In last week’s column, I described my assistant’s quest to purchase her first home. I concluded that despite the fact that home prices are close to double what they were 25 years ago, it is easier to afford a home today, thanks to low interest rates and the availability of a variety of mortgage products.
I got into the mortgage business in 1986, and I can tell you that borrowers had to jump through a lot of hoops to get a loan approved. “No doc” loans didn’t exist, credit scores didn’t exist, and I recall that my underwriters seemed to request a “letter of explanation” for everything.
Fast-forward 15 years to 2002, and the entire mortgage landscape had changed. We all know what happened. Mortgage money was available to anyone who had a pulse. Unscrupulous loan officers pushed large loans on buyers who were being pushed to buy homes they couldn’t afford by unscrupulous real estate agents.
Wall Street, along with now-bankrupt Fannie Mae and Freddie Mac, gobbled up those easy mortgages with the expectation of low risk because “property values never fall.” Sealing the fate of this obvious train wreck were our politicians in Washington, on both sides, who encouraged the loose lending to boost homeownership numbers in America.
Today’s mortgage landscape is more similar to 1987 than 2002. Those of you who read this column regularly might ask yourselves why I spend so much time bellyaching about the tight lending standards we all face today. After all, nobody wants to create another scenario that would cause a housing bubble and mortgage meltdown.
I can explain. There’s one very big difference between the lending standards of 1987 and 2012. Common sense.
Back in the day, borrowers had to provide asset and income documentation, just as they do today. The loan file had to have sufficient papers proving the borrower passed the very important litmus test of “ability to repay,” just like today. But let me give you a couple of examples that manifest the difference between the underwriting guidelines of 1987 and those of 2012.
In 1987, there were no credit scores. A borrower’s credit report may have shown one or two isolated late payments. The underwriter would ask for an explanation and possibly some documentation to understand the reason for the late payments.
It was her job to determine whether the late payments were a product of irresponsibility or an isolated mistake or misunderstanding. Much of her decision would be based upon common sense.
Today, the two late payments might drastically lower the borrower’s credit score, regardless of whether the credit dings were justified or not. It doesn’t matter. If the credit score falls below a certain number, the loan won’t be available. Period. Common sense doesn’t exist.
Back in 1987, underwriters used “qualifying ratios” to determine affordability. The guideline was that your total monthly debt shouldn’t exceed 38 percent to 40 percent of your gross monthly income. We still have that guideline, and it’s important. But in 1987, an applicant with $1 million in the bank but no income could get a loan.
His debt-to-income ratio literally was an infinite number, but the underwriter, using common sense, could see that though the applicant had no current income stream, he had 30 years of income already earned in the bank. A qualifying ratio clearly wasn’t needed.
Today, assets and savings don’t matter. If today’s underwriter, who’s been reduced to being a clerk in charge of checking off an inflexible list of requirements, is unable to check off the box that says “Debt-to-Income Ratio Less than 38 Percent,” our millionaire will not get a loan.
I long for the day when I can harass my qualified borrower for paperwork and be able to make loans for those who clearly have the “Ability to Repay,” but for whatever the reason, don’t fit into Fannie and Freddie’s myopic little box.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to email@example.com.