Dave (in La Jolla?), I agree that the best way to underwrite loans is for a local bank loan officer who knows the customer well over a long time to size the risk up using all the available information. In such a world, I can imagine many self-employed people getting a bigger, lower-cost loan than w2 people earning the same (real) income.
That’s the ideal world. What about the real world? We’re stuck with a big bank remote lending system that uses just a few data elements. Income variability is a very important factor that should be taken into account, and the average amount of variability amongst the self-employed is greater than the average amount of variability amongst the w2 people. So a dumb remote big-bank system should require more downpayments and/or higher interest rates for the self-employed.
Again, I’d prefer the local, more detailed analysis, but it’s not here now.
As for whether a greater % of the self-employed will suffer a big drop in their income than w2 people in this downturn… I don’t know, but it’s not the historical pattern, so the weight of evidence is against it this time too.[/quote]
The problem with your “local bank” model is it will never exist again. Nor should it. (Local UNDERWRITING makes sense – but not using local BALANCE SHEETS to fund the loans.) Please explain to me what local institution – other than perhaps a crazy credit union – is going to underwrite a fixed-rate 30-year loan at 4.5%? I’m a director of a local bank and I’d sooner put a bullet in my head. That is a recipe for losing your ass. (See “S&L Crisis.”) Just as the government’s going to lose its ass on the current crop of mortgages it’s underwriting (UNLESS someone is smart enough to match fund this crap with long-dated treasuries – here’s to hoping). So, if you really think this “local bank mortgage model” is a good idea, then you need to sit back and think about it for another 1/2 a second.
There are groups for whom a 30-year fixed-rate piece of paper is appropriate because they have liabilities of matching duration. Insurance companies, Fannie/Freddie in the past, foreign governments, and a few others. But absent the government buying them (via Fannie/Freddie), there isn’t enough “real” demand for this paper – which is why these rates will eventually go WAY up. But that’s an issue for another day.
Regarding the “big bank” mortgage model and “just a few data elements” is concerned, you obviously haven’t gotten a mortgage lately. I’m refinancing right now and it’s a very thorough process as the poster above has outlined. I sent in two years of tax returns, business documents, various bank account statements as well as brokerage statements, retirement account statements, etc. It was a joke a couple of years ago, no doubt about it. But right now, based on my experience, they’re asking for all the right documents right now. It’s a pain in the ass – as it should be!
Regarding the historical pattern of W-2 wages versus self-employed wages in a downturn, I don’t know what the historical pattern is. Care to share the source of your “evidence”? Inquiring minds and all…
