To get a better understanding of why we have so great a budget deficit, visit it a mortgage bankers meeting and talk to any member about the problem of arranging home finance for the self-employed.
Simply put, a great many self-employed work "off the books," meaning, of course, they operate a cash business and report only a small fraction of what they earn to the Internal Revenue Service.
As a result, when they come in for a mortgage, their reported income is way below what they earn, and they are not eligible for a home loan.
Upset at Being Rejected
Many mortgage lenders report these potential borrowers scream, "I earn an awful lot more than this statement shows. Do you have any idea how much I make and how easily I can finance this mortgage?"
The response of one mortgage banker was, "Do you know how much I can raise my income too if I report you to the IRS?"
Up to now, these members of the "underground economy" have been able to have it both ways: They report small income so they can pay a small tax bite, yet they have used "no-income mortgages," which rely on a substantial down payment and no examination of income levels, to secure the loan.
But banks don't like to accept no-income loans anymore.
First of all, banks know how hard it is to obtain control of the collateral if a home borrower defaults. And second, banks do not want to have real estate owned on their books anyway.
Since banks today are relying on earning power far more than on collateral to back all mortgages - both primary and home equity loans - this makes the individual who operates a cash business and underreports income far less attractive as a candidate for a mortgage than would be the case were he to report what he honestly carns.
And with more and more Americans now leaving large business, due to downsizing and streamlining, and entering the world of the independent entrepreneur, this willingness of so many individuals to use the underground economy bodes ill for government tax collections.
It helps explain why so many observers would prefer a national sales or value added tax or a higher gas tax as the basic sources of increased government revenue. These proponents feel it would be more easily collected than is an income tax levy in a nation of expanding,. individual entrepreneurship.
Long Mortgages
Another development I learned about at this recent mortgage bankers-meeting I attended is that a number of bank and thrift mortgage lenders are going back to making 15-year and 30-year fixed-rate loans and adding them to their portfolios instead of selling them in the secondary market.
"I thought they had learned their lessons," I said. "Didn't bankers realize," I asked, "that making long-term fixed-rate mortgages and funding them with short term liabilities that can soar in cost is a certain recipe for disaster when rates rise again."
But I was told that a number of banks have such liquidity that they want to put the money out and will gamble on rates not rising enough to make these fixed mortgages unattractive. On top of this, these banks report that they have adequate capital today, so if the market does turn against them, they can write off part of their losses with no problem whatsoever.
30-Year Loans in Favor
Implicit in this policy is the recognition that the customers like long-term fixed-rate mortgages and are even moving from 15-year to 30-year loans to cut the monthly interest and amortization charges.
But I do not feel that the function of capital is to provide comfort to a bank that wants to accommodate its customers by adopting an unsound lending policy.
If the customer wants a 30-year loan, either sell it immediately or don't make it in the first place. After all, 30 years is a long time. Think of what your bank was like in 1963 - what its asset and liability policies were and how much volatility in interest rates lay ahead.
Above All, Jobs
These are the issues that mortgage lenders are buzzing about. But at the conference I just attended, all agreed that the key to their industry's immediate future is not interest rate levels, it is jobs.
Without employment for one or both breadwinners in the household, no level of low interest rates is going to attract a family to take on the commitment of a new mortgage, unless both the borrower and the lending bank or thrift have serious mental problems that have not been resolved.
Mr. Nadler is a contributing editor of American Banker and professor of finance at the Rutgers University Graduate School of Management.
