How to get a mortgage if you are self employed?

[davelj]

[quote=patientrenter]

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…

[patientrenter]

[quote=davelj]

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…[/quote]

I work for a large financial institution, and one of the things I have to do is price products, so I have a real appreciation for your comment that lending at a fixed rate for 30 years at 4.5% doesn’t make a lot of sense. As for the comment about local underwriting being good, but not local lending… let’s leave that to another day. (One of our biggest systemic problems was that separation of underwriting and risk.)

I’ve never had a loan, so you’re right, my knowledge of underwriting is 3rd hand. I sure hope things have changed from what I’ve heard was common practice, but I admit that until I hear Barney Frank say in public that the government needs to get out of the lending business, I will remain skeptical that the changes go beyond appearances. (I will be very happy to be proved wrong.)

Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.

[patientrenter]

[quote=davelj]

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…[/quote]

I work for a large financial institution, and one of the things I have to do is price products, so I have a real appreciation for your comment that lending at a fixed rate for 30 years at 4.5% doesn’t make a lot of sense. As for the comment about local underwriting being good, but not local lending… let’s leave that to another day. (One of our biggest systemic problems was that separation of underwriting and risk.)

I’ve never had a loan, so you’re right, my knowledge of underwriting is 3rd hand. I sure hope things have changed from what I’ve heard was common practice, but I admit that until I hear Barney Frank say in public that the government needs to get out of the lending business, I will remain skeptical that the changes go beyond appearances. (I will be very happy to be proved wrong.)

Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.

[patientrenter]

[quote=davelj]

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…[/quote]

I work for a large financial institution, and one of the things I have to do is price products, so I have a real appreciation for your comment that lending at a fixed rate for 30 years at 4.5% doesn’t make a lot of sense. As for the comment about local underwriting being good, but not local lending… let’s leave that to another day. (One of our biggest systemic problems was that separation of underwriting and risk.)

I’ve never had a loan, so you’re right, my knowledge of underwriting is 3rd hand. I sure hope things have changed from what I’ve heard was common practice, but I admit that until I hear Barney Frank say in public that the government needs to get out of the lending business, I will remain skeptical that the changes go beyond appearances. (I will be very happy to be proved wrong.)

Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.

[patientrenter]

[quote=davelj]

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…[/quote]

I work for a large financial institution, and one of the things I have to do is price products, so I have a real appreciation for your comment that lending at a fixed rate for 30 years at 4.5% doesn’t make a lot of sense. As for the comment about local underwriting being good, but not local lending… let’s leave that to another day. (One of our biggest systemic problems was that separation of underwriting and risk.)

I’ve never had a loan, so you’re right, my knowledge of underwriting is 3rd hand. I sure hope things have changed from what I’ve heard was common practice, but I admit that until I hear Barney Frank say in public that the government needs to get out of the lending business, I will remain skeptical that the changes go beyond appearances. (I will be very happy to be proved wrong.)

Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.

[patientrenter]

[quote=davelj]

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…[/quote]

I work for a large financial institution, and one of the things I have to do is price products, so I have a real appreciation for your comment that lending at a fixed rate for 30 years at 4.5% doesn’t make a lot of sense. As for the comment about local underwriting being good, but not local lending… let’s leave that to another day. (One of our biggest systemic problems was that separation of underwriting and risk.)

I’ve never had a loan, so you’re right, my knowledge of underwriting is 3rd hand. I sure hope things have changed from what I’ve heard was common practice, but I admit that until I hear Barney Frank say in public that the government needs to get out of the lending business, I will remain skeptical that the changes go beyond appearances. (I will be very happy to be proved wrong.)

Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.

[davelj]

[quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]

This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.

[davelj]

[quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]

This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.

[davelj]

[quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]

This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.

[davelj]

[quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]

This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.

[davelj]

[quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]

This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.

[patientrenter]

[quote=davelj][quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]

This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.

[/quote]

davelj, the std dev numbers I gave are for the economy-wide aggregates for that portion of national income. For any one individual, the variation would be greater.

As for the calibration of risk charges on personal residence loans against corporate bond risk premia – well, I am curious, but I think it needs a bit more work. Amongst all non-recourse 80%+ CLTV loans on homes for business owners, the variation in the value of the collateral is small compared to the variation in protections amongst AA corporate bonds, and the protective value is probably less on average. So I am not coming to a small risk premium for the home loans right away.

More anecdotally, I have to deal with some segments of our own business that are exclusively driven by small business owners, and those segments do seem more prone to boom and bust. Well, I am East Coast, so I’ll call it a night.

[patientrenter]

[quote=davelj][quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]

This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.

[/quote]

davelj, the std dev numbers I gave are for the economy-wide aggregates for that portion of national income. For any one individual, the variation would be greater.

As for the calibration of risk charges on personal residence loans against corporate bond risk premia – well, I am curious, but I think it needs a bit more work. Amongst all non-recourse 80%+ CLTV loans on homes for business owners, the variation in the value of the collateral is small compared to the variation in protections amongst AA corporate bonds, and the protective value is probably less on average. So I am not coming to a small risk premium for the home loans right away.

More anecdotally, I have to deal with some segments of our own business that are exclusively driven by small business owners, and those segments do seem more prone to boom and bust. Well, I am East Coast, so I’ll call it a night.

[patientrenter]

[quote=davelj][quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]

This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.

[/quote]

davelj, the std dev numbers I gave are for the economy-wide aggregates for that portion of national income. For any one individual, the variation would be greater.

As for the calibration of risk charges on personal residence loans against corporate bond risk premia – well, I am curious, but I think it needs a bit more work. Amongst all non-recourse 80%+ CLTV loans on homes for business owners, the variation in the value of the collateral is small compared to the variation in protections amongst AA corporate bonds, and the protective value is probably less on average. So I am not coming to a small risk premium for the home loans right away.

More anecdotally, I have to deal with some segments of our own business that are exclusively driven by small business owners, and those segments do seem more prone to boom and bust. Well, I am East Coast, so I’ll call it a night.

[patientrenter]

[quote=davelj][quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]

This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.

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davelj, the std dev numbers I gave are for the economy-wide aggregates for that portion of national income. For any one individual, the variation would be greater.

As for the calibration of risk charges on personal residence loans against corporate bond risk premia – well, I am curious, but I think it needs a bit more work. Amongst all non-recourse 80%+ CLTV loans on homes for business owners, the variation in the value of the collateral is small compared to the variation in protections amongst AA corporate bonds, and the protective value is probably less on average. So I am not coming to a small risk premium for the home loans right away.

More anecdotally, I have to deal with some segments of our own business that are exclusively driven by small business owners, and those segments do seem more prone to boom and bust. Well, I am East Coast, so I’ll call it a night.

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