Before Dodd-Frank, banks faced strong pressure to lend so that more people could own a home regardless of their ability to repay. Dodd-Frank will spawn byzantine regulation enacting bank capital requirements, retention of 5% interest in securitized mortgages and other mortgage reforms. Most regulations required under Dodd-Frank have yet to be proclaimed, so banks are going through the motions of accepting mortgage applications as if they might approve a few.
Today, homeowners who ask, complain that it’s hard to get a mortgage approved even if you are fully able and willing to repay the loan. This allegation has been heard on CNBC, Bloomberg TV, and Fox Business channels by reporters who generally get business facts right. Below are two concrete recent examples that backup the complaint. The metrics are actuals, but the peoples’ identities are masked.
Case One: A retired single woman in Virginia owns 3 houses; a fully rented duplex owned 11 years, a rented single family house (acquired 5 months ago then renovated), and a personal residence of 5 years. Mortgages on each average 50% of current market value and they earn a substantial part of her taxable income. As well, she draws social security, a small pension, a small amount of interest and dividends from her IRA, and she works part time. Her gross income is just below $80,000 and her FICO score is near 700.
This Virginia consumer bought the latest rental house using a bridge loan (low interest rate but 6 month term) and wants to convert that into a regular mortgage. She took funds from her IRA to rehab the house, which is now rented and showing a good net income. Post-rehab, the home appraised above her total investment and shows on the tax rolls as worth significantly more than her total investment. She asked her bank for a loan of 50% of the house’s total value to repay the bridge loan and she was denied. She tried another bank and was again denied. The first bank said they are not able to consider the rehab investment as part of her equity and thus the loan to value ratio was too high. The second bank said that if each year she took from her IRA the same amount as the current year the IRA would be exhausted before the loan was repaid. Each bank has invented a bogus excuse to avoid approving a mortgage.
Case Two: A retired North Carolina couple own 3 houses; a farmhouse and two single family houses – one rural, one in town. The properties have been rented for 3-7 years and generate annual net rental income of about $12,000. The properties are mortgaged at about 63% of current market value and the couple owes no other debt. They draw social security, have a part time job, and receive a small annuity. Their IRAs generate a near 6-figure annual gain from which they draw almost nothing – why pay tax now on something you don’t need yet? Their FICO scores are in the high 700s.
The Carolina couple wanted to refinance a 5.7% first mortgage with one at a lower rate. That mortgage is about 45% of the market value of the property. They also have a Homeowner Line of Credit on that property of about 20% of the market value. The couple has regular taxable income of about 3 times the total of mortgage and property tax payments on the sum of their properties. If they elected to withdraw IRA gains, their net income would be 5 times the mortgage and tax payments. They contacted a well-known Internet mortgage broker so that the opportunity could be shopped to multiple lenders. The broker was unsuccessful. He reported that the banks consider only earnings actually declared on the couple’s IRS 1040, and on that basis the banks did not like their total income level. One bank considered the Line of Credit (3% per year and “interest only”) to be an excessive credit card debt. These are bogus excuses for refusing to make a loan.
It is unclear whether banks anticipate that eventual regulations will give them a thrashing if they have anything but pristine mortgages on their books, or whether today’s mortgage rates are too low to be compensatory, or that the value of mortgages will be decimated when interest rates inevitably rise after QE3. Regardless, it’s no secret that real consumers cannot get mortgages that would be justified by any realistic metrics.
Alan Daley is a retired businessman living in Florida and following public policy from a consumer’s perspective.