My friend and colleague, Morgan Brown of Blown Mortgage, is basking on a beach in Fairfield County, CT, watching the leaves turn colors. Morgan’s given me the opportunity to hijack his weblog and speak to his audience.
Mortgage veterans will often refer to the Three C’s of Lending when explaining how lenders view potential borrowers when underwriting a mortgage loan:
1- Credit- How does the borrowers pay his obligations?
2- Collateral- Is there sufficient equity protection if the loan defaults to recover the loan amount?
3- Capacity- Does the borrower have the income to make the payments?
Pay attention the the final factor, capacity. In short, the question is “can they afford this house?”. In Southern California, among other fast-growing markets, the honest answer is a resounding “No.” The go-go years of SoCal real estate and lending displayed an utter disregard for this simple factor. The prevailing thought was that the first two factors, perfect bill paying history and a rising real estate market, would trump the principle of affordability. Good credit displayed prudential money management and the improved collateral would bail out the tangential mistakes made in underwriting.
It got so bad that in the summer of 2005, underwriters would call me and instruct me to adjust the loan applications in order to “dress up the package”. That summer, as I approached my 40th year on earth, I realized something very bad could happen in Southern California.
We do a bit of business in private lending . That’s mortgage banker talk for “hard money”. It’s a rewarding business as we are able to offer “Band-Aids” to temporary life problems and capital for opportunistic investors buying unique properties.
The California Department of Real Estate, offers a pretty hard and fast rule for owner-occupied, private mortgages (trust deeds) - no stated income. The DRE requires originators and private mortgage investors to document an ability to repay the loan. They’re pretty liberal in their guidelines. Bank statements, trailing spousal income, co-signers, and future contractual agreements are all acceptable. The income you disclose on your MySpace profile will not be sufficient documentation for the California Department of Real Estate. Still, borrowers and co-operating brokers shop hard money lenders like a retiree shops rugs at a Saturday morning swap market. Here’s the difference between my 40th and 42nd summer; that crap ain’t cuttin’ it no mo’.
Southern California borrowers, aided by greedy mortgage originators, threw caution to the wind and jumped into the real estate market woefully unprepared for the worst-case scenario. Mr. Murphy flew in to LAX and left behind his legacy in the form of declining housing prices. The old adage that you are only lying to yourself holds water today. Especially in the high-wire act of Southern California real estate.
Party Responsibly. The hangover is a bitch.
Brian Brady is a Managing Director of World Wide Credit Corporation in San Diego, CA. He is a 20 year veteran of financial services with 6 years on Wall Street and 14 years in lending. Mr. Brady writes a weblog called “America’s Mortgage Broker“, has been cited on CNBC, Google Finance, and Yahoo ! Finance, and is published in Mortgage Originator Magazine and Broker Magazine.
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[Source: Blown Mortgage]
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