Carol H Tucker Passionate about knowledge management and organizational development, expert in loan servicing, virtual world denizen and community facilitator, and a DISNEY fan
Contact Me Subscribe to this blog
beladona Memorial Be warned:in this very rich environment where you can immerse yourself so completely, your emotions will become engaged -- and not everyone is cognizant of that. Among the many excellent features of SL, there is no auto-return on hearts, so be wary of where your's wanders...
I post the link to the blog on FaceBook and actually get more comments there than I do on the blog itself at times. The post about the banks giving mortgages to borrowers who couldn't pay prompted a couple different swipes at the banks: The comments broke down into two categories: they sell it to another bank and both make money; they stick it to the customer and make money. The functional conclusion was: bad banks make money on hapless borrowers.
You know, I am more than willing to point the finger at the folks who make money off of boondoggles, but in this case, I AM the mean old banker type person and I happen to know for a fact that I didn't get rich and none of the community banks or credit unions around here are rolling in dough, so I keep piping up and correcting misinformation. The reason that banks would bundle up and sell loans on the secondary market was to mitigate the risk entailed by making loans to risky borrowers to meet CRA requirements....
oh, who is a risky borrower?
er... well lets talk about the basis for credit worthiness. When a lender looks at an applicant, there is something called the four C's of credit:
-Character: this is what establishes whether or not you think the borrower will pay back the loan you give them. Since whether or not you are a nice person is pretty much irrelevant, and I have no idea what you are going to do in the future, lenders rely on past payment history -- the ubiquitous credit report. The lender is looking for a warm fuzzy feeling that you will pay without being a PITA.
-Capacity: a simple mathematical formula -- does your income handle your outgo with the additional payment factored in
-Capital: how much are you actually worth? If you lose your income stream [e.g. your job], how long can you stay afloat and keep paying back the loan?
-Collateral: in the case of a mortgage, what is the appraised value of the property VS the loan amount [AKA LTV]. Any LTV over 80% is considered risky, by the way. That is why the government requires loans to have PMI [private mortgage insurance] to cover the rest of the loan.
The ideal borrower?
has great credit with no past dues, no charge-offs and no public information [like tax liens]
can make the loan payment and handle all of the other expenses using less than 50% of their monthly take-home pay
has a net worth that is at least 10X the amount of debt that they have outstanding
is putting down at least 20% in cash
yeah -- I don't know many people like that either. And it was found that a disparate portion of protected minorities were not able to afford the American Dream of a home of their own. So a fifth "C" was added:
-Conditions: government guaranties. selling the loan on the secondary market. imaginative loan structures.
YAY! lots of homes being bought! Lots of people who couldn't afford a home now were able to have one! People are happy! Builders are happy! The government is happy!
CEOExpress
