In my loan officer training sessions on tax return analysis, this subject comes up: ‘What if I don’t think the borrower can pay, even though the analysis shows they qualify?’
Tricky question. As a business borrower, I do not want my lender to decline a loan when I meet guidelines because they are personally worried I cannot pay. If I ask for the loan, I have already made the business decision that I can pay. And if my company meets guidelines (amounts, collateral, primary and secondary source of repayment) then I think my company should get the loan.
That brings us to the sub-prime meltdown. The Dayton BizJournal article Tighter Credit Could Reduce Ownership Gains sites the Center for Responsible Lending prediction that lenders eventually will foreclose on more than 19 percent of these subprime loans, causing 2.2 million borrowers to lose their homes.
Not surprisingly, the mortgage industry sees things in a different light. Sandor Samuels, executive managing director of Countrywide Financial Corp., points out that subprime mortgages have helped increase the home ownership rate in the United States to 69 percent of all households, up from 64 percent in 1994.
Here is my view. Make the loan if:
- The borrower has requested the loan,
- You have fully disclosed all aspects of the loan and the impact in the short- and long-run, and
- The borrower qualifies.
People losing their homes who were lied to or coerced are a different matter and criminal and civil action should be taken. My guess is that the leaders in the mortgage industry are as distressed about predator lenders as anyone else. To imply that all subprime lenders are predators because some are unethical is ludicrous.
At least some homeowners who now face foreclosure took an unreasonable gamble with their most important asset. I am sorry for their loss but it was their gamble to take.
Be clear, be fair, be ethical, and apply guidelines across the board…and say “Yes” to the loans when they meet your financial institution’s criteria.