This is my first blog entry since the acquisition of Dorado, the company I founded with Rob Carpenter, by CoreLogic and yes, it seems like a lifetime ago. Back in March, the combination just made sense. And I’ve been proven right now, 6 months later.

When I look at the market over the next three years I believe there is growth on the horizon. The right partnership would help us realize that growth potential while at the same time continue to provide a team of entrepreneurial computer engineers with opportunity to do something really interesting. I like to tell prospective team members during a job interview, “what is going to have the biggest impact on your kids’ lives? Building yet another site so they can find their old high school flame or laying the network cloud down that puts them into a home to raise their kids without bringing down the world’s economy?”

To me, to be successful, the market will move quickly from data processing to information processing. What is the difference? I’ll give you a simple example when I check the weather app on my iPhone. Data is barometric pressure, satellite imagery,  radiosondes that measure temperature, humidity, wind speed, and cosmic ray intensity, etc. My little display on my iPhone shows me a little sun, or little sun with clouds, over the next five days. Those little drawings of a sunny day are information – easily digestible information – that allows me to quickly make decisions about what to wear on a particular day anywhere in the world.

Information processing is a combination of data – reams of it, the network to provide ubiquitous and predictable access to it, and technology to make it consumable and digestible.

CoreLogic is all about data. They are the largest provider of data in this industry and others. The have the largest Oracle database on the planet right next to the largest Sybase database on the same planet. Its almost impossible to close a residential loan without some data housed in CoreLogic’s data centers. [what are some examples of CLGX data that would be interesting?]

Dorado is pure technology. Empowered by CoreLogic’s data, we’ve become part of a larger overall strategy to provide technology to the market that transforms data into actionable information. That technology represents an intelligent and robust grid that provides ubiquitous access to data, an open platform to lay composite applications that digest and disseminate that data as usable information – for example loan processing. And services on top of those applications – to add even more value such as outsource services or business consulting.

The empowerment of Dorado by CoreLogic excited me last spring, and now that our combination has proved successful – more than we anticipated –  I’m looking forward to the next few years to come.  We are on track to make every loan on the planet, better and safer.

There is risk associating something so important as breast cancer with something so uninspiring as the financial crisis but there is a segue I promise. I also promise that I take the first part, breast cancer, very seriously and am very passionate about it. It’s been in my life, or rather a presence in the lives of friends around me, and I’d like it eradicated from our lives categorically around the world. But before we can do that, I think that we need to fix the way in which we are attacking breast cancer research.

More American women have died of breast cancer that Americans killed in WWI, WWII, the Korean War, and Vietnam combined. In 1940, the lifetime risk of contracting breast cancer was 1 in 22, in 2007 it was 1 in 8 — nearly triple. In the nineties, a Japanese woman who had little to no risk of getting breast cancer prior to moving to the U.S. within two years had the same propensity to develop breast cancer as the rest of U.S. women. Japan’s rate of breast cancer is expected to rise 25% over the next few years. My point? Breast cancer is a huge global problem and it is becoming clear that the cause of this devastating disease is environmental, hormonal, or dietary related — in other words, preventable. And yet most if not all research and intellectual capital is focused on the cure and not on the prevention. The National Cancer Institute annual budget is $1.8 billion; amazingly, only 5 percent goes for cancer prevention. To me, that doesn’t make sense. It’s a lot cheaper and healthier and more wonderful to prevent it from happening in the first place and yet we can’t seem to focus on that.

Now the segue. Bad loans that result in repurchase or buybacks are an ugly problem. Mortgage repurchases skyrocketed from $7.34 billion in 2008 to $30.87 billion in 2009, according to Inside Mortgage Finance. One analyst I talked to estimates that bank private-label securities losses range from as low as $23 billion to worst-case scenario estimates of $180 billion+. According to Compass Point Research & Trading, big banks could ultimately lose $134 billion if mortgage securities are put back to them. The problem is huge and preventable. Yet all the attention seems to be on the cure and not prevention. The cure is to put the loans back on the originator. Prevention lies in producing quality loans in the first place that aren’t at risk for repurchase.

