Last Updated Jul 17, 2009 3:22 PM EDT
It all started last when I read Joe Nocera's article in last Saturday's New York Times. He underscored a problem that lurks in the housing market: the necessary solution of returning to strict underwriting can bog down the recovery process and is flummoxing the administration's efforts to modify the millions of loans that are under water.
This isn't meant to encourage a return to the bad old days of the credit and housing bubble, when people were approved for hundreds of thousands of dollars of loans in a mere couple of hours. (Low income? Not a problem. Shaky credit? We can overlook those minor blemishes.)
The days of "NINJA" loans (no income, no job, no assets) are thankfully gone, but the old school approach to underwriting means that a lot of people who thought they could refinance mortgages and some who are seeking to purchase new homes, are being shut out.
I saw this first-hand, when my friends called me in a panic this week after they had just been rejected for a mortgage. It wasn't because their down payment was too small (they were putting down 35%!) or a low credit rating (their score was 720). Nope, the culprit was self-employment. "John" was too big a risk because he owned his own business and his take-home income was deemed too erratic.
Bummer for them, but this is what happens when the pendulum swings. The unintended consequence of sane lending is that some people will not get credit who may have been able to do so in the past and housing will take some time to get back on its feet.
Image by Flickr User bixentro, cc 2.0