Fascinating piece in the New York Times this weekend regarding the illogical shift in lending rules for those seeking mortgages.
As a self-employed person, I was essentially told that I would not be able to qualify for a mortgage in today’s environment. Forget about the fact that my credit scores were perfect, that I have a ten plus year history of paying my previous mortgage timely, that the mortgage I was seeking was smaller than my previous mortgage, that I was looking to put 30%+ down on the new purchase, etc., the lenders could not see around the fact that I recently started a business. I am lucky to have found some alternatives which probably would not be available to most in the market, but I think the key line from the article is, “Banks have forgotten that loans are collateralized by the home itself.” Exactly.
To be fair, losing all common sense isn’t just the mortgage lender’s doing. Under the new federal rules, there are specific formulas that lenders must follow. And, to answer those that would say, “but, left unchecked, the lenders almost bankrupted this country”, I would suggest that the community reinvestment acts had a good deal to do with the troubles as well. Further, I am not suggesting no standards, just that lenders should be allowed to take into account a sliding standard or “credit matrix” as opposed to a one-size fits all hard and fast rule. For instance, if you want to look past a self-employed status or a higher debt to income ratio, you can require an increased downpayment or factor in past history more. Common sense, no?
So, where do borrowers go? From this article, the borrower was forced into a sub-prime mortgage that changes 8–12% interest rate. But, the article is still a good read:
But the vocabulary has changed. Because new federal regulations have created something called a qualified mortgage, or Q.M., which must conform to strict requirements, future lending is likely to be categorized as Q.M. or non-Q.M. rather than prime or subprime. Non-Q.M. lenders will have both more flexibility and more liability, but not all non-Q.M. loans will be subprime.
Among the lenders preparing to make non-Q.M. loans is New Leaf Lending, a division of the Skyline Financial Corporation, based in Calabasas and run by William D. Dallas. In 2007, Mr. Dallas was a subprime lender who told The New York Times that investors had pushed him to make risky loans. “The market is paying me to do a no-income-verification loan more than it is paying me to do the full-documentation loans,” he said. “What would you do?”
Now, he says, the pendulum has swung too far the other way. “If you’re self-employed, you’re hosed,” Mr. Dallas said. “If you just started a job, you’re hosed. If you get a bonus, you’re hosed. Just got a severance payment? Can’t count that. I don’t have to do a lot to be a lender. I just have to be normal.” Banks have forgotten that loans are collateralized by the home itself, he said.
In the case of the Arroyos, for example, the house would have to lose 75 percent of its value for the lender to be at risk. “They just have a formula, and they decide whether or not you qualify without looking at what’s logical,” Ms. Arroyo said of conventional mortgage lenders.
Some employees of conventional banks might agree. Barry Boston, for example, recently left one of those banks for a job at Athas, frustrated by having to turn down so many perfectly fine borrowers and because of the endless paperwork involved in closing a loan. “I couldn’t stand it anymore,” he said. “The wind had been completely sucked out of my sails.”