Underwriting mortgages: the story we wish to change
By Ricardo Henriquez
Pauline graduated 1 year ago from Florida State University College of Medicine. As the elder of 3 siblings, she usually complained to her parents (half-seriously) about her strict upbringing, in contrast with the leniency that (in her opinion) they had towards her younger brothers. Having spent most of her childhood and teen years in Gainesville, Pauline gladly moved to Tallahassee in search of a fresh start and a career as a doctor. She could have entered into Gators and stayed home. But Seminole represented change and adventure, so there she went. After 4 years, she headed back home to do her medical residency… and also to find her own independent place to live. She found a modest apartment at 16th Avenue, at a price of $150,000.
While her parents were able to partially support her to get into college, Pauline had to take a student loan, and has now a whopping $195,000 debt (which happens to be the national average for medical students). As a resident at UF Medical Center, she has an annual salary of $58,000, slightly above the average. With a couple of credit cards, of which she only missed one payment more than a year ago, her FICO credit score is a barely fair 652. She managed to save $15,000 and get an additional $20,000 from her family: she’s ready to take her chance at a mortgage.
Sadly, the mortgage officer tells Pauline that she could only afford a $140,250 home… This is very disappointing. Other properties she saw were not so attractive, so she’ll have to remain with her parents until she can manage a higher down payment.
Flash-forward 4 months… She’s got additional $10,000 from a distant uncle. Her dream of becoming a homeowner seems very close… until she finds that her cherished apartment was just sold one month ago. Curious, she drops by the place to see if by any chance she knows the new owner. She asks the janitor and, by a strike of luck, there they were coming out of the building: a nice young couple. Only, they were not actually the owners… they were the tenants. The new owner had bought the apartment under a buy-to-let mortgage scheme… and who was he? No other than Martin! That nasty guy from high school… How is it that he was able to take the mortgage and not her? She needed to find out. So even if it wasn’t particularly nice, she decided to contact him on Facebook (Yes: they were friends there at least…).
Here they are chatting in the Starbucks at Library West.
Pauline: Don’t take it personal Martin, but how come you drop from college and are they approve your mortgage application, while I toil for 4 years to become a doctor and contribute our community, and they reject mine? And don’t tell me is about money, because I earn as much as you do as a car dealer.
Martin: You got it wrong Pauline. Your whole life philosophy. Yes, it is admirable to become a doctor and do all the sacrifices you took, beginning with the 200k student loan. But the fact is, as an investment, is very poor. Not as poor as doing an MBA, but still a bad choice.
Pauline: I don’t see my career as an investment.
Martin: But banks do. The whole financial system does. It’s all about your credit score and your current debts. Yes, I dropped out of college, and that’s why I don’t have this crazy student debt burden.
Pauline: You didn’t even buy the house to live in!
Martin: It doesn’t matter! Banks only pay attention to your income, level of debt, credit score and L/V ratio. Pauline, you are a good person; always engaged in community building; an educated professional. But all this is irrelevant for banks. They only care about whether you can pay them back.
Pauline: Banks should take on account these things… If I were to lend money to someone to buy a house, I would care about whether she needs a home. Certainly, my uncle wouldn’t have given me those $10,000 otherwise.
Martin: Perhaps. But it would be your money. Banks lend with other people’s money… They are accountable for their lending decisions.
Pauline: Sure! They were so accountable in 2008…
Martin’s smartphone ringed. He was sorry, but he had to leave to close a deal. After finishing her venti, Pauline just kept wondering: is there any way to change the system?
