Putting Out Welcome Mat

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We’ve all heard of banks being too big to fail. But some banks became too big to succeed. Their inflexibility in mortgage lending practices hurt L.A.’s real estate market and that has slowed the area’s economic recovery.

Perhaps it’s not surprising that these large money-center banks are now more conservative in their mortgage lending practices. After all, their overly lackadaisical lending guidelines of just a few years ago allowed borrowers to obtain mortgages that well exceeded their financial means.

These lending practices eventually resulted in more than 15 million foreclosures filed and 5 million homes repossessed nationally since 2007. These foreclosures cost the banks billions of dollars, required government intervention and ushered in the most serious economic crisis since the Great Depression.

However, I believe the pendulum is swinging too far toward overly conservative lending practices for the current real estate market.

Buoyed by continued historically low interest rates and accessible inventory, Los Angeles – and the rest of the country – is in the beginning of a real estate recovery. In December, L.A.-area home prices rose by nearly 10 percent year over year, while the foreclosure rate fell by 34 percent in the last quarter of 2012 and by 23 percent year to year.

The conditions remain favorable for the recovery to continue. Interest rates are likely to remain low for the remainder of 2013 and money will be “cheap” to borrow. It’s doubtful that the Federal Reserve will raise rates until we see a significant reduction in the unemployment rate – probably around 6.5 percent or lower.

But the new lending guidelines are inflexible and lack common sense. That means agents cannot serve their clients with confidence, brokers cannot find funding for qualified potential buyers and deals take longer to close, when they close at all. All these factors combine to hobble the real estate industry and slow the recovery. And that’s bad business for Los Angeles and our economy.

Potential borrowers, who don’t fit neatly into predetermined guidelines and those with legitimate but less traditional financial means are finding it increasingly difficult to obtain funding.

Take, for example, one client of mine: a foreign national with millions in liquid assets around the world but lacking any U.S. tax returns or credit history. Trying to purchase a home in Los Angeles proved nearly impossible because the large banks couldn’t see beyond their cookie-cutter criteria. A smaller niche bank, however, was willing to take a more common-sense approach to this individual borrower’s circumstances.


Beyond traditional

By looking beyond traditional qualifying criteria, and instead focusing on liquid assets and other financial conditions, the bank was able to offer an exclusive mortgage product tailored specifically to borrowers in this financial situation. This niche bank was able to close a deal where others had refused to try.

Increasingly, these smaller niche banks are filling the void. Recognizing the opportunities that exist, these lenders understand that in markets like Los Angeles many would-be homebuyers simply don’t fit into the stringent, traditional guidelines. By offering greater flexibility and products geared for those with more complex needs, these niche banks – and the brokers who have relationships with them – are able to close deals that the large money-center banks no longer can.

That’s significant because Los Angeles is a unique economy and the needs of potential borrowers reflect that. For example, according to the Los Angeles County Economic Development Corp., more than 160,000 people are employed in the film industry – accounting for approximately 5 percent of all private-sector jobs. Thousands more work in the investment industry. Both are groups whose income is large but seemingly sporadic. These aren’t high-risk borrowers, just people with less traditional financial resources. Yet too few of them can obtain mortgage funding under most lending guidelines.

Make no mistake about it: I’m glad to see more prudent lending and I certainly am not advocating that we return to the free-for-all days of loose lending. That was bad for the economy and disastrous for far too many L.A.-area families.

But it’s time for some common sense.

Large money-center banks need to recognize that the inflexibility of traditional guidelines are costing them deals, impeding the L.A. real estate recovery and threatening the area’s economy. Until then, niche banks and seasoned mortgage professionals must continue to work together. Understanding the unique needs of Angelenos is the only way to ensure loans can be funded and keep L.A.’s economic recovery on the right track.

Mark Cohen is president of Cohen Financial Group, a Beverly Hills-based mortgage banking and brokerage firm.

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