Active Rain March 14, 2010

Lenders: Their Own Worst Enemy

It is obvious to anyone that until the housing market turns around-as in, more people buy homes-the economy will not recover from it’s current malaise. When I was primarily doing mortgages in 2002-2003, wholesale representatives from lenders would introduce products that basically had Helen Keller type underwriting. We called it the mirror test; if they can fog up a mirror, they get the loan. We should have known it would yield a bad harvest. It did. 

In 2007, the pendulum swung the other way when the meltdown began. Banks went from foolhardy crazy to stingy crazy, with common sense a casualty in both extremes. Otherwise qualified borrowers with good credit, strong down payments and steady jobs were suddenly no longer qualified. It continues to this day. Today’s NY Times has a story on the incredible reasons that lenders are turning down mortgages

The examples of paranoia subordinating due diligence are absurd but all to often, true. In New York, for example, the lender might not like the building or co op. I’ve seen perfectly good mortgage commitments with well-qualified buyers not close because the PMI company would not grant insurance. We almost lost a deal on a sale of our own apartment in Queens because the buyer made an error in the dates of a previous job, and a 3 month gap in employment forced the borrower to switch banks! That cost us some time. 

Until lenders realize that paranoid underwriting is sabotaging a recovery, we’ll have to deal with a stagnant industry where common sense is the exception rather than the rule. Throwing the baby out with the bathwater and putting people who do not deserve to be treated as high risks through the meat grinder is not the solution to solidifying housing. Lending money to people with good credit, income and down payment was never the problem; simply stop loaning to the unqualified and we’ll be OK. 

There is another problem with this paranoid landscape: It is making people nuts. When “full faith and credit”  in our American system loses its meaning, we have bigger problems than a condo that isn’t on FHA’s approved list. When people lose confidence, up is down, and 700 is no longer adequate credit, they make other plans- they do dumb things to compensate (like walk away from their house) and the vultures, i.e., dispassionate, cash investors, pick the bones of cadavers that should be alive and thriving. The domino effect is devastating. 

Are you listening, banks? We’re a team; you have to to increase the pool of qualified buyers to include people that would never have been sub prime 5 years ago and we’ll be OK. THAT was the reason for the bailouts. Loan money. It’s your job. Until you do your job, we can’t do ours.