That it is silly season in the mortgage industry cannot be denied.
Of course, it’s been silly season for an awfully long time, but now the weather’s changed – from greed to fear.
It’s a well worn complaint that banks have led to the un-creditworthy, but now in a knee-jerk over-reaction, many of them are withdrawing perfectly reasonable mortgage products left, right and center. The thought seems to be that pulling products that allow for lax checks of a person’s ability and propensity to pay will fix the cause of the lending crisis.
This is wrong. It can only at only some of the symptoms. The real cause doesn’t get much of an airing, but it is fundamental and rather simple: the very idea that the verifiability of income and FICO scores alone, or even primarily, constitutes a sensible basis for assessing ability and propensity of meeting the obligations of a mortgage is wrong-headed, lazily corporate, and due for a change.
Some of the most self-defeating assumptions of the current system are as follows.
1) That someone who is conventionally employed is a better risk than someone who is not.
2) That net worth (as opposed to income) has almost no bearing on a whether a person is considered for a loan.
3) That the duration of a U.S. credit history should determine 15% of a person’s creditworthiness.
4) That a holder of fewer credit accounts is riskier.
5) That a holder of more mortgage debt is riskier than a holder of less such debt, even if their repayment history is perfect.
6) That foreign income from whatever source is not given the weight of US income.
7) That foreign credit history is irrelevant.
8 ) Most importantly, and summarizing most of the above, an individual’s actual history is less important than a FICO score that is based on a system that is derived from averages over a population that differs entirely from the loan applicant.
Now, I know that an anecdote proves nothing, but indulge me in an attempt at least to illustrate the issue. The following story, from about a month ago, is true.
A U.S. resident, whom I’ll call Mr. Savvy, obtained a mortgage from a large U.S. bank at the beginning of April. He is a responsible investor. Although with modest income, he saves and has chosen real estate as the vehicle to secure his retirement and grow funds for the family that he may one day have.
He has four mortgages in the USA, two in the UK, and owns two other apartments free and clear in Europe. On average, he has more than 50% equity in his properties. He’s never paid a bill late – not a penny – not ever. He has never bought a property that has not been able to rent out for more than his payments (mortgage, tax, insurance) and has never lost money on a real estate purchase. He is able to put down 30% on a property in the US that he is seeking a mortgage of loan no more than one fifth of his net worth. Not only is his net worth more than five times the loan he wants, but the house he is seeking to buy has a rental value that exceeds all of the outgoings. In other words, if tomorrow, the property market fell by 50% and all of Mr. Savvy’s income dried up, Mr. Savvy could put a tenant in the property and the bank would still get its mortgage payments.
Mr. Savvy doesn’t have a job: he hasn’t had one for seven years – he has a long track record of making his own living without relying on anyone else, and has never lived off credit, and never even taken ten bucks from his mom! Indeed, he doesn’t use credit cards that charge interest because he is too financially responsible and doesn’t need to. His income is from various sources internationally. His international credit history is a decade old; his US credit history is three years old. Both are completely clean.
Four weeks after My Savvy was approved for his mortgage, the loan was withdrawn, because the bank had changed its lending guidelines.
Why? By what insane rationale is our anecdotal mortgage seeker more of a risk than John “Employee” Doe who works for Big Company Inc, has only a 10% downpayment and needs a loan that is probably ten times his net worth? Based on wealth, Mr. Savvy is 50 times better able to afford his mortgage than Mr. Doe. If a crisis hit, push came to shove, Mr. Savvy could actually sell assets to pay off the mortgage (many times over). Mr. Doe, being more like the average American, would be in trouble if he was laid off or got upside-down on his mortgage.
Mr. Doe’s credit score may even be 700 because he uses credit cards and hasn’t had a crisis over the last few years. Since he has an employment contract from his employer, which verifies nothing more than that today, he could pay a mortgage, the banks will fall over themselves to lend to him – even if the market is completely over-valuing his property.
Mr. Savvy in this example is a real person. He was denied his mortgage less than a month after he was approved, and some of the reasons given were as follows.
• Your income isn’t in a single country
• Your net worth is irrelevant
• We won’t lend to you because your FICO score is just under 700 – even though we can see that your credit history is perfect and that you school is lower only because you’ve only had US credit for three years, and even though you have a ten year international credit history that is perfect.
• Yes. We did give you a mortgage three years ago before you even had a US work visa, and yes, you do have a three-year history as one of our customers without a blemish, but we’re not allowed to take that into account.
• We may be able to give you a mortgage, but you’ll need to put down 45% downpayment – not just 30%.
At the time of writing, Mr. Savvy, who has contacts in the mortgage business and has put numerous mortgage bankers and brokers to work, cannot today get a mortgage from any bank in the US for less than 40% down. That’s pathetic and entirely self defeating.
As one of the mortgage bankers said, “I can see the craziness of this. God knows we need business from people like you. There aren’t a lot of people who have 30% to put down”
Of course, all of the above excuses are examples of one thing – mortgage banking is not, even after the lending crisis, about the individual, but about one-size fits all corporate policies that tend to be either fear-driven, as now, or greed-driven as before.
The obvious question, then, is what can be done about it? Is treating each customer as an individual too costly? Is empowering a mortgage underwriter to apply common sense in determining whether to lend to a particular individual too costly? Not when compared to the alternative, as America is experiencing right now.
This anecdote is not to suggest, of course, that Mr. Doe shouldn’t be given his mortgage, but rather to show that mortgage banking system is fundamentally uninterested in evaluating the actual risk associated with a loan and the individual to whom it is to be given. And In failing to perform such an evaluation, the system rewards those whose financial situation is risky just because it is more conventional, while penalizing those who are highly financially able and responsible because they are unconventional. Think about this: Mr. Doe is the riskier mortgager in the above example precisely because his financial life is conventional – depending for income on an employer and without independently holding any large financial assets, to name just a couple.
There is an irony here that is worth a second thought: someone who’s financial wellbeing is decoupled from the markets, a particular employer and even the American economy at large will be unconventional, almost by definition. And I’m not talking about the rich, but the responsible. Mr. Savvy’s annual income is five digits – not six.
The world is changing, as more people work freelance or remotely or in various fields at once. If we are truly going to protect ourselves as a healthy capitalist society, empower individuals and enable responsible corporations to make honest profit, then the job of loan officers must be to understand their customers rather than categorize them, and the job of the lending institutions must be to develop a paradigm that puts such people back into decision-making, in place of generic FICO scores and algorithms.
Robin Koerner is a British-born citizen of the USA, who currently serves as Academic Dean of the John Locke Institute. He holds graduate degrees in both Physics and the Philosophy of Science from the University of Cambridge (U.K.). He is also the founder of WatchingAmerica.com, an organization of over 100 volunteers that translates and posts in English views about the USA from all over the world.
Robin may be best known for having coined the term “Blue Republican” to refer to liberals and independents who joined the GOP to support Ron Paul’s bid for the presidency in 2012 (and, in so doing, launching the largest coalition that existed for that candidate).
Robin’s current work as a trainer and a consultant, and his book If You Can Keep It , focus on overcoming distrust and bridging ideological division to improve politics and lives. His current project, Humilitarian, promotes humility and civility as a basis for improved political discourse and outcomes.