In effect, the lender will be able to rely upon this impartial analysis and fulfill the lender’s fiduciary responsibilities.

I welcome your contact on this issue.

Best Regards,

Samuel D. Bornstein, CPA, MBA, BME
Professor of Accounting & Taxation
School of Business
Kean University, Union, NJ

Bornstein & Song, CPAs
Certified Public Accountants & Consultants
P.O. Box 627
Oakhurst, NJ 07755-0627

Tel: (732) 493 - 3399
(732) 493 - 4799
Cell: (908) 433 - 6744

Email: [email protected]


That's a pretty scary forecast. I'm going to have to take a look at where our pension money is now.

I'm of the strong belief that lenders need to be held accountable and here's why: When a lender invests in a "bad bet," he's not hurting just the borrower. The lender is also hurting those who have invested in that institution.

Consider that there were FOUR big losers in the last crash: the borrower, the lending institution, those who invested in the failed lending institutions and the average American who paid too much for a house they became stuck with. (And let's not forget that artificial run-ups in housing prices hammer homeowners with huge property tax bills.)

When a lender gives hundreds of thousands of dollars to anyone who is not qualified, that is negligence at best and fraud at worst. It's time we hold predatory lenders accountable just as we did when strong usury laws were in effect.

Landismom: Oops, missed your comment. The American media has completely failed in reporting the dismantling of the pension system. Sure, there have been stories, but not enough to stir the outrage it deserves.

The Baby Boom generation eventually will be remembered in the history books for screwing millions of Americans of their retirements. Well, at least I'll remember them for that.

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