You might recall from part one of these columns that I feel not only do the powers that be have the wrong culprits when it comes to the sub-prime crisis, or credit crunch, they also will not come up with the proper solution. In other words they'll never learn!

Let me outline the specifics I wish to go over and perhaps you will see what I am talking about. The underwriting of loans is right at the top of the list. If they could get out of the notion that every borrower has to fit in a specific box then the tremendous amount of effort that is being made to move each borrower to fit the system would stop and most likely defaulting loans as well. Basically those who fit easily, easily get loans; those who don't, don't.

I have three examples to help you understand.

1. A borrower with a net worth in excess of $10 million with a 750 credit score and total debt of less than $500,000.

2. A borrower with a net worth in excess of $1 million with a credit score of 790 and total debt of less than $500,000.

3. A borrower with a net worth in excess of $7.5 million with a credit score of 640 and total debt of less than $500,000.

The first borrower was seeking a rate and term refinance for $417,000 and was declined. The second borrower was seeking a rate and term refinance for $325,000 and was declined. The third borrower was seeking a $850,000 purchase for a second home with a purchase price of $2,450,000 and was declined. You say that is impossible? Let me tell you more.

Borrower 1 is a widow who derives income from 8 condos, across from a college, that are rented full time and have been for years. The borrower has a multi million dollar other home without a mortgage. There aren't any mortgages on any of the condos. The borrower also owns several businesses that provide income, but the income is written off for tax purposes. The assets in the other businesses are in excess of $1 million dollars.

Borrower 2 is working in same line of work for his entire adult life and is also taking income from his pension. The income he earns from his profession goes into a corporation and is written off for tax purposes.

Borrower 3 is working and has a personal corporation. The income from the corporation is W-2 income to the borrower. The last three years the W-2s averaged $2.5 million per year with the latest year well in excess of that number.

So you ask why were they declined? Borrower number 1's income from the rentals goes into a trust and the income doesn't flow directly to the tax return. As with borrower number 2 the rest of the income is written off for tax purposes and therefore cannot qualify under the ratios that lenders want to see. Borrower number 3 couldn't get a jumbo loan because of the need to have a 660 credit score and of course it is 640. Reason, a late payment of the cable T.V. bill. That is what happened the first time around and I was more than disgusted. Continued...