Mortgage Backed Security
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Independence Day is a time we all (should) be reflecting on the formation of this great nation and the challenges our founders faced in those times. Meanwhile we sit today in a stalled housing market with home construction at a very low, home sales volume very low, interest rates at or near an all time low, and guidelines for qualifying for a home mortgage as stringent as at any time since the 1980s. Leaving out everything but the major changes in lending practices, with or without government interference, let’s revisit for just a moment the changes since July 4, 2007.

Anyone who has paid attention to home mortgage qualifications over the last several months knows the ability to borrow money has returned to, and in many cases, passed a level of reasonableness to both allow for home purchases and mortgage refinancing. In the summer of 2007 the non-conforming mortgage industry had already begun to change and, at the time at least, we really believed the changes to be for the good of the economy and the good of home buyers and home sellers.

Non-conforming loans, also called sub-prime loans because they were made to people who did not meet conforming loan qualifications, allowed people who did not have the ability to prove their income to “state” there income. These stated income loans were originally intended for home buyers who were self-employed and who may have used part of their home for their business and their activities resulted in erratic pay cycles but still with enough Adjusted Gross Income with add-backs of certain deductions to qualify for a home loan. Over time almost anyone, including an order taker at a fast food restaurant, was allowed to state their income. Fortunately that was corrected but unfortunately it was so over-corrected the self-employed with good but obfuscated income are also no longer allowed to use the technique.

Another way lending has changed I can’t find anything bad to say about and that is the disallowance of stated asset loans. Never did I support someone saying they had money or income they did not have. However the market made these loans available and literally millions of loans were approved with people stating both their income and their assets. Although they were dubbed “liar loans” I did not support that phrase until stated asset home loans entered the picture.

Building on the stated income, stated asset home loans theme along came a mortgage loan called the “no doc” meaning there was no stating of anything – the borrower simply did not show or state income or assets. This loan was issued based on credit score and payment history. It probably would have been okay had it been limited to people with credit scores in the high 700s and credit accounts at least 10 years old with no late payments or other derogatory credit information in the last 5 years but it was not.

To sum it up there are people who deserve a home today who cannot qualify because of their self-employment but there are also millions of homes not being sold to people who have not established a historicity of deserving a home loan. In the end the changes are good, at least better than what we had that helped lead to the financial collapse. And while this is true there would have been a much better way out of this mess than we had and yes, we do know what that answer was.

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