- The Washington Times - Friday, February 5, 2010

I typically don’t like to dwell on one subject in this column, but the tightened lending standards that have followed the loose underwriting practices of recent years have put me a personal mission to educate the public and bring some of these ridiculous policies in the spotlight.

I have contacted mortgage giants Fannie Mae and Freddie Mac, as well as a prominent portfolio lender, to comment on this column. As of this writing, I have been unable to speak to a representative on the record. With luck and persistence, I will speak to someone in these institutions who can comment on what is clearly an unreasonable and inequitable policy.

The problem that exists is the unwillingness of Freddie, Fannie and other lenders to recognize wealth and assets when evaluating a borrower’s credit risk. Let me illustrate what I’m talking about by describing two very common borrower profiles.

Borrower One is a retired couple who have a 6 percent, 30-year fixed rate with a balance of $400,000. Their credit scores exceed 740 and their loan-to-value ratio (the loan balance divided by the property value) is below 60 percent. They have verifiable cash and marketable securities that exceed $1,500,000, plus an additional $1,000,000 in their IRA. They take minimal IRA distributions to minimize their tax obligation. Other than their mortgage, they have no debt.

Because they are retired, their income is limited to Social Security, investment income and their modest monthly IRA distribution. In the past two years, their adjusted gross income averaged only $36,000. Despite their demonstrated ability to save, their very significant wealth, their excellent credit, and their low loan-to-value ratio, they are ineligible for a Freddie Mac or Fannie Mae 30- or 15-year fixed-rate refinance due to an excessive debt-to-income ratio.

Even though these folks have enough money to pay off the loan several times over, Fannie and Freddie would decline the loan based upon their limited income stream.

Borrower Two is a couple in their 40s seeking to refinance their 6 percent mortgage. The loan balance is $400,000 and the property will appraise for $500,000 making the loan-to-value 80 percent. Their middle credit score is 680, considered acceptable but not excellent. They have no late payments, but their credit card debt and car loan exceed $45,000.

They have combined salaries of $160,000. Cash and savings in the bank total $3,000. They have no IRA or other tax-deferred retirement accounts. However, because of their high income, they qualify for a Freddie or Fannie loan because their salaries are high enough to support the loan payments.

These folks make great money, but have far less equity and have demonstrated no ability to save, yet they are eligible for a loan. Our retired couple, on the other hand, who have far more equity, better credit scores and gigantic assets would not be approved for a Freddie product.

What’s wrong with this picture? I’m not suggesting that the second couple be denied a loan, I’m demonstrating the flaws currently in the system that are preventing the very qualified retired couple from refinancing. It seems to me that too much emphasis is put on a salaried job, which is in no way guaranteed, rather than the broad-based No. 1 rule of lending: Determining the ability to repay the loan. Our high-earning, high-spending, non-saving couple are far more likely to lose their jobs and thus their ability to repay the loan than our millionaire retirees.

It’s evident that the three criteria of underwriting must be met regardless of common sense: income, equity and credit. The funny part is assets and savings aren’t a priority. Freddie and Fannie have no cash reserve requirements for most of their underwriting scenarios. As long a borrower has a job, which can be lost at any time, a loan is doable - but if you’re a multimillionaire with little income, you can’t get a loan. I always thought the best folks to lend money to were the ones who don’t need it.

As I said, I have contacted Freddie, Fannie and a national portfolio lender and told them I was writing this column. I’ll let you know what they have to say about it next week.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Reach him at [email protected]


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