“What you hear from the banks is that it’s overwhelmingly mortgages that were originated in ‘05, ‘06, ‘07 and a bit into ‘08 that are getting put back to the banks,” said Chris Kotowski, an analyst for New York-based Oppenheimer & Co.

On the origination side, the preventive response is to simply tighten credit. LTS that require 30% down payments, 700 plus credit scores, extremely low debt to income ratios. But this is not good for the consumer and the market. “Tight credit conditions, higher mortgage rates and a big drop in refinancing will push residential originations below $1 trillion this year to levels not seen since 2002,” according to Jay Brinkman, chief economist at the Mortgage Bankers Association.

And still, banks are making mistakes, unable or unwilling to invest in prevention. According to Bloomberg, an internal Freddie Mac review of accuses Citibank of continuing to sell mortgages that violate quality standards. “Fifteen percent of the performing loans Citigroup sold to the government-owned mortgage-finance company in the second half of 2009 and the first half of 2010 had such flaws as missing appraisals or insurance documents or income miscalculations, according to the review of 375 mortgages. The target for defects should be about 5 percent,” said Tim Rood, a former executive with Freddie’s sister agency, Fannie Mae, and now managing director at Washington-based advisory firm Collingwood Group LLC.

We can let the market continue to cool, interest rates to go up, and the requirements for borrowers to obtain a loan to continue to increase, but I don’t think that is good for the economy in general. It will have a broader impact. A simple example is jobs. Asha Bangalore, an economist at Northern Trust in Chicago, tallied figures from the Bureau of Labor Statistics for sectors like construction, building material and garden supply stores. She found that from November 2001 to October 2005, housing and real estate accounted for a whopping 36 percent of private-sector payroll job growth. Obviously the opposite is also true when these industries contract. According to Bernake, “Job growth would be stronger if not for the depressed housing industry and financially ailing state and local governments. Construction firms and local governments shed a total of 36,000 jobs in December.”

The real focus, investment, and intellectualism should be on prevention in my mind. The focus should not be on reviewing quality after the loans have been delivered but in ensuring the accuracy and quality of the loan data throughout the origination process. This means investing in, and better understanding loan quality through data reliability, origination risk assessment, fraud prevention, regulatory compliance and by embedding investor guidelines, transparency, and collaboration in the communications process with credit providers.
Here is where I think technology and information can play an incredible, game-changing role as do the companies and people that are willing to invest their time and capital into research and development into those areas that focus on creating and delivering solutions to bad loans – and preventing a bad loan from ever being issued again. Facebook or Google’s impact on our culture is profound and permanent. Outside of those companies’ shareholders, I’m not sure either company had any real impact in putting a roof over someone’s head. Dorado and data analytic leaders such as CoreLogic, on the other hand, do.

Recently, The Wall Street Journal posted an article about the battle that is reshaping the way airline tickets are being sold. The fight is between American Airlines and SABRE. Now I’ve watched SABRE for a long time because I think that the transition that the airline reservation market went through is the same that mortgage lending is going through. I’ve said this for some time.

SABRE is what is called a GDS – Global Distribution System – and was actually developed by the airlines in the early seventies as a response to the travel agents building their own system and charging the airlines for access. It consolidates fare offerings from hundreds of airlines to share with travel agencies. SABRE is paid for by the airlines — the airlines where worried about intermediation. Back then everything was commissioned based. The airlines are a lot like lenders and the travel agents are a lot like third party mortgage brokers. In many ways, Dorado is modeled after this SABRE technology model as a cloud-based order and procurement system for lending.

