[quote=patientrenter]urbanrealtor, I would lend less to someone who had irregular income than someone with regular income. Isn’t that the way it should be?
In your example, you say that the person newly classified as self-employed had difficulty qualifying for an 80% loan. I assume you meant in Calif – meaning it was a no-recourse loan. That we have arrived at a situation where people are surprised that higher-risk borrowers can’t borrow 80%, w/o recourse, of the price of their home purchase is just an indicator of how irrational the home lending market has been allowed to become.
If they asked for a 50% loan, would they be denied? If so, that means to me that the home lending market has lost its center. A 50% loan is probably so unusual that there are no standard ways to underwrite it. That’s what is wrong with this market. If the people approving the loans were responsible for the losses on non-repayment of the loans, then we’d have lots of good product for higher-risk borrowers as well as others. But the downpayments would be where they should be – much higher than today, and higher for higher-risk borrowers than for others.[/quote]
You are correct.
Higher-risk borrowers should have harder times getting loans.
My post was not primarily a normative suggestion but to point out that there are requirements for those who cannot point to years of stable income that are different from those who can.
Recourse is largely irrelevant as recourse on purchase money defaults is seldom (as a percentage of defaults) pursued by lenders regardless of which state the property is in.
My normative comments are that sometimes definitions of income stability seem counterintuitive and that the definition of self-employment is sometimes counterintuitive. While I certainly endorse conservative lending standards, I sometimes question the logic of those who establish the risk management models for underwriting these instruments.
I think that questionable logic is only slightly less prevalent today than it was in 2005. The difference today is that banks are less concerned about market share and generally more gun shy.
