In the big financial mess that started in 2008 how many houses with a 60% loan to value or less were foreclosed upon? How many borrowers with at least a quarter of a million dollars in liquid assets lost their house? Keep these questions in mind as we will touch upon them soon.
I have been in the mortgage business for over 2 decades, and through thick and thin, the industry sticks with the rules of Fannie Mae and Freddie Mac religiously. In fact they have taken some of the good things away, such as limited documentation loans for strong borrowers, and replaced them with more nonsensical rules; such as requiring borrowers to supplying a paper trail on all deposits over $1000 for those who earn $5,000 to $50,000 a month in salary.
Underwriters look at credit reports, tax returns, appraisal for the loan to value and reserves held by the borrower to determine if the borrower is qualified for a loan. Credit reports and tax returns are the most important out of this list.
Let's examine credit reports and tax returns. A credit report is run on every borrower and it shows how the borrower handled his obligations in the past. It also shows public records such as foreclosures, bankruptcies, short pays, tax liens and judgments. This is yesterday’s news and only gives one side of the story. What is the result of this approach? It doesn't tell how or why the borrower was late, or why they had a public record, or on the other hand, why anything good happened..
Tax returns are last year’s news in my mind, and quite frankly are dead on arrival. A returns status as “good” or “bad” does not indicate whether the good will continue or the bad will get better. Tax returns and credit reports are still pictures in a moving world. Using these to judge the future is hazardous at best. How many companies have gone out of business and left their A credit employees out in the cold? There goes their income, followed closely by their credit.
Now let’s look at the common sense to lending. Remember the two questions I offered at the beginning of this column? That is what is missing from the mortgage industry today: reality. We have thousands of borrowers who can't get a loan today because they are either successful self employed individuals with excellent credentials, or retired borrowers without sufficient "classical income". What these types of borrowers have in common is low loan to values and reserves approximating at least 75% of the amount of the loan, or more.
We are willing to accept credit reports and tax returns to determine a pattern of behavior by the borrowers so a loan can be approved. Low loan to values and large amounts of liquid assets are just as much a pattern of behavior by those who possess them, as the aforementioned credit and tax reports. For example, a person may have bought a house "right" and thus achieved a low loan to value by the market moving. Or someone could have won the lottery and therefore have a large amount of liquid assets. It is highly unlikely one or both achievements were pure luck.
Our President is again thinking about having borrowers with extremely poor credit and low income come back into the mortgage market and buy homes with government help. And as this is happening, the financially strong borrowers are ignored. How about letting those with low LTV's and large reserves into the market first? They will not become a financial drain on our economy, but instead they will help the mortgage market move forward.
I have noticed, as I grow older, some disturbing trends in our country. The government seems to have a problem hiring companies to fix major problems such as entitlements, because they do not want them to make a profit. On the other hand the government doesn't have a problem running projects at a loss and increasing the deficit. I believe it is time to end the nonsense and get back to common sense, especially in the housing market!