Anyway, SABRE itself has become a third party intermediary or middleman (and no, Dorado doesn’t want to do that!) to the airlines and according to analyst Henry Harteveldt, at Forrester, “There’s going to be a shoot-out in the airline distribution corral.” SABRE is raising fees on American Airlines in retaliation for their going directly to consumers using their own technology. American also pulled fares from Orbitz. Now, American Airlines sells about two-thirds of its seats through outside parties and spends about $1 billion annually on ticket distribution. The airline is pushing travel agents to bypass SABRE and work directly with them. Other airlines such as Southwest also eschew intermediaries, relying on valuable travel incentives such as free baggage check to build a loyal direct-book consumer following.

Beyond reducing the fees to the distributors, there is something else driving American and other airlines. And that’s what I’m watching. Airlines make much of their money now on separate fees charged to consumers for baggage and other services. Selling tickets directly gives them more opportunities to up-sell to consumers, offering special deals or upgrades along with the ticket purchase.

It will be interesting to see how this plays out. Certainly the same is true for the mortgage industry. Banks, like airlines, are under increasing pressure on profit and revenue and will look for upsell opportunities to get that profit back. In an article on Bloomberg last June, journalists David Henry and Dakin Campbell cite both Wells and Bank of America as pushing their customers to buy more brokerage and banking services to make up for the money they aren’t making with loans and investment banking in a weak economy and heightened regulatory environment. But I think there will be more and more creative ways of finding new revenue sources on the origination side when the default challenges begin to wane and the attention is again directed to the demand end of the value chain.

According to the Bloomberg article, Wells Fargo is using slogans like “Eight is Great” as it asks its employees to cross-sell the most financial products per retail customer in the U.S. On average, Wells Fargo beats other large banks with an average 6.02 products per household. Wachovia, for example, before Wells acquired them, sold 4.85 products per household. For customers that have a mortgage with Wells Fargo, the average product per household is significantly higher.

I can think of many other products that banks could sell beyond new deposits. I once worked with another firm understanding the retail financial purchases of consumers during home purchase — from loans for appliances, credit cards, even new cars. There are others like fraud protection and new insurance products by the score. There’s a mint to be made but it seems more like leprechaun gold — in sight but never found. I think that is because banks have relied heavily on intermediaries and I think that reliance is quickly going away either because of profit motivations or the need to mitigate risk.

It is true, post collapse, that brokers that used to make up over 60 percent of origination have all but gone out of the market. But still loan originations in the industry are split in half between retail and correspondent third parties. I wonder if that will remain the same and if so, how the relationship between correspondents and lenders will be affected as the drive towards zero defect loans only increases?

It will be interesting to watch how that changes as even higher pressure is put on earnings in these large retail banks. Even more interesting will be the technology response – those that enable the banks and those, like SABRE, that have morphed into intermediaries between the bank and consumer. Dorado will sure to keep close vigil.

I was driving yesterday down to Santa Yenez to visit some family and was flipping through AM radio channels on the way when I came across this story. I looked it up on wikipedia this morning.

Before the 1900’s the agricultural economy in Alabama centered on cotton as the main crop. Then in 1913 disaster struck. The boll weevil invaded from Mexico and decimated the market for years. Farmers in Alabama were mortgaged to the to the hilt. It was really bad. A complete meltdown of the market. A local depression.

Now there’s a monument, erected a few years later, of a beautiful woman with her arms outstretched above her head. She’s holding a boll weevil. (There’s a photo of it online…) And she’s not getting ready to chuck the weevil across the street. There’s sincere benevolence on her face.

The inscription says:

“In profound appreciation of the boll weevil and what it has done as the herald of prosperity this monument was erected by the citizens of Enterprise, Coffee County, Alabama.”

This is a true story.

Turns out that when it was the worst, a local businessman named H.M. Sessions had the idea (and the cash) to encourage an area farmer to plant peanuts. Boll weevils don’t like peanuts. The crop made the farmers in the area more money than cotton, a lot more. They paid off the debts in their first year. Farmers became rich. Very rich. If it wasn’t for the boll weevil invading their crops and the pain it inflicted on them, real bad pain, they never would have changed what they were doing to become rich.

They were self aware and appreciative enough to erect a statue of a bug.

