You can't make this stuff up. The U.S. government has spent something north of one trillion dollars bailing out underwater or defaulting mortgage borrowers. It is estimated that U.S. mortgage debt totals around ten trillion total dollars. I have done the math and it would have been more effective and cheaper to send every homeowner in the U.S. a check large enough to pay off their mortgage! Obviously that did not happen. Instead a plethora of bewildering government programs were spawned but none achieved their stated goals. But selfishly, what about me and others like me? We are unappreciated and ignored tax paying mortgage borrowers that are eligible for zero help. The "silent majority"? Why? The government has arbitrarily labeled us "rich" which has my family especially my wife asking are we really rich? And I repeatedly explain we will be fortunate to survive through retirement and disability so no we are not rich.
There is an old saying that goes something like this, “a recession is when people you know lose their jobs but a depression is when you lose your job.” Keeping that analogy in mind, for the last few years I have heard the mantra of tight lending and mortgage credit. Given I have worked for almost my entire career in the mortgage finance industry I am well aware that past sins and the current legislative backlash of regulations. Clearly something needed to be done given the well-chronicled abuses of sound lending principles resulting in massive borrower defaults and the damage to worldwide economies.
However, despite my intellectual awareness the credit tightening could not apply to me, could it? I have always considered myself an outstanding and conservative user of credit so none of this talk of credit tightening could possible apply, could it? Mortgage credit restrictions were hypothetical and surely only applied to marginal or poor credit risks, right? Wrong!
No longer is the discussion of tight credit hypothetical but it became painfully pertinent on a personal level when my wife and I recently applied for a mortgage to purchase another home.
Here is my experience. To begin I live in a very nice upper-middle-class neighborhood of about 40 homes in The Woods, a master planned community in San Diego. Candidly, approximately 17 borrowers out of the 40 in my neighborhood have defaulted on their mortgages since 2007. In some instances, like the house next door, multiple borrowers have defaulted. As you can imagine, the impact of all these defaults and distressed sales have destroyed the value of my property to the tune of 70%. This is a painful financial consequence since we invested a life time of hard earned savings in excess of $500,000 cash in acquiring and improving our property. Yikes! That money represents a big portion of our live savings and at my senior age is just gone.
Little did we know, the majority of buyers and eventual defaulters in our neighborhood were real estate agents buying these homes with no money down and the sole intention of flipping them for a quick profit. Mea culpa—I should have done more research about my prospective neighbors and their motivation for buying. In my defense the builder we purchased from was Pulte Homes who had a policy of only selling to buyers who intended to occupy the property for at least one year. What we did not know was Pulte had acquired this development from a smaller builder who sold to anyone with cash and did not have any occupancy requirements.
The reason I mention the decline in value of my current residence is this decline is one of the central reasons our mortgage application was declined. Let me explain, if I can. Freddie and Fannie established a secondary market rule that unless a borrower has substantial equity in their current residence they cannot receive credit for any rent when buying a new residence and renting their current one.
This questionable credit rule renders many borrowers prisoners in their current home since in most cases like mine we cannot afford to debt service two properties without counting the rental income. Now the other factor for declining our application was my employment/retirement status. I should have anticipated problems when I could not decide how to fill out the employment and income boxes on the mortgage application. So much for 30 years of experience. I was stumped even though I have reviewed thousands of applications and bought dozens of homes over the years. No problem I thought, I will call a friend who is a senior underwriter and risk manager for a major bank. She will know, right? Wrong again! I related to her I had retired from a bank at the end of last year but continue to receive biweekly paychecks in deferred compensation.
And recently I started a consulting business and have a couple of paying clients but no tax returns yet or a two-year history to support my self-employed income. My situation is further complicated since I am not yet drawing any retirement income until next year for tax reasons. Retired, self-employed, current income, past and current income, or future income? Neither I nor the senior underwriter had any clue what to put on the application.
In the end, I put self-employed and used a blended income figure, the only number I thought made sense and I could document. Now on the plus side of the ledger, my wife and I have a long history of perfect credit and FICO scores north of 780 and we have investments and reserves. We were also amenable to putting 30% down.
We were stunned to be told we were declined a week later. Because our current residence has no equity, the rental income we intend to generate after we move into the new home cannot be counted. In fact, the entire liability, mortgage payment, taxes, insurance, etc., must be included in our debt-to-income ratio with no rental income offset. Is it just me that feels this is idiotic? What does the new lender care what I do with my current house unless I am planning to use equity to purchase the new property? The loan officer explained this was a social imperative and called it avoiding the “buy and dump” scenario. Now I know the SEC has rules against the “pump and dump” to protect stock market investors but little did I know Freddie and Fannie were doing some social engineering and protecting society from the “buy and dump.” Apparently this is a new rule since my neighbor, a real estate broker, has been living payment free for over two years in his home during the lengthy foreclosure process but was able to purchase his next residence which he rents out. Go figure!
Well the story does have a happy ending when my loan broker, not the builder's lender (Wells Fargo), got my loan approved on excellent terms at a local community bank. My story is cautionary and provides a real example of why the housing market and the economy continue to be disappointing.