As I look back over the last year, one of the experiences that I will not recall with fondness was the arduous process I experienced obtaining a home loan. Quick background..my wife and I have excellent credit and cash flow was not an issue. Yet, there was a certain point where I almost decided this process was far too difficult and gave up. How does anyone in America get financed these days?
The truth is that they manage to figure it out. Within that truth is also a theory. Home sales would improve if the process of obtaining financing had not become so painful. For the record, what I am advocating does NOT involve lowering credit standards. I am suggesting some potential buyers walk away from the process because it is too burdensome and time-consuming.
One of the major sources of funding that keeps the mortgage markets flowing, but also causes this distress, are the GSE’s-Fannie Mae and Freddie Mac. It is their willingness to purchase loans made by lenders that keeps the funds flowing. These very large semi-government institutions were ransacked a few years ago with loans that they purchased where underwriting was flawed. In their efforts to require the selling banks to buy-back these loans many lenders went out of business-unable to meet the buy-backs. It is due to this history that today the GSE’s require an incredibly complicated set of underwriting standards.
On the surface, this makes great sense and seems like something we should support. The problem is that it appears to become a one size fits all approach. In other words, while a single borrower with a salary and a few assets may not find the requirements difficult, the self-employed or other non-conventional income earners are treated to a plethora of requests that dig so deep into their backgrounds and finances that the time spent ultimately may not justify the gain. These are people who often are paid based on how much they work and their time spent dealing with a mortgage documentation nightmare can be spent much more profitably.
Is there a better way? There is not a perfect answer because every situation is different. It seems to me a person with a long, successful history of paying their bills on time will be identified with a high credit score. This credit score indicates a person who understands how to manage their cash inflows and outflows. Shouldn’t that history mean more than an underwriter sitting in a cubicle somewhere requesting five years of revenue history for an LLC that the borrower is a 35% owner? This happens and it kills sales.
My parents use to say God gave you a brain..use it. It is time for the marketplace, through the GSE’s, to review their underwriting requirements. The market has been held back for too long. Lets make it much easier for great potential buyers to get loans and make purchases. Underwriters- start by placing a lot more value into a successful credit history and cool it on dissecting every source of income. These types of borrowers are who is missing in the market. Believe me, until the experience of obtaining a loan improves, they are likely to not enter enthusiastically.