On Transperency In The Marketplace
Apr 5th, 2008 @ 6:03 PM by Alden Smith
I’ve read enough pro’s and con’s this week about various “stimulation” and “relief” packages that it is enough to make an old man’s head swim. Everyone from Wall Street analysts to Edward L. Glaeser, a professor economics at Harvard University have chimed in. It is a bit hard to really know what is going on. One thing is sure, this entire mortgage and foreclosure debacle has gotten everyone’s attention. One would hope that an equitable, equally fair solution comes out of this mess, all the way from Wall Street to Main Street. I do not believe that the government should put all their backing into an investment bank like Bear Stearns and do nothing about Mr. Average Joe. I mainly feel this way because in the final analysis, it is old Joe who is going to end up footing the bill. A lot of people seem to forget that this is why we pay taxes. And to my line of thinking, if I am helping to foot the bill, I should at least have a little say about where my money goes. Does anyone share my feelings, or am I still that old hippie from the 60’s that has the “peace, love dove” attitude?
Mr. Glaeser, who I am sure is much more cognizant than I about financial matters, says this: “The current proposal for the Federal Housing Administration to increase its refinancing of troubled mortgages is an example of honest redistribution. The FHA can issue mortgages and resell them in a transparent way that aids those with the most need.” The key word being “transparent.” He went on to say “…Moreover, the FHA can access Social Security records so that it can avoid bailing out those borrowers who misrepresented their incomes on their mortgage applications.” Why is this significant? Here’s why.
The gentleman who wrote the article, Aubrey Clark, is a retired mortgage broker who is a definite conservative. Nothing wrong with that - he shares a lot of people’s view. What I found odd, though, is that he was concerned about the phrase “borrowers who misrepresented their incomes on their mortgage applications.” Isn’t that a part of this mess? Or am I missing something here? Mr. Clark goes on to say that - and I quote him here “this is what mortgage lenders call “stated” income loans; these are loans that do not require proof of income.” Proof of income? Does it mean that I, as a freelance writer that works for himself, can go across the street and tell my banker that my “stated” income is $100K an year, and that is supposed to be okay? Let’s get real here. Yes, I admit that there are self employed workers who don’t have pay stubs at every month’s level to show a banker. But they certainly have a tax return, and if they are truthful on this, what else does a banker need for proof of income?
I have long felt that the government should be regulating all industries that loan money, whether for mortgages or a simple car loan. That would weed out a lot of unethical people, in my opinion. And until this happens, and we see real transparency, then we will always have trouble. And that is just one old man’s humble opinion.
- Posted in Mortgage Refinancing, Mortgages
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Alden,
Thank you for opening this dialogue. In answer to your question “Isn’t that a part of this mess? Or am I missing something here?” You are indeed missing something.
Self employed workers in America rely on tax deductions and write-offs to allow their company to operate in the black. One third of the GNP is generated by this group of Americans, small business owners.
Unfortunately, when they use the legal deductions PROMISED by congress in lieu of increased taxes their adjusted income is lower.
This being said, Fannie, Freddie and FHA’s(conventional mortgages) underwriting guidelines (Government dictated) will only calculate their income when trying to qualify for a mortgage from the gross adjusted amount at the bottom of the taxes. This will rarely will show enough income to qualify for a mortgage that is within their means.A w2 wage earner earning the same amount of money can show his w2 and underwriting will take the DTI from the gross amount.
Granted, stated income loans were abused in the subprime arena but were born out of necessity to help the self employed borrowers. If congress had not imposed additional taxes that by design were offset by deductions and dictated conventional underwriting standards we would have never had a need for stated loans in the first place. (run on sentence…sorry)
So when you say “government should be regulating all industries that loan money” you are throwing more fuel on the same flame that brought us to this mess. If our banking system was ran as efficiently as Amtrak and the US Postal service your interest rate would be twice what it is today.
Aubrey Clark
Thank you for the feedback. I don’t pretend to be a financial wizard - just a researcher and “eye on America” kind of guy. I understand the need for stated loans as you put it. But you go on to say that “Granted, stated income loans were abused in the subprime arena but were born out of necessity to help the self employed borrowers.” That is a noble gesture. To my way of thinking, this cannot be a “what if” situation, or else we wouldn’t be in the state we are in. I recognize that there are a lot of other factors, such as America’s rage over fuel costs, which I am sure has helped contribute to this situation. But until clear cut regulations are set in place, and we have transparency in the market place, we will never get out of the mess we are in. See today’s post…
Alden Smith
Alan, I’m not a financial wizard either. I have a cooking degree from Rhode Island and 25 years in the mortgage and lending business. It would appear that having this distinction and four bucks earns me a free cup of coffee at Starbucks.
Keeping with the sentiment that this cannot be a “what if” situation, what should we do with the 25 million small businesses that write off income to stay in business?
According to the 2002 census bureau (http://www.census.gov/epcd/www/smallbus.html) there are around 25 million people who own a small business that does not have employees. Meaning they are a one man or woman show.
Each and every one of these people earns more money than their taxes will show after the proper deductions. Almost, if not all of these people will not show enough money to buy the same house as those that are paid the same by an employer on a w2.
If we were to add in the commissioned employees and those who are paid by a 1099 over one third of the potential homeowners cannot prove enough income to own a home. This is not a “what if” situation, this is a reality.
Do we simply tell these people not buy homes, crippling small business and banking? Or do we tell them not to use the deductions they were promised, which kills small business and raises unemployment? Too many people who “are not financial experts” are chiming in on this subject with little or no regard for the consequences of what they propose.
Alan, I have read most of your articles on the web and this blog and have no doubt that you are much more of a financial than you claim to be. In fact, I would say that by the context of the articles that I have read that you are extremely intelligent. This is why I am puzzled that you haven’t engaged the specificity of this problem but have elected to paint the issue with broad strokes. Ignoring the details and consequences of “throw the baby out with the bath water” legislation will deepen the crisis, will it not?
Aubrey, I have no qualms about the people you speak of - I am one of them. I work as a contractor, and receive the 1099 you speak of year by year. Our GAI for the year was a little over 10K, yet we made a substantial living. I agree wholeheartedly about the need for people like myself, who need the financial backing of the banks and the industry. Yet I also cannot stand by and allow the government to take nearly every dollar I make.
I think you may misunderstand my position. I am not dinging the people who need these services. My problem lies with the investment banks and the commercial lenders who are “creative” and IMHO unethical. I have experienced this myself when I bought the commercial property my wife and I now own. This is my biggest gripe, and one that I believe is shared by many like me.
I appreciate your kind words. What I learn about the industry I learn through research. I am blessed - or should I say cursed? with knowledge that the average person has not seen, but it is the nature of my job. I appreciate this dialog with you. Your background belies your description of yourself.
Alden Smith~