The Federal Reserve announced yesterday a $600 Billion infusion of capital into the economy. The intention is to keep interest rates low to stimulate borrowing and spending. However, the freer money supply doesn’t address the need for freer lending standards. I’m not talking about 0% down, low FICO score loans, but I sure would like to see easier qualifications for the self-employed.
The need to offer a low documentation loan to non W-2 borrowers cannot be understated. After all, the backbone of our economy and the largest segment of luxury the home market are the small business owners. We’re talking about the store owners, the dry cleaners; the mom and pops shops of America. Currently a small business owner needs to open up their books, trying to add back in all the legitimate tax deductions the IRS allows them, so that they can qualify to buy a home. No matter how much you try to rebuild the financial picture, it’s just not enough. Plus, this is not a loan a bank underwriter really wants to sign their name to. But low doc loans at a small premium have been around since the early 1990’s – until now. These past few years have eliminated thousands of the best home buyers, the move up buyers, the luxury home buyers, because there is no option for these borrowers to obtain financing. Property value, like the value of any good or service, is based on supply and demand. The Fed and every home seller, wants an increase in demand. Small business owners can help solve that problem, but without a vehicle to finance their home purchase, our most important buyer, is left out of the equation; slowing the housing recovery. I know the argument that low-income verification is what lead to the mess we are in. However, that is simply not true. The crisis was from poor underwriting standards – bad credit; no down, no doc loans to W-2 employees. That’s not what I’m talking about here. What I’m advocating is a loan that is available without income verification, but requires the borrower to have substantial assets, excellent credit, 25% down payment, have been self-employed for a minimum of 2 years and most importantly, not be a W-2 employee. Years ago, it cost 1% over market if you were going low doc. If we had this today, we would quickly infuse the housing market with well qualified buyers and they would be buying expensive homes. This is the market most desperate. I remember in 1994 there was a fixer in the flats of Beverly Hills that was on the market for $700,000. $700K! If you could buy in the most expensive neighborhood for $700K, then Sherman Oaks had to sell for less; if Sherman Oaks had to sell for less, then Tarzana had to sell for less. If Tarzana was selling for less, the Woodland Hills had to also and so on. The downward pressure from the high-end, can crush the value of the middle. Sure, the low-end will have to push the middle from the bottom up, but that’s only really effective if the high-end doesn’t collapse on top. Remember, it doesn’t matter how ripe the soil or quality the seed, a tree can’t grow under a stack of bricks.