I was recently asked by a client to help find a lender who could offer them a home loan. They are the perfect clients who: own two successful businesses, are willing to put $250K down on a $750K home and have excellent credit. I figured this would be a slam-dunk. The first lender I approached informed me: "Sorry, I can't write them a loan, they are self employed- no more stated income or signature loans." "They are not paying themselves enough salary. It would be easier for me to write a loan for one of their employees." Looking at it another way, the bank would not write the loan because my clients are self employed and are putting their extra earnings back into their business (you know-hiring more people, buying equipment- all things that improve the economy). I've spoken to several other lenders after that first rejection and am still looking for options.
All of this reminded me of my Grandfather who was a bank vice president in Northern Oklahoma. In his time, they had the double whammy of the Oklahoma dust bowl (that almost destroyed family farming in the area) and the great depression to contend with. Through it all, the community bank he worked for kept writing loans; to small businesses, farmers and home buyers. I remember as a kid (this was long after he retired), folks walking up to my Grandfather on the street and thanking him for helping them keep their farms or homes. Once I asked him how he decided who would be a good "risk" for a loan. He said, "Always meet them face to face and take the measure of the person." He'd be appalled by our current system for loan approvals. We've all been reduced to a FICO score and a W-2.
Many of you may think that the plight of my client is an isolated incident. I propose that there are many middle class and upper middle class home buyers in the same boat. These self employed individuals are the people who tend to own the $700K and up homes. Let's face it, there aren't too many W-2 jobs that give you that kind of purchasing power. If home sales are restricted at this level, It will ultimately affect us all. With fewer people able to qualify for the next level of home, sales will continue to be anemic and values will continue to drop (or at best remain stagnant).
Almost every home owner I know has been touched by our current credit crisis. It's true that lending regulations were lax and contributed to the number of bad loans that were written. But, it's my opinion that the pendulum has swung too far towards over regulation. If a borrower who can afford to put down over 30% , has great credit and can prove cash flow to cover the payments, can't get a loan; there's something wrong with the system. Money lending will always carry some risk. That's why higher risk loans warrant a higher interest rate. Loans for the self employed must begin to flow again in order to sustain a recovery. Maybe we can even start taking "the measure of the person" into consideration (it worked under more difficult conditions).
David (
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