Thursday, October 7, 2010

Following (made up) rules and attempting to rant constructively

So my now wife and I have been working pretty hard for the past couple years. And we want to buy a condo in America. We will not live there, my mother will. She is on a fixed, but steady and reliable income. We have enough money to pay for the condo outright, but figured we could use that cash in other ways and with interest on mortgages so low right now thought it would be better to get a loan. The mortgage payment would be a little more than half what my mother would pay us in rent.

If you think that it should be an easy slam dunk for us to get a mortgage, you would be completely wrong.

We are apparently considered very risky. This judgement is of course based on a variety of rules that banks use to determine risk. One of which is, apparently, that anyone outside of the U.S. isn't making real money.

Why are we risky? Well actually according to one lender we are not. They pre-approved us. But then decided that since we wanted to borrow less than $50,000 dollars they are no longer interested. They told us they "want our business" but that its their rule not to lend less than $50,000.

So we go to another lender. This lender doesn't forbid itself to lend less than $50,000. Great. But then they don't accept Power of Attorney, i.e. my mother can't sign for me, and won't evaluate my foreign owned income (again its not real money apparently).

And so three rules, that have zero bearing on the underlying financial risk realities of my situation, prevent me from getting a loan. Rule 1. My money isn't real. Rule 2. No lending under $50,000. Rule 3. No Power of Attorney.

We are buying the condo anyway without the banks.

Rant over.

But what I find interesting about this whole situation is how it is a microcosm of what seems to have occurred (and to be still occurring) in the US financial industry. The rules of the game are so detached from reality, and actually prevent people from thinking critically and engaging with reality, that they create and alternate world, a "model," from which banks nevertheless make real judgments about how "risky" we are.
What is sad about this is ultimately not that we aren't getting the loan, but that banks are not performing their primary economic function which is to match capital with ability which is the engine of economic growth. Instead the banks' risk rules are funneling capital to those who not only do not produce economic growth but end up in bankruptcy.

We should all be afraid when the banks themselves can no longer judge a good investment because they have constructed a set of rules that don't allow them to deal with reality.


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