Last night just after 5:00 PM I got a call asking me to stay another 30 minutes to visit with a homeowner to whom I have made a couple of real estate loans in the past. The man said that he needed to talk to me and wanted to come by about 5:30 and visit for a few minutes. The man's property is located in New Mexico, where I no longer hold a lending license, and I was getting ready to leave for the evening when the call came in, but as a courtesy to an old customer I stayed and waited for him.
When my borrower arrived he told me that he knew that I could not loan him any money on his New Mexico property but that he was very frustrated by his current experience of trying to get a loan and he wanted to see if I could make some suggestions to help him. His property in New Mexico is very nice and he does not owe much money on it, but he wants to buy a home in Texas and in order to get the down payment for his new home he wants to do a cash out refinance on the New Mexico property where he currently lives. He complained that the companies that he is working with now don't return his calls, that the level of service is terrible, and that he is not getting the cooperation he needs. "I called over here and you agreed to see me right away, but I can't even get these other guys to return my calls."
He wanted to know why I stopped lending in New Mexico, and I explained to him that when the SAFE act was introduced requiring that mortgage brokers have federal licensure, the licensure fees for each state more than doubled. I had always had a New Mexico license for as long as I had been in business, but I could no longer afford to pay the fees to be licensed in two states, so I had to choose the state where I conducted the most business, which was Texas. Prior to the SAFE act, I could have handled the transactions in both states. It was true that I always met with him after hours, at times that were convenient for his work schedule and that I closed his loans quickly and was always accessible, but the elevated costs of doing business coupled with the drastic cuts to our income produced by regulations have made it impossible for me to work the way I once did.
I then explained that he needs to be aware that the mortgage debt ratios for borrowers refinancing their homes or buying new ones are tighter than they have ever been. In order to be able to purchase the new home after he refinances his current one, he is going to have to be sure that his debts do not exceed 45% of his income if he is going to be getting a conventional loan. His current plan is to rent out his home in New Mexico to offset the payment on his new loan so that he can qualify to buy his new home, but if he does not have 30% equity in the existing home after his new loan is finished as verified by the current appraisal he will not be able to use the rent to offset the payment which will mean that he will have to qualify for the house with both his current house payment with his new higher loan amount and the new payment on the new home he is buying. To make matters worse, his wife has a steady job with the school district but her credit is not very good, so she may not qualify to be on the loan which will mean that her income cannot be used. He is also working with the school district, and his credit has always been very good, but due to a mistake by his current mortgage servicer where they erroneously reported his payments late because of an escrow shortage, his scores are lower than they were when I was working with him and he may not make enough money to qualify by himself.
While we were talking, he received a text message from one of the mortgage loan originators he has been working with saying that the mortgage loan originator wants to meet with him. The originator wants $400.00 in order to order the appraisal on the house in New Mexico. My former borrower looked at me expectantly as he told me that he can't pay for the appraisal right now and expects it to be rolled into the loan. I explained that mortgage loan originators used to allow borrowers to pay for appraisals at closing--which often meant that if for some reason the loan did not close we had to pay for those appraisals ourselves. Although not collecting the money upfront meant that many times we had to pay those fees ourselves, because the lending environment was very competitive, we would often take the chance on not collecting the appraisal money at the time the appraisal was done because we were competing with other lenders who would not collect the money up front, so we could risk $350.00 or risk losing the deal totally. Now, however, since new appraisal regulations were introduced in 2009, we no longer hire the appraisers ourselves. Appraisers are selected by appraisal management companies contracted by the lender and the appraisal management companies demand payment in full upfront. Not only are appraisals considerably more expensive than they once were, but we no longer have the flexibility to call up our friendly local appraiser and ask if he will wait three weeks to get paid. Since loan originators no longer have the money to cover those costs themselves, and since most the competition is gone now, the borrower has to cover the cost of each and every appraisal up front. I explained that he will be paying for his appraisal on his refinance and his appraisal for his purchase at the time each is ordered--no exceptions.
As I talked to this man, he commented that if the market is slow and loans are difficult to originate, then everyone should be eager to work with him and eager to accommodate him, but that is really a very naive view of business. In a competitive, profitable environment, loans were affordable and loan originators worked hard to try to close the borrower. Today, loan origination is extremely difficult and laborious and not very profitable. As a result, there is very little competition and very little incentive to go above and beyond. I am sure from having known this man for a number of years that he voted for President Obama both times and that he has been completely in support of Obama's anti-business policies and his strangling regulations, but now he does not understand why increasing the regulation and the costs of doing business for lenders is making it difficult for him to get the loans, the pricing and the service he wants. I am sure that there are people all over the U.S. who would agree with him. They like to complain about evil business people, but they don't understand why high costs of doing business and low profit margins kill the incentive of business people, increase costs to consumers and limit consumer choice by driving out competition.
Tonight President Obama will give his first State of the Union of his second term. One major focus of this speech is supposed to be jobs, the economy, and to paraphrase one commentator, "making sure that all Americans can participate in the economy while paying their fair share." We can look for a speech calling for more regulations, higher taxes and more top down economic stimulus in the form of taxpayer funded subsidies for pet projects such as union shops and green energy. We can be pretty certain that the speech will not call for any of the real actions that actually would stimulate the economy--unraveling the tens of thousands of regulations that have been implemented over the past four years, lowering taxes or reducing the cost of compliance. Yet, if the President were serious about improving the economy, these are the actions he would take. No matter what the left likes to tell themselves, the government does not create jobs. The government does not create opportunity. The government only has the power to kill jobs and opportunity. For profit businesses do not operate out of a sense of altruism; the owners and employees work hard and give their utmost effort so that they can experience the rewards that go with hard work. When those rewards are stifled, the incentive to produce and compete is gone. And when business becomes too difficult and expensive to conduct, business owners either close up shop completely or they raise the costs they pass on to the consumers and cut services. Either way, in the end, the American people end up paying the final bill, not only through higher taxes, but also through higher fees and costs and poor service.
Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. Her novel, The Planner, about an out of control, environmentally-driven federal government implementing Agenda 21, is available on Kindle and in paperback. For more information, visit her website at http://www.frontier2000.net.
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