With the financing pendulum swinging wildly from one extreme to another over the last 12+ months, many of us have almost voluntarily strapped on straight-jackets over the outrageously absurd issues spilling forth from the mortgage lending industry. Just when we thought that we had seen it all, a new twist in underwriting may be just around the corner.
First, let me share with you a couple of the more frustrating experiences that we’ve had over the last several months:
One of the most nerve-wracking situations of 2009 involved two clients of ours in escrow to buy a beautiful home in Lafayette. Both husband and wife were physicians — one in private practice in a high-demand specialty, and the other was an employee physician with Kaiser — also in a specialty field of medicine. Their total annual income most certainly places them in the top 10% of the community, and their credit scores were 750+. With 25% down, they should have been an excellent credit risk!
After 5 weeks of fumbling around with the loan file, the large California institutional lender with initials UBOC notified our clients that they needed to put an additional 5% down if they wanted the loan. The reason stated by the bank was that our clients’ credit score had slipped 5 points during the review period. To put matters into perspective, that’s approximately a one half percent change. So, why did it drop 5 points? It was due to the multiple credit inquiries originated by the lender!!! In order to purchase the home, my clients needed to put an additional $85,000 down to satisfy the lender’s modified condition for making the loan, and given the timing of the last minute lender demand, there were no viable options!
The second outrageous lending encounter we experienced in 2009 also involved a physician client… this time, another high-demand specialty doc working as an “independent contractor” with a large medical group. His credit scores were 825+, and he had 25% down on the property. His loan application was rejected outright by one institutional lender, and then once again by our friends at UBOC, after they spent 4+ weeks trying to extract some extraordinarily ridiculous documentation from this client. This included a request for the confidential, individual K-1s of the 800+ partner physicians in the medical group! What was their reason for rejecting this objectively well-qualified borower? Well, after several years of being an “employee” physician at Kaiser, he only had about 18 months of “history” as an “independent contractor” – better known as being a ”private practice” physician. The fact that his income was at least 25% greater than what it was at Kaiser was essentially irrelevant to them, as was the 825+ credit score and the fact that his medical group had been highly profitable for over 25 years. Fortunately, we found another financing option and our clients were able to purchase their new home.
So, what prey tell, could lenders possibly come up with next to make things more challenging for buyers? Well, it appears that they may start looking at prospective borrowers’ social networking connections. Many of us remember our parents saying that “you’ll be judged by the friends you keep”. Well, maybe we should have given them more credit for their wisdom! According to CreditCards.com, “The presumption is that if those in your “network” are responsible cardholders, there is a better chance you will be, too. So, if a bank is on the fence about whether to extend you credit, you may become eligible if those in your network are good credit customers. Social graphs allow credit issuers to know if you’re connected to a community of great credit customers. Creditors can see if people in your network have accounts with them, and are free to look at how they are handling those accounts.” If lenders find value in this for credit card lending, they will also find value in it for assessing mortgage lending risk where much more is at stake, and where they have incurred much greater losses.
There’s a moral to all of this… be careful about the “friends” you keep. 
