I’ve used, Albert Einstein, several times in the past, in referencing things done by the incumbent. Not, however, to suggest the incumbent's a genius by any stretch. But because he continues to prove one of Einstein’s most famous observations: "Insanity is doing the same thing over and over again and expecting different results."
This time around, the inanity applies to the housing market where the incumbent wants to disband Fannie Mae and Freddie Mac, quasi-government agencies that underwrite roughly 90% of the mortgages in existence, replacing them with regular commercial banks.
At the same time, he also wants those banks to once again lower credit-condition requirements for mortgage approval in order to make financing available to a wider range of presently sub-par applicants. Precisely the same thing that caused the second greatest recession of all time ten years ago, when mortgage defaults became so widespread they caused the financial collapse we, and the rest of the free world, have yet to fully recover from.
Now, from the outside looking in, lending and financing appear to be quite complex, intricate endeavors, and in many ways really are. But, in their most basic formats they aren’t very complicated at all. Especially today, where so much information has been amassed over considerable periods of time that can now be easily referenced and tapped, lenders have huge historical record performance to rely on.
In the most basic credit decision-making, what lenders do first when reviewing applicants is to assess their financial condition. The information sought includes subjects like how much income is earned compared to an applicant’s current obligations. If there’s enough revenue to cover existing debt, plus the new addition in question, that of course is a very big plus.
Another important factor is the time span that potential borrowers have been earning at current levels, because if there’s been a recent rise in income, such as a promotion or new job, that’s not as secure a situation as one where the applicant's been sustaining a level of income for a substantial period of time.
There are also instances where income’s been gained from one-time occurrences, such as an inheritance, proceeds from a lawsuit, sale of assets or other types of singular gains. In these cases, lenders have to be very careful, because while steady income can usually be relied upon to meet future payments, once “windfall” profits are exhausted, there’s not only no assurance they’ll ever occur again, the probability is that they won’t.
So, as lenders go down the list of simple queries, their intent is simply to determine where the funds will come from to satisfy new loans in question. And if the future “cash flow” can’t be determined, the obvious need is to find out where it will come from. And if there’s no reliable, documentable answer to that, a new loan shouldn’t be granted.
But, the most important thing of all for any lender who has even the slightest hope of ever receiving repayment is maintaining minimum standards for loan approval. And whereas by now all lenders of any repute clearly understand how their own loan portfolios perform, including what the lowest applicant approval criteria should be, if the government forces acceptance criteria to be lowered, that’s a purposeful step toward another financial debacle.
So, once gain we have an example of either total financial ignorance on the government's part or a definitive objective of fulfilling the goal of economic redistribution, even though it can’t be accomplished.
And the most despicable aspect of the whole scenario is that once again, not a sole in the administration cares an iota that it’s the taxpayers who’ll pay the price of failure.
That’s it for today folks.
Adios
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