Clearly, the state of our economy is not helping the real estate situation. It is harder for many to buy homes, and, as seen from the ever growing number of foreclosures and short sales, it is harder for many to stay in the homes that they’ve already bought. With Obama’s Home Owners Affordability and Stability Plan there are incentives are being given to banks to restructure current loans in order to enable homeowners to stay in their home rather than foreclosing. But this is an arduous and daunting task and in the grand scheme of things, it will not do much to bring us out of this real estate slump. I was speaking with my boss this morning, Carlos Aguilar, President of Axia Real Estate Group in San Diego, and I asked him what it was that the real estate market needed more than anything right now. His answer, to no one’s surprise, was: Buyers.
But why aren’t buyers buying? Prices are low and still getting lower, especially in Southern California. There are great deals out there and yet very few homes are being sold. Of course, money is tighter now than it has been in a long time, and that, without a doubt has a lot to do with this. But a main reason for the lack of buyers may lie in the fact that it has become very difficult to qualify for a home loan. This happened as a direct result of the sub prime fiasco. Regulations were almost non-existent at one point and it was necessary for the banks and the federal government to put their foot down and demand much more stringent guidelines for borrowers. So, away went 100% financing, away went the 600 Credit score borrower, and away went the possibility of stated income. Getting rid of 100% financing and disqualifying borrowers with poor credit were no-brainers. Those had to go. But stated income loans got a bad reputation during the sub-prime era, and their original purpose and value have been brushed aside. Bring them back with strict guidelines, and many more people, rock-solid borrowers, will be able to once again buy a home.
One of the perks of being self-employed is the business expense write-offs. Depending on your line of work, you can write off a ton of things as business expenses. And there is no doubt that a fine line exists between a business expense and something that can pass as a business expense. But writing off business expenses in order to lower one’s overall taxable income is a very common and very legal practice. There are millions of self-employed Americans who make substantial amounts of money, but each year they make it appear that they earn far less income than they actually do. And it was for these people that the stated income loan was invented.
So what went wrong? It was the greed that inundated the financial and real estate industries. The more people the banks could qualify for a loan, the more money they were making. Guidelines were so lenient at one point, that in some instances, a store clerk earning $10 an hour, could state his or her income as substantially higher, and qualify for 100% financing on a $500,000 home. This may or may not be an exaggeration; it was really that bad. Exploiting the stated income loan, and qualifying borrowers for much more than they could afford is a huge reason why thousands of people have lost their homes. So why on earth should we even consider bringing it back?
Well, as Carlos said, our markets need buyers. There are a lot of investors and self employed business owners who cannot currently qualify for a loan even though they have impeccable credit and can easily afford to make payments. The main reason that stated income loans failed is because there were hardly any guidelines for them. It does not take a genius to come up with a set of strict regulations in order to keep stated income loans in check. Stated income borrowers might be required to put down more money, they will have to show substantial proof of their business and that they’ve been self employed for a minimum of three years. Their credit history must be substantial and flawless, and the banks cannot rely on brokers to provide all of this information themselves. The irresponsibility of those who exploited stated income loans should not be the reason that qualified borrowers cannot buy a home. I have not seen anything in Obama’s Home Owners Affordability and Stability Plan that addressed the issue of bringing buyers back into the markets, but that doesn’t mean much, because there is a whole lot of that plan that I have not heard about. I hope for everyone’s sake that it addressed this problem because if home loans continue to be this difficult to obtain for everyone, this uphill climb we’re already facing will be even more daunting.
By Andrew Brentan