It’s back in the news again….. Poor underwriting standards created the housing mess. It is an all too frequently used phrase these days.

From the way the phrase is used, it appears that when obtaining a home loan, the person who is borrowing the money walks into a bank and fills out an application. Then the loan officer must simply hand it over to an underwriter who then tells the loan officer and the borrower how much they qualify for, and how much they must borrow.

It appears that from the media’s perspective, the borrower has no choice in the matter…. No thought enters their mind of affordability, budget, etc. The person who was taken advantage of had no idea that they couldn’t afford a $3,000/month payment, they only make $4,000 a month, and the Loan officer wrote down on the application that they made $7000 a month.

What everyone fails to acknowledge is that in the loan process there are multiple points at which the borrower discloses, and then acknowledges the information. Unless someone is truly not looking at the paperwork, they see all the details of the loan. (the exception possibly being the ‘pick-a-payment loans, an entirely different conversation)

At the point of applying for the loan, they complete a loan application. This application includes their income, and all their monthly debts. The loan officer then is required to send out disclosures showing the terms of the loan, which include the monthly payment they are applying for.

In the case of mortgage brokers, when the loan is submitted to underwriting, the consumer receives a second set of disclosures from the lender showing the terms of the loan.

If the interest rate that was quoted at the time of application changes, the borrower will receive a subsequent set of disclosures telling them the new rate, and payments.

At closing the borrower signs a ‘final’ application, once again disclosing income, and this one must be initialed on every page. The terms of the loan are all there, and payments are disclosed on the ‘final application’, the ‘Truth-in-lending’ disclosure, and the mortgage note. There is typically also a payment stub included in the package showing the payment amount.

This is not to say that there aren’t unscupulous lenders and loan officers - there are. It is simply saying that the consumer should read the documents they are signing, and use common sense when getting a loan. If you don’t think you can afford the loan, you probably can’t.

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Almost invariably, there is a cycle that takes place in consumer spending. Business spending isn’t all that different, but somehow we figure that government spending is different.

When the average consumer is building their lifestyle, they usually start out small (relative to the terms of their upbringing, whether it be smaller house, used car, apartment, etc) and build from there. They typical consumer will rent an apartment, or buy a smaller home, and then at intervals in their life, the will upgrade.

Many consumers also will go through cycles of difficulty, at which times they will either lose a job, leave a job, or their job will disappear as has happened to so many people during this difficult time in the economy.

During these cycles of difficulty, the average consumer will live on their savings first, then possibly credit cards, and then they will either adjust their lifestyle to their current living standards, or they go bankrupt and are forced to change their standard of living. The only way to get back to their previous lifestyle, is to earn more money.

Businesses go through similar cycles. They grow, they contract, they want to expand quickly so they borrow money, if they don’t spend the money on things that generate more money, they either have to make major cutbacks, or they become bankrupt.

While the economy can be much more complicated, and there are many ways to hide or mask true issues, the foundation is pretty simple. You can’t spend more than you make forever. At some point you have to repay the debt, and repaying debt is much harder than living within your means. Once the debt is there, you still have to pay your normal daily living expenditures, but you also have to pay your debt payments……

Bottom line – if we don’t spend our country’s money wisely, we will not only not fix the problem we are facing, we will make it worse.

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So the other day I was talking to some of the ‘other’ Americans. You know, the ones who put a down payment on their home, didn’t leverage themselves out, who are paying their bills on time every month, even though that is becoming a struggle, and they wonder – Why are we bailing out everyone else? What do I get out of this?

Well, we all know the answer to that….. we get higher taxes once things come back around…. Someone has to pay for all the spending. Even if it isn’t a direct tax, it gets passed through in most cases.

So to offset the amount we have to pay back, why not implement something that recaptures some of this federal ‘bail-out’ money that we will be making payments on for years.

Here is my proposal: If someone has their interest rate or mortgage balance reduced, that amount is reported to the government. If the bank taking the loss received federal bail out funds, then that consumer will not get a tax refund check until the amount the bank lost is recovered.

This will still allow people who need the help to get it, but will prevent those who are simply taking advantage of the situation from doing so without thinking about it….

Just a thought.

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