The New “R” Word: Reset
Over the past 18 months, we have been inundated with bleak tales of economic strife. Inevitably, the media has worn us all thin with their never-ending string of bad news. Yes, we are stuck in the thick of a very painful recession. Unemployment rates are flirting with double digits, fears of inflation are beginning to handcuff the government and their financial actions, political parties are torn and bulls are all but extinct on Wall Street. Instead of sitting on the sidelines and waiting for struggling newspapers to drop good news on our porch, I argue it is time for us to stop fearing our economy. I argue it is time for a reset.
After someone has a disease that is critical, but not terminal, they take a reset of their life and gauge what they have to work with. Although this would classify as more of an emotional reset, the same principle can be applied to our current financial struggles in terms of an economic reset. This is where we are right now, both here in the United States and in many parts of the world. Prices have reset. The sooner we realize this and the sooner we gauge what we have to move forward with, the faster we will regain the confidence our capital needs to move forward.
Our economy will recover, but it will not sporadically jump to pre-recessionary levels. Our core growth will be more conservative. Cheap credit will become a thing of the past. The availability of extreme financial leverage will be nonexistent. Instead of returning to business as usual, we will work to create a new world. One with regulations that help our economy, not inhibit it. We will all return to spending, but accountability will be involved. We will assess what tools we have and what tools we need. At that time, we will be able to help our economy grow responsibly. It is not something to fear, but something to embrace. And there is no time better than now to begin.
Much more on resetting our economy in future Powell Perspectives.
Start Your Own Business, Just Don’t Expect to Buy a House
Unable to find steady employment, many Americans are starting their own businesses out of necessity. Small businesses help create new jobs. Nationally, small businesses comprise half of all private-sector employment and they have created about 70 percent of new jobs each year over the last 10 years. Simply put, entrepreneurs drive our economy. But, when it comes to acquiring a home loan, self-employed business owners might as well be lepers.
The qualifications for obtaining a home loan through the Federal Housing Administration (FHA) require that self-employed borrowers have two years of self-employment experience in the same field. However, if a small-business owner has been self-employed for more than two years, then lenders need to see a consistent increase in the business owner’s earnings. If the borrower has been self-employed for less than two years, then past W-2 information is often considered irrelevant unless they still hold their W-2 job. And, since underwriters rely on tax returns as proof of a borrower’s income, year-to-date income is worthless until it is filed with the IRS. Many times, the self-employed borrower is out of luck, especially when banks are tight with lending.
Banks view the self employed as “risky” because their job security is wobbly and their incomes can vary widely from month to month. Because of this unfavorable view, self-employed persons are forced to explore other non-traditional options to purchase a home. The most-feasible of these options include owner financing and lease-to-own properties.
Looking for a faster sale or attempting to move a property that is otherwise difficult to sell, owners will sometimes offer financing themselves. Owner financing can help keep the banks out of the picture and get self-employed individuals on their way to home ownership more swiftly. While owner financing may offer easier qualification requirements and less paperwork, it is crucial to not get swept away in a sour deal. Having a real-estate attorney help to complete the transaction is crucial and will keep both parties informed about the details of the deal.
Another option for self-employed individuals is to find a lease-to-own property. With a lack of buyers, many condo complexes are offering lease-to-own options on their units. After the renter has agreed on a purchase price with the seller, the renter is allowed to move into the property and make monthly rent payments to the owner. This option allows the renter to build equity every time they pay their monthly rent. At the end of the lease, the renter can apply the funds that have accrued toward the purchase price of the property. Plus, by that time, the self-employed renter has had time to acquire the two years of tax returns needed to acquire a conventional loan.
Patience is often the best tool for someone who is self employed and looking to obtain a home loan. Although they may miss out on timely investment opportunities, a self-employed individual can use their waiting time to explore their home-buying options. This way, they will be well-versed in the home-buying process by the time they meet the requirements set forth by loan underwriters.
The way the system is set up, it makes more sense to be a W-2 employee for a number of years, then purchase a house and then risk it all to start your own business. But, entrepreneurs are a spontaneous and confident bunch. They do not always fit into the confines of structured systems. Therefore, we will continue to allow them to fuel the driving force behind our economy, we just will not help them purchase a place to live.
Mortgage Fraud Burns
Last week, the FBI released its 2008 Mortgage Fraud Report. The aim of the study was to provide insight into mortgage fraud crimes perpetrated during 2008. The Mortgage Fraud Report addressed “current mortgage fraud projections, issues, and the identification of mortgage fraud hot spots.”[i] Not to anyone’s surprise, the report suggested that mortgage fraud continued to be an elevating problem throughout 2008. Practically all of the findings indicated an increase in mortgage-fraud activities.
Although a single, precise instrument to determine mortgage fraud does not exist, there appears to be a positive correlation between mortgage-fraud activity and distressed real-estate markets. Therefore, mortgage fraud thrived in the stumbling housing market of 2008. According to the report, mortgage fraud is defined as “a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan.”[ii] Suspicious-activity reports (SARs), which are one of the government’s main weapons against financial crimes, increased 36 percent to 63,713 during the 2008 fiscal year, up from 46,717 in 2007.
Among the most popular mortgage-fraud scams are deceitful short sales, unnecessary bankruptcy filings, reverse-mortgage schemes and unlawful loan modifications. According to the FBI’s website, mortgage fraud is categorized under two main labels: fraud for profit and fraud for housing. Fraud for housing is typified by a borrower who provides false information in order to qualify for a loan. As long as borrowers are clear and honest throughout the loan acquisition process, they should have no worries of being a victim of fraud for housing. However, the FBI cautions borrowers of deceitful professionals who try to coerce them into reporting false information on their documentation. Even though you may be following the advice of a “professional,” you could still be held accountable for the crime.
The second category of mortgage fraud, fraud for profit, is committed by industry insiders who take advantage of borrowers for their own financial gain. Fraud-for-profit schemes include motives to revolve equity, falsely inflate property values or issue loans based on fictitious properties. Existing investigations suggest that “80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.”[iii]
In order to avoid becoming a victim of a fraud-for-profit scheme, the FBI offers the following tips:
* Choose your mortgage broker/banker carefully
* Arm yourself with basic mortgage knowledge
* If something is too good to be true, it probably is
* Never sign a blank document or a document containing blank lines
* Never sign over the house deed “temporarily” for a fee to anyone[iv]