Forget Larger Down Payments, Lend Like The VA
I have been Blogging about changing the way we lend and emailed Secretary of HUD Shaun Donovan that we are still lending poorly. I have had a pretty strong stance that we need to look more at debt to income ratios and reserves and I still agree with it however I was talking with my Managing Director and he brought up a great point. He said the lending model should be the same as VA. I think he hit it right on the nose.
The reason behind this is because VA looks at debt to income ratios, residual income based on family size and NET income, and takes into account child care expenses. I guess they have to when they are requiring zero down however it is a great way to base all lending standards on.
We are too stuck on credit scores. Yes, that might have worked well in the past but things have changed and people have changed. We need to control the consumers behavior because they have no self-control. I can tell a borrower a hundred times that they shouldn’t be spending that much even though they qualify but they will pick up and go to the next Loan Officer that will do it because they can and they need to get paid. We need to keep Mortgage Professionals in check too and that includes me.
These borrowers are a broken refrigerator away from foreclosure. You can get a loan with a 55% debt to income ratio and not a penny leftover after closing. How can we do this to these people and our country? It is setting them up for failure. Our country is financially illiterate and we need to guide them.
A lender (to remain nameless) came out with an announcement stating:
Based on feedback received from our Correspondents regarding their inability to capture DTI on secondary market transactions, we are pleased to announce the removal of the maximum 50% DTI on FHA transactions. With the exception of the manually qualified streamline refinance, the maximum DTI for all other FHA transactions will be per AUS.
Let me translate this for you. “Due to us losing business since others will allow above 50% and the secondary market doesn’t care quite frankly we don’t care.” Are you kidding me? Your lending standards are based upon what the secondary market picks up on? The lending guidelines should be based on risk and a borrower’s ability to repay a loan and the fact that you want your company to be around for the next 100 years.
I could go on for days on this. The bottom line is something needs to be done about it and I am trying to be the voice for it because I do this for a living everyday, Shaun Donovan doesn’t!