On a personal note, here’s a story that illustrates some of the problems with our economy and banking system:
I have a mortgage on my home residence, but no other debts. I have several properties that I have bought for cash. I decided, with these very low rates, that I would do a financing on one of them at about 50% of value. The property is two doors down from where I live. I bought it in February 2009 and completely redid the inside. I have a very stable and good tenant in it. They have been there for two years – actually 23 months – and they just resigned a new lease at 3% more than last year's lease, that starts November 1.
Problem #1: I made 8 calls to banks and mortgage brokers I was referred to. Two of the banks were large and four were small local ones. Neither of the mortgage brokers could help me. It seems that this doesn’t fit into a “cubby hole” program that they have. Three of the banks came to the same conclusion. One banker told me if I could wait for a couple of months they would be adding some lenders, and he might be able to work with me then – whatever that means.
The issue is that this is a rental property and a CONDO and a “cash out” financing. You see, in today’s world banks have two ways to make mortgage loans. They can lend you their own money and keep the loan, or they can sell the loan to Fannie Mae. When they sell the loan it must conform to rules set by Fannie Mae. Banks do not want to keep loans, so that is what is driving the issues I had.
Problem #2: One issue is that in order to sell a condo mortgage to Fannie Mae that the condo must be certified “conforming” by Fannie Mae. This costs the condo association money so most have not done this. If the association has not been certified, the loan can still be approved, but it takes a lengthy discovery process. The type of information being looked at has to do with the number of foreclosures, late payers of fees, reserves and more.
Problem #3: A good acquaintance is the head of mortgages at Bank of America here (where I live). He was really very funny, and told me not to go near Bank of America as it would take at least 90 days, be a complete nightmare, and make my life hell. I appreciated his candor and humor.
Problem #4: My list of banks is smaller so I chose a friendlier, national bank. Here’s where it starts to get perverted.
They are looking at my personal information. What it really boils down to is that while I say they are looking at personal information, what I really mean is that they are looking at the information they are told to look at by the government, which is not indicative of my ability to repay the loan.
They can’t use the rental income from the property because it must be a history of two years – mine is a mere 23 months. I receive a substantial quarterly payment from a lawsuit that goes back 12 years. They can’t use that because there is no guarantee how long it will continue. I receive income from a mortgage I lent, but it’s only been paying for 14 months – not two years. I had a substantial amount of money in 4 Master Limited Partnerships that I sold earlier this year, at much higher prices than they are now. The K-1s from those show losses – the income is thus sheltered – so that becomes a subtraction from income instead of actual income. I did tell the rep, and have been very forthright with her, that they were sold and I don’t own them anymore…..doesn’t matter, it’s in the tax return stupid! They can’t use all of my bond interest income because most of them were bought in ‘09 and ‘10 and thus their full effect doesn’t show on those tax returns – they average the years.
I am the beneficiary of a small trust that goes back over 40 years – I wish it was more substantial. I get quarterly payments which I can show from bank statements. Ooops! The K-1 from the bank that manages it shows zero income for tax purposes last year. I don’t know why and don’t really care as I have no input into its management. I just get a check and use whatever tax info they send me.
Also, for my mortgage file the lending bank just wants a copy of the trust and not true verification of the amount I receive. You can get the drift from all of this. They don’t care about really understanding a person’s ability to repay; instead, just getting the info that their computer tells them they need. It sounds a lot like the loans given out previously, where the banks never got information. Only today they are using erroneous and misguided info.
Problem #5: They can’t use any income that cannot be guaranteed to last at least another three years. I nicely pointed out to the Loan Officer that a person can lose their job – W2 income – at any time and that a person’s income can drop. I had a 50% drop in my income, unfortunately, at one time. While sympathetic, she’s just doing her job.
Problem #6: I read that Facebook has a 3 billion dollar line of credit. That’s a lot of mortgages. All that unsecured risk with a company that hasn’t been around long and hasn’t showed a sustained ability to make consistent or growing profits. It may be a superpower or it may fizzle out when something new shows up.
So where am I going with this? Banks are still making dumb decisions and putting our economy at risk. If they truly understood who they were lending to instead of their automated cubby holes, our economy would be mending better and we’d all be at less risk. Unfortunately, that’s not the way it is.
And, oh yeah, my loan officer told me that with the documentation she has asked me for – which as stated above is irrelevant and erroneous – I get an accept message from her “automated underwriting system”.
Approved and Now Able to Eat Again,