Now that we have seen "amateur night at the Bijou,” starring the President and the Congress, maybe we can realize that knowledge of a subject should be somewhat of a prerequisite to running anything: ice cream truck, bagel company, an army or the health care system of a very large country. Why do I feel that way? I have seen what the "knowledgeable" congressmen and senators have done to our mortgage industry. It isn't pretty. They missed a golden opportunity to fix an industry that emphasizes the wrong criteria when underwriting a loan. The horrors that we have seen can easily be repeated time and time again.
Who determined that the best judge of one’s worthiness to purchase a home is a tax return, or two tax returns or more? Why can't they see the flaw that make a tax return, especially one of an employee receiving W2 income, as obsolete as the post office (whoops, that comes in a later column). There are four important pieces of information one needs in order to evaluate a potential borrower and I believe that the tax return is the least important of them all. The other three are the credit report, the liquid reserves, and the loan to value of the property.
The aforementioned government guys want a guarantee that the rules and regulations they currently have on the books, and amend almost daily, will stop any and all problems (foreclosures, short pays, etc.) from ever occurring again. Unfortunately, all the rules in the world will not stop a foreclosure from occurring if the borrower loses his or her job and doesn't have sufficient reserves to make payments until they procure another job. Aren't reserves one of the four important pieces of the mortgage puzzle mentioned above? So, perhaps reserves should be weighted a bit higher than tax returns, because good tax returns cannot stop a foreclosure from happening while sufficient reserves can certainly do the job. Basically, tax returns are a snap shot from the past performance of the borrower. Reserves will tell you, if you ask, how many months or years the borrower can hold out for, in case of a foreclosure, before defaulting for lack of an income stream.