Wednesday, July 8, 2009

They say it like it is a bad thing...

The San Francisco Chronicle has an article titled, "Undocumented income makes it hard to get a loan". Now apparently we are supposed to be abhorred at the tight credit conditions because no-doc and stated income loans aren't being brokered out anymore.
With more than $300,000 in combined annual income, tens of thousands of dollars in the bank and credit scores that top 800, Jennifer France and her partner would seem like ideal candidates for a mortgage refinance.
But when they applied to swap an interest-only loan on their nearly $1 million San Carlos home for a 30-year fixed that locked in today's low rates, they were summarily denied. The reason: effectively, because both operate their own businesses.
While the amount they make is easily enough to qualify for the new loan, tax deductions for self-employed workers dropped their official income below the threshold that banks wanted to see.

What a terribly sad story. Except when you think about the real nitty-gritty details. Either the write-offs on their taxes are legitimate.. or they are using them to hide income. Now this isn't true in all cases, depreciation on rental properties (or crops) is an example. An underwriter could dig through the tax returns and separate the wheat from the chaff but the reward really isn't there for the bank. In reality the stated-income programs are really about the people who aren't paying their fair share of taxes and want to use that extra money to buy houses.

I am a firm believer in no-doc and stated income loans shouldn't be brokered. They are specialized loans that are for people with a solid relationship with their banks. It was the same niche that option-arms existed in for years without being a problem. They fill a small niche and just aren't suited for the cookie cutter approach since each small business is highly variable. As to the people in the story, its a little weird that they are making 300k and only have "tens" and not "hundreds" of thousands of dollars in the bank. It sounds more like a bank didn't want to take a risk on marginal borrowers. Yes, you can make hundreds of thousands of dollars and still be marginal if your income and expenses are running closely together. You are highly dependent on cash flow and it didn't sound like they had any other assets to back them up except a depreciating house.


Anonymous said...

Indeed I agree. Something doesn't sound right about those 2. $300K per year? What the hell do they do?

I'm super wearing of people who make a lot of money as business owners. Some shady stuff.

junkyard said...

" What the hell do they do?"

From the article, apparently a landscaper and gardener. I'm in the wrong business as an engineer if they are bringing in that amount of dough pulling weeds and digging holes in the dirt.