Through pain, innovation and technology created prosperity. Hardship created the opportunity to stop, look at what they were doing, and to introduce change.

Reward followed.

I think about the pain in the lending markets today, of Lehman, Bear, WAMU, Wachovia, of the complete market meltdown.

But I think we may just erect a statue of an ancient and beautiful Grecian woman holding a subprime loan or credit default swap sometime in the middle of D.C. or Central Park someday. I think that when this is over we will understand that without this pain we never would have stopped what we are doing, look around, and think about it differently, and reap the rewards that follow.

I recently attended thought seminars like the AmeriCatalyst 2010 or the Housing Renaissance and I’ve been listening to very smart people who are doing just that. Its got me excited about the type of leaders that are rising to the top and the new way of looking at the success of the market long term.

The article noted that securitization grew as a way for banks to get around capital rules, as it was more expensive for banks to hold capital against the risk of the loans than to securitize them and sell them into the market. For no other reason than that, the loans were securitized. This also had the affect of opening the market to new entrants who wanted to originate loans but had no intention of holding the paper. This ability to quickly move the risk of a loan onto someone else’s shoulders helped to nearly bring down the entire global financial system and bankrupted entire countries like Iceland.

So does the U.S. need a securitizations market? Canada doesn’t. (I got in an argument once with a Canadian banker over dinner about this). The answer, according to the Times article, is probably yes.

Norris quotes U.S. Comptroller of the Currency John C. Dugan as telling the American Securitization Forum, We need a vibrant, credible securitization market to help fund the real economy going forward.” Ninety-five percent of the U.S. mortgage market currently depends on government guarantees (through Freddie, Fannie, or FHA.) When that dries up, the market will surely suffer without a healthy alternative.

Again according to the Times’ Norris, two fundamentals changes are needed to fix the securitization market: 1) The underlying loans have to be better quality; and 2) Investors have to believe in that quality and be rewarded for their risk.

“We must have better loans,” Michael H. Krimminger, the deputy for policy to the FDIC’s chairman, said in an interview with Norris, “One way is to have regulatory fiat. That is important, but it is not sufficient.”
Let’s let Norris take it from here for a moment. He writes, “If the private securitization market is to be revived, would-be investors will have to be persuaded there are better safeguards. Such persuasion seems likely to include more disclosures, more time for investors to review loans before securitizations are completed and perhaps [more] rules. […] [but] mortgages are highly dependent on individual facts that are not easy for an investor to review. Is the borrower really responsible? Is the house really worth this much?”

I have been saying the same thing for years now. Maybe that’s why I think Norris is a genius.

I use the word “transparency.”

The Government can impose new regulations and investors can demand higher hurdles to secure their investment, but both require the appropriate technology to be in place in order to be effective. The appropriate use of technology can empower financial institutions to deliver the necessary levels of efficient transparency to make the securitization market work.

A lot of technology investment since the crash has been on the side of servicing and default management — for good reason since that where the money is. The government is spending billions of dollars on stabilizing the market by trying to keep people in their homes. Personally I think that is the right thing to do. But that investment does nothing to establish the transparency that will enable the securitization market to come back. Short-term stabilization and “band-aid” measures were necessary in the short term, but long-term cures require continued investment in the right solutions – those that bring permanent change in the way of increased efficiency, with accountability and compliance built into the system.

I get excited about that idea, to be part of the rebuilding the world’s number one economy. To me that’s better than working on global warming, electronic cars, or an iPhone App. In fact, I think this is the sexiest place to be in Silicon Valley. While Facebook can connect me with my old high school friends, and OpenTable can help me get a great restaurant reservation in the city, neither can bring the global stability that comes from a healthy world economy. While it may seem a stretch to suggest that origination technology holds the key to worldwide prosperity, it has a not insignificant role to play.

I think that a shift must be made from lender-centric process tracking confined to the four walls of the enterprise, to an open market-centric approach of information management and data orchestration.

