A new year; old challenges and new solutions.

We will remember 2007 as an exceptionally tumultuous year for the housing and mortgage industry. As rising home prices made buying an affordable home increasingly difficult, the industry extended to create products that would help people get into homes by qualifying borrowers who might not have met traditional eligibility standards. Now we're paying the price. No matter what role we played in the first part of this cycle, we will all need to play a role in the recovery that begins now, in 2008.

The biggest challenge we face this year is the need to keep people in their homes. On the front lines of the American mortgage crisis there are hundreds of thousands of borrowers who are in trouble and looking for help. All industry participants, working together, have to find ways to develop workout plans for people who have the ability to make a reasonable monthly mortgage payment. Doing so is vital to maintaining our credibility with the borrowers who look to us for our knowledge and expertise.

Adding to the difficulty of this challenge is the fact that we have to develop these solutions quickly. As we used to say on the Georgia farm where I grew up, "We're burning daylight."

Typically the time from delinquency to foreclosure is 14 months. That should be enough time to intervene and offer solutions. At the same time, we need to act now to help families before they get into trouble and their loans become delinquent.

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Even as we face this crisis in the short term, we know that in the long term homeownership will continue to be a cornerstone of American culture and of the American dream. People are going to continue to want to buy homes, which means that servicing the needs of the high-loan-to-value (high-LTV) borrower will be more important than ever as we go forward.

Protecting homeownership

One of the issues we hear debated often is whether the majority of borrowers in trouble understood the risks associated with their home purchase or refinance. The question is relevant because it has implications for origination and disclosure; but for those borrowers who are in homes and in trouble, it no longer matters if they understood the risks or not. What matters is these people expected the experts they were working with and relying on not to place them in a position to fail. Arguing right or wrong or pointing fingers accomplishes little.

The widespread failure of so many loans is a clear indication that something went terribly wrong. While the system and accountability will be debated, one of the best opportunities we have to regain credibility and the trust of our customers is to create opportunities for borrowers to stay in their homes. As long as a borrower has a reasonable chance of becoming a successful homeowner, we ought to be working on ways to get him or her into a mortgage that works.

Innovative solutions

In a pilot program that began in March 2007, PMI Mortgage Insurance Co. was able to initiate contact with approximately 40 percent of delinquent borrowers with mortgages insured by PMI who had previously had no contact with their lenders. That is a huge success born of creative, nontraditional thinking.

To do this, we reached agreement with our lender customers and partnered with Consumer Credit Counseling Services (CCCS), Atlanta, a national nonprofit organization, to reach out to the delinquent borrowers. This is a strategy we have used successfully in the past.

We arrived at this solution because research and experience told us that delinquent borrowers were often afraid to talk to their lenders, and were more likely and willing to respond to help and advice from a neutral third party. In a similar effort, we funded a League of United Latin American Citizens (LULAC) foreclosure-prevention clinic where more than 100 families were assisted with their foreclosure cases.

Our industry has a standard book of plays that we run when a borrower is facing foreclosure: free counseling, reinstatement plans, forbearance agreements, and loan modifications and assumptions. These are great tools under normal market conditions, but this crisis demands that we look beyond traditional models to provide more borrowers with a chance for long-term success.

As mortgage professionals, we should be the architects of a solution to this crisis. The alternative is a government-mandated solution.

Meeting the needs of future borrowers

We know homeownership is not going away. Borrowers are still going to need mortgage loans, and the weakness and fear in the credit markets will not disappear overnight. For that reason, it will be vitally important to accurately qualify people for high-LTV loans.

The prospect of making a 20 percent down payment (20 percent on a median priced home in the United States--more than $200,000--would require a borrower to save $40,000 or more) is simply not a viable alternative for most first-time buyers. However, it is also clear that the market got ahead of itself with 100 percent LTV loans. The 100 percent LTV loan counts on rising home prices to build the borrower's equity position in the home. What we're seeing now with declining home prices is homeowners forced to sell without enough equity at closing to cover the loan and the closing expenses.

Especially in a climate of declining home prices, a 3 percent to 5 percent down payment helps everyone. And from the borrower, it's an important signal of readiness and commitment that should be the basis for every home loan.

A return to fundamentals

It is also important that we revert back to qualifying new borrowers for loans that we know they can afford at the fully indexed rate. Those who qualify need to be matched with loans that we know can help them become successful homeowners. If that loan does not exist for a particular borrower, then we owe it to our customers to say "no." As an industry, we need to take the leadership role in extending credit to borrowers who have exhibited a history of responsible credit behavior.

Our expertise in predicting a borrower's success in paying back a loan is integrally tied to our ability to assess the five C's--credit, capacity, collateral, conditions and character. That determination can be made most accurately when the loan is fully documented with income, employment and asset verification. For this reason, in most cases a return to fully documented loans will provide consistency, stability and success for future homeowners and for the industry.

We can also help borrowers who don't have the credit history they need to buy a home to get qualified for a mortgage loan. By continuing to provide homeowner education programs and credit-counseling services, we can provide people with the resources they need to manage their finances. We all know from experience that a person who sets his or her mind to something and works hard to achieve it will typically have success. We can help put borrowers who don't yet qualify for loans on the path to homeownership by helping them build their qualifications.

A lot to do

Collectively, we have a lot to do. Keeping people in their homes and focusing on sustainable homeownership are at the top of my list.

The good news is that, to millions of Americans, the idea of owning a home is still the embodiment of the American dream. Homeownership has historically been one of the best ways for individuals to build wealth and increase their net worth over the long term, and, more important, it helps to create more stable families, communities and involved citizens.

I am confident in this industry's ability to develop new and creative solutions that will help both current and future homeowners.

Steve Smith is chairman and chief executive officer of The PMI Group Inc., Walnut Creek, California. He can be reached at [e-mail].