Posted by: union03g | June 25, 2009

Conservative Mortgage Lending Is Also Killing What Is Great About America

Since the exposure of over zealous lending practices which caused much of the financial turmoil we are seeing today, and thrifts have asked home buyers to prove everything but their blood type to get a loan. Lenders want 2 years of continuous W2’s, FICO scores above 740 to get in the best rates, a trail of steady pay stubs, bank accounts that show enough assets to cover debt servicing for several months, and it goes on and on.

Who do these requirements hurt?

  • Entrepreneurs that leave their steady paper-pushing job and try to start their own business. Even if the business does okay they still will have to explain a drop in their “wages” and why their savings took a hit. A colleague of mine is in the position now where he has to defend his choice to take a business risk 18 months ago and his loan has just been denied. Read: stay in your cubicle and be quite with that business plan crazy talk.
  • MBA graduates who want to buy a house out of school when they land their first big job – forget it. Lenders will ask for a long steady employment history and will turn you away if you can’t prove 2 years. Even though 95% loan-to-value mortgages still exists, the rate is so high it makes 80% LV loan the only one worth while. MBA’s are so riddled with debt and so rarely have a large nut to put down on a mortgage that they won’t qualify for the attractive interest rates for many years.
  • C level executives that forgo their paycheck for a year until the company turns itself around. I’m thinking, of course, of smaller companies where the executives may not have millions saved up or options they can cash in. Goodbye Mr. egalitarian exec. There are real drawbacks for breaking the lineage of any steady, healthy income stream.
  • Real estate investors who have really solid, vetted investment properties they would like to purchase, but don’t have a ridiculous amount of savings. Lenders want investors to be able to cover all debt servicing, vacancy percentages and expenses associated with the property for 6 months before you can get a loan. Goodbye brilliant small time investor with a calculated tolerance for risk.

My point here is that although we are turning away bad sub-prime borrowers that are greedy and financially unprepared, we are throwing the baby out with the bathwater. Lenders are literally turning away and penalizing some of the most educated, hard working and promising Americans because of a non-continuous paper trail/small savings accounts. They are creating a HUGE disincentive for risk taking, leaving for school and entrepreneurialism, which has been the real engine of our country and what gives America the international edge. Our underwriters have gone away from looking people in the eye and hearing their story, to simply quantifying people.

At least in 2007 educated and experienced risk takers were able to borrow toward a home and they grinded on forward with their plans and aspirations.

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  1. good post

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