Simply put, today’s processing systems do no more than manage tasks in processor’s queues, check off underwriting conditions, order documents, trigger funding, then send a small bit of information to a back office system for accounting and servicing the loan.  Investment and expected ROI is made on processor efficiency – making more profit in origination.

The new model, I believe, is a system that takes its place in the value chain itself – from application past funding to securitization.  Systems need to collect information over the Web, verify and analyze that information, enable processing of that information, and then orchestrate the dissemination of that information.  Investment is made on quality, ROI is measured based on the value of the asset AND on productivity – making more profit not just by doing more operationally with less, but also on the value of the originated loan itself.

That comes from transparency.

The Internet is made for transparency. That’s why I believe any technology solution must reside on the Web.  It can be a lender specific technology platform or one that many lenders use at the same time but I believe that the key technology beyond workflow approaches, collaboration techniques, integration hubs, data warehouses, and decision engines, is “the cloud”.  And that is because only in the cloud can any solution be part of the value chain; integrated with other companies that bring value to the borrower, to government in its new relationship to the chain, and most notably, to the investor.

In the cloud, a promising new technology is XRBL.  Dorado is exploring this new idea.  XBRL is an open markup language from the roots of XML that can make financial reporting elegant and simple.  Wired magazine wrote an article on this technology and its potential impact on the securitization market (“Road Map for Financial Recovery” – 2.23.09).

XBRL is currently focused on SEC accounting.  Last December the SEC mandated that every company with a market capitalization over $5 billion will be required to submit filings using the format.   This allows investors to be able to run their own reports against reported information.

The same technology can be used for marking loan information – providing volumes more information beyond addresses and  credit scores. Information including why the bank made the decision, what processing workflow was used to originate the loan, what fraud analysis was done on a loan and the stakeholders associated with the loan, and especially what compliance and regulatory standards were adhered to in providing the loan.  This, in turn, will make an investment made up of securitized loans more attractive to investors.

Unlike my Canadian friend, I believe that a healthy securitization market is necessary for the overall health of available credit and the economy.  I agree with Norris’ assertion on the need for quality that comes from transparency.  And I get excited about the role technology and the cloud can play in that.

The annual IMD World Competitiveness Scorecard came out in October for 2009.  In this measure of worldwide competitiveness, or “how nations and enterprises manage the totality of their competencies to achieve prosperity and profit,” the U.S., with all of its problems, was ranked #1 overall, as it has been for a while.  Hong Kong switched this year with Singapore to gain the #2 position.  China’s Hong Kong is “swiftly closing the gap” with the U.S.

If you read any of my blogs you’ll know that I’m very much in favor of globalization.  I embrace it.  There are smart people all over the world; I think cross-pollination of ideas is a good thing; and regardless of anyone’s opinion, it’s here to stay.  I also agree with (and this is the only time you’ll get me to say that) Paul Krugman, a critic of these rankings, “The world’s leading nations are not, to any important degree, in economic competition with each other.”

All that said, I’m a very competitive person by nature and I like the idea of the U.S. being in the top position.  In 1989, when Japan was ranked #1, everyone here in the U.S. was scared to death.  Today, Japan is ranked #17 and people don’t seem to really care.  I don’t want that to happen to us.

A lot of experts will argue that the current U.S. economy echoes that of Japan before its downslide.  IMD economist Professor Stephane Garelli points out, “In 1989, Japan was unassailable…Then all hell broke loose: the stock market went into reverse in 1989, land prices collapsed in 1992, credit cooperatives and regional banks came under attack in 1994, large banks teetered on the edge of bankruptcy in 1997 and a major credit crunch occurred in 1998.  Does that ring a bell?”

He, of course, is pointing at the U.S. economy after the subprime mortgage crisis.

But at the same time, he is quick to say that the comparison to the U.S. and Japan is not airtight, “because of its openness, resilience and entrepreneurship, it [the U.S.] always finds the means to reinvent itself in ways that Japan and much of Europe often lacks.”

