Wednesday, July 9, 2008

Here's What's Really Wrong With The Mortgage Industry

Mortgage Denied Last week, Diane Cipa wrote a post about the FICO score and how it punishes the wrong people. Today, this hit home for me. A relative of mine needed $20,000 this week. His banker suggested a $20,000 HELOC. He has approximately $400,000 tied up in bonds and CDs and wanted to avoid paying a penalty for withdrawing a portion of his money early. He owns his $300,000 home outright. He and his wife paid cash for it 40 years ago. He's paid cash for all his cars. He owns three tracts of valuable land which he bought with cash 35 years ago. He and his wife have zero debt. The only credit card he has ever owned is his gas card which he pays off at the end of every month. He's lived his entire life within his means.

The bank denied his HELOC. Credit score too low. I spoke to the banker myself. We even went to high school together. Nothing can be done, the underwriters can't approve it because he has no past credit. Are you kidding me? He can't get a $20,000 loan on a paid off house worth at least $300,000 because he has no past credit?

So, you want to know what's wrong with the mortgage industry? We're idiots. We back up the money truck to those with a long history of living above their actual means, and we're stunned when it finally catches up with them. In the meantime, we consider those who are financially responsible their entire lives to be unacceptable risks. We're so stuck on more rules, and more forms, and more disclosures, and more requirements that we completely abandon all common sense. It's no wonder we're in this predicament. It was inevitable. We deserve it. And there's no sign that we're getting any wiser.


Anonymous said...

Well put! I have suspected for some time that there is little intelligent life in the banking industry.

I have done private money lending which is based on the value of the collateral. I'll take solid assests over established (potentially excessive) credit lines any day.

Anonymous said...

I couldn't agree more, Alex. I tried to buy a tv on credit years ago. I couldn't get approval since I had no active accounts on credit. I had put a freezer on credit but it was paid off. Items that have been paid off are of no relevance. They want to see items that you are paying on. Not items you have successfully paid off.

My father owns three farms. In his older years, he decided he wanted a cell phone. The company told him he would have to pay a deposit of $500 because he had no credit history. Of course, he was totally shocked.

Our system is totally backward. Promoting the use of credit instead of saving until you have the money to purchase and item and giving more credit to those who are already to far in debt.