I believe that is true for the mortgage industry in the U.S.  Openness, resiliency, and entrepreneurship will dictate how competitive this industry will become as it rebuilds itself.  Will it garner the trust and envy of the global community and its investors?  I think innovation will play an important key in the market future success.

Technical innovation will come not from just from digitizing a paper-based process. Real innovation will come from using technology to turn the industry upside down.  From people making decisions with limited information, transformed to data over the network, processing the decision itself.

People fill the gap because decisions need to be made on very little information – only a few loans in a pool are verified before being sold; underwriting decisions are based on a few submitted documents and a credit report; appraisals are accepted from standalone contractors; brokers and consumers are taken at their word alone.

The point of sale, the loan processing system, the pricing engine, the underwriting engine, the vendor services, and the network transactions themselves will morph into one.  And this “one” will reside not in a single standalone lender, or amongst a limited consortium, but be readily available in the cloud.  And in this way, the entire industry moves forward.

This move towards greater efficiencies through innovation has happened before in other verticals like airline travel, securities trading, and retail.  These industries rebuilt themselves over the last few decades, and remain competitive globally today.

I’m not saying technology innovation will in itself create a stronger, more competitive mortgage industry.  However, as Professor Garelli says, open and resilient entrepreneurs and leaders in any industry must willfully choose to innovate out of doing things the old way.

In my opinion, when you look at the financial services industry, that same attitude was shared before the market collapse – in Mortgage 1.0 – some individuals ignored the rules at great consequence.

The rebuilding of this market has global consequences.  All of us have friends whose jobs are gone because of the crash even when those jobs weren’t directly related to the financial industry itself.  People are out of work in places as far removed as Thailand and India because of the market failure.  Entire countries like Iceland, far removed from the boardrooms in the U.S., are bankrupt.  Like the world that started my career, the entire geopolitical balance is under severe pressure, this time over economics rather than weapons and ideology.

As it was then, right before the demise of the Berlin Wall and the collapse of the Soviet Union, the stakes are high.  And these days, the regulatory landscape is itself becoming increasingly important in protecting the interests of our citizens.

We as market leaders need to take today’s situation as seriously.  Mortgage 2.0 will not succeed without a new relationship between business and government.  Not only should that relationship be accepted, it must be embraced.  Regulation can be adhered to without undue burden to operations.  In fact, regulation and the government can be our ally.

Dorado recently held its first compliance summit, to discuss RESPA.  Compliance officers from many of our customers attended.  They listened to industry experts from TowerGroup, the Mortgage Bankers Association, and WKFS.  They shared views and built consensus on interpretations of new regulatory requirements.  They exchanged ideas and pledged to continue to communicate with Dorado, and with one another on developing best practices.  They came with the clear support of their CEOs.  The attendees’ purpose wasn’t to find ways around the regulations, but to identify ways to integrate turnkey adherence to compliance into their profitable businesses.  With the most interesting of outcomes being that these changes to the way they worked didn’t need to be burdensome.  In fact, compliance could be integrated in such a way as to add value to the workflow and to enhance profitability.

Mortgage 2.0 is more than capturing new loan volume.  It is about lending profitably and stability.  More important than just generating new loans, it is about creating more profitable loans in a sound manner, using best practices to create cleaner loans.  There are new relationships being formed between lenders, consumers, investors, and the government, and the intersection of these new workflows is compliance.

My odyssey began on the 47th floor in a building in the center of the financial district in New York. I was ushered into the corner office to meet one of the most senior and most written about executives that I have ever met in my life.  He called me, as the CEO of one of his strategic technology partners, into his office to challenge me. His fist hit the table and he looked at me.  He said he wanted to be the best.  He asked me how I was going to help him. I told him I would take personal responsibility for getting him there.  I meant it.

A few days later, I took the train to Washington D.C. to meet with an executive responsible for a production operation with tens of thousands of people reporting to him.  I asked him over dinner what was important to his success.  We talked briefly of the demise of third party originations, now only producing 17% of all originations and declining, and how the correspondent channel is only a single government regulation away from losing viability. He said that people in the industry don’t get it, including his own loan officers.  He woke up one day and decided to look into his top 100 producers and was amazed to find out that with all of the volume they do, only a handful of them were profitable for the company.  Most think that profitability, especially with the secondary market gone, is in the volume, he observed, but I got my team together and explained to them that we lost millions on the quality of loans due to repurchase.”  So to be their best, improving  quality was key.

My quest continued onto St. Louis to meet with the CEO of one of the largest mortgagecompanies in the world.  He knows the industry because over the last thirty years, he helped build it.  I asked him the same question I asked in D.C.  He said what is confusing to most banking executives in Manhattan is the difference between this business and retail banking.  For most bankers, transactions happen in seconds or less.  In the mortgage business, a single transaction can take 45 days.  They don’t get it.  Being the best, he said, is a continual process, not an overnight change.  Return or ROI in this market, he said, is much more iterative with analysis and execution.  While large-scale agility is very hard — it takes time and discipline with the right people and systems in place – it is also the benchmark for success.

My odyssey then took me to Kansas City.   I was in the car of the executive responsible for all alternative delivery for the largest lender in the country.  He is an expert on risk.  We were looking for Gates BBQ – a hole in the wall kind of a place and a landmark for smoke pit aficionados around the world.  I sat in my suit across a platter of slabs of pork ribs and smoked beef, sitting on plastic seats, and sipped my beer.  I asked him how important transparency was to rebuilding a secondary market that has collapsed. How important I asked is transparency to being the best?  He said it could help build it or ruin it forever.  It has to be done right.  He said that some officials and advisors want to make all information accessible throughout the life of a loan.  For example, if a person’s credit score changes a few years after getting a mortgage, then an investor has the right to know as that could influence the health of that loan.  There are a lot of people in D.C. and New York that would like to see that happen, he says.  But if it does, they will kill the very thing they are trying to fix. Who will trade on assets that you can’t predict the value of?  If credit worthiness data continues to be made available after funding, it’s like putting a webcam in the bedroom of every borrower.  The after-market will be crippled with too much information.

Fast-forward and I’m at the Epic Roasthouse, right on the water under the Bay Bridge, back home in San Francisco.  I’m having dinner with the CTO of a lender from Texas that now finds itself in the top 20.  He is young, smart, and laser-focused. He is having the New York strip and I’m thinking I should have gotten that over the lamb.  I make up for it with a Russian River Pinot.  This lender is growing fast.  They are making money and taking advantage of the market conditions to expand.  They are making tons of money.  They have a vision — to be the best. Now more than ever, it’s in sight.  To them, being the best means producing the cleanest loans in the fastest amount of time, without losing their entrepreneurial spirit – the quality that makes them great.  It’s part of their culture.  They are here to win.  And that’s why we are talking.

The problem is that the law isn’t set up to enact real change – the changes necessary to address the problem at hand – of how to keep people in their homes.  Under the Act, lenders and servicers that can prove they already have a loan modification program in place are exempt from the law.  Note that they don’t have actually to modify any loans, just have a “program.”  In addition, the bill does not require a servicer to violate contracts for investor-owned loans, but as we know from the collapse of the market, most of the loans that require a moratorium on foreclosures are the same loans that were sold and are now worthless. Senator Corbett, who introduced the bill, said in a recent interview, “I would have liked to have written a much stronger bill.”

Even if the modifications did take place, and there was a moratorium for California homeowners seeking help, the law would only delay the inevitable for 3 months.

Unfortunately the State is a little distracted right now.  I was recently up in Sacramento meeting with various state senators and assemblymen, and in speaking with those at the front line, it was apparent that the problems facing the state were greater than could be derived from just the media reports.  There are roadblocks at every turn. And I deeply respect the marathon hours our legislators are putting in to solve a host of issues that cut to the very core of our financial and social infrastructure.  California is facing a $21.3 billion gap between spending and revenue while at the same time losing jobs at an alarming rate.  Sacramento has been unable to find a solution.  “People don’t realize where California is at — people are losing homes, people are losing jobs,” Maldonado told CNN affiliate KOVR. “We are in a fiscal emergency and we need to come together to (resolve) it.”

I think there is something California and other states can do to seriously help stem the tide of foreclosures — think locally.  To think locally, we can take some lesson from the way California is leading solar energy production and adoption, facilitated by institutions and private individuals.  There are three things they did in the case of solar:

1.  First California articulated and adopted a common goal for Solar power.  In 2006 the California Public Utilities Commission announced a goal of 3,000 megawatts of solar generation capacity by 2016.  Legislatures began to sing a single song.  A commission was organized.

In this housing crisis, California needs to do the same thing — state a goal, and act to build a program to address the problem.  Certainly the tax revenue in property, not to mention sales from home repair, furnishings, and utilities, from citizens in their own homes makes this a viable program to fund and more immediate that even solar power (not that solar power is not important for the earth’s future, but per Maslow’s hierarchy of needs, first things first). In April of 2009, according to RealtyTrac, there were 96,560 foreclosure filings.  Assume an average home price of 350K, at a 1% property tax, that’s $337 million of revenue at risk in a single month of foreclosures.  In 2008, there were 523,624 properties foreclosed in California or using the same math, $1.86 billion of property tax revenue.  That’s money lost indefinitely as a foreclosure can prevent a person, or a couple – people often in their 30’s, in their prime earning years – from owning a home again for the next decade.  That’s a lose-lose situation for all.  So it’s time to get the lenders involved – it not only protects our social fabric, but the lender’s own revenue potential.

2.  Second, they created rules.  The legislature created a very transparent regulatory process and involved the public and business community to participate, (Rule-making [R.] 08-03-008).  Likewise, California needs to create standards for loan modifications and refinancing, working with investors and business but also with consumers – it makes sense to involve those who are most affected.  Standardizing for example, the loan modification process or FHA refinance process allows for a common framework in which to educate the public.  Without such regulations and rules the interaction between business and consumer is unique every time.  I’m not a big fan of regulations, but sometimes it’s what is necessary to get a lot of people with disparate roles working together.

3.  Third, in the case of solar, the legislature partnered with consumers and business instead of pitting them against each other.  California invested in developing partnerships with new start-up technology companies looking to find new ways to make solar power more efficient and accessible.  The players also worked with large utilities, the stalwarts of the industry to build scale.  They educated the consumer and built incentives and credits to motivate conversion.

In the case of the housing crisis, instead of legislating an Act that essentially brushes the problem under the carpet for 90 days, California should act. — build incentives for home owners to work with lenders rather than avoiding or trying to punish them, and incentivize lenders and investors to work with the local legislature and consumer groups to meet the goal.  Build trust, iterate on results, and team with all who are willing and can help – essentially treat the housing issue as a grassroots campaign.

Homes build neighborhoods.  States like California can have a significant impact in this crisis.  Solar power is a great initiative and deserves our legislators’ real attention though programs and leadership.  But protecting the basic fabric of our neighborhoods could use the same coordinated attention.

Doug Jones, a San Jose mortgage broker, said on a California Money Report radio cast that most banks already have loan modification programs, but without much success.  “I think that most people who try to modify really put their head against the wall –  they’re not getting a lot of success… There’s a lot of paperwork, there’s a lot of lost papers, a lot of time delay.  I see people call up the lender and the lender says I can’t talk to you until you’re 90 day’s past due,” said Jones.

According to Jones, lenders are overwhelmed and although they have the programs in place they don’t have the systems to support those programs.  Worse, the rules are changing every week.  Like bread lines in the 30’s, customers are queued up in long somber lines waiting for help.

Having a program in place to modify loans doesn’t mean loans are getting modified.  Lender announcements and the best intentioned promises to consumer borrowers and the government seemingly mean very little.   In the end, without the right systems in place, the lines will continue.