Mario and Maria had worked hard and now felt they were ready to get married and have a home of their own. They plan on starting a family so wanted more than a one bedroom or studio apartment. They came up with the idea of buying one of the two family houses that were being built near them when they were out for a walk.
They didn’t want to move out of the neighborhood. Their friends and family were there and they felt comfortable. Maria had convinced Mario to attend church with her on Sunday and they started to get involved with some of the church groups, further strengthening their ties to the community.
The two family houses were part of a redevelopment plan that finally, after many false starts, was causing the demolition of abandoned or unsafe-to-occupy buildings, cleaning the site up and selling the sites to developers. Seeing progress in improving the city where they were living was another factor that influenced Mario and Maria strengthening their resolve to stay and invest.
Public transit was convenient and improving and both Mario and Maria could get to work relatively easily by using it. This lowered their transportation costs substantially. Their age and the densely populated area they lived in made car insurance very expensive. There was also the cost of the car, fuel and parking. The lower transportation costs were a factor when they were figuring out how to pay for the two family house. The practical workplace and household economics courses they took in high school were a big help. They prepared a budget and went to several banks to find out how much a mortgage would cost. At first some of the banks said they would not be able to give them a loan because they worked as a housekeeper and in in construction. The bankers had been burned many times lending to people in those fields because their income fluctuates and is almost impossible to verify.
Mario and Maria responded by showing that they were Employee Members of the SFHAX Workplace Community. They each received a W2 and filed their taxes. They showed the banker their income tax filings for the last few years. Their tax forms showed a relatively constant year to year income. The SFHAX Workplace Community allows Employee Members to work for Multiple Employer Members. This helps avoid any periods of unemployment. They also told the banker the amount of down payment they were going to make. This was different from many of the other loan applicants the banks see. These applicants always seemed to have no down payment or, if they had one, it was borrowed from someone else.
Mario and Maria knew they could negotiate and kept trying different banks to see who would offer them the best deal. They finally settled on a bank when the loan officer Ryan took their application tothe credit committee. It seems that many banks use a credit scoring software program, including Ryan’s Bank. When housekeeper and construction worker are entered as occupations, the interest payment is increased significantly because of the perceived risk. Ryan did his homework including checking out the SFHAX Workplace Community and was able to convince the credit committee that Maria and Mario were a solid risk. This reduced Maria and Mario’s interest rate to what a suburban couple with salary jobs would pay. In fact the bank even thought the Maria and Mario loan was good enough to keep on their books, instead of selling it off as soon as they could.
Ryan went into banking after graduating from college with a degree in economics. He soon found out that bankers didn’t talk about economics very much. The loan officers, especially at the first bank he worked for, seemed only concerned with maximizing their short term income, even if that meant putting people into loans they had little prospect of repaying. The answer the loan officers gave was usually, house prices are rising and will continue to rise. The house can be sold and the money recovered. Most people usually didn't become late in their payments until the second or third year so if they moved the loan off their books to Fannie and Freddy, Fannie and Freddy would clean up the mess. The bank received the loan originator fee and the loan officer their commission.
Ryan knew from his studies this was unsustainable. The 2008 crash in the housing market proved it. People forget, especially when the prospect of quick money is available. The bank he was with now was a bit more conservative and he found some of the executives would talk about economics. He felt it was a bank he would stay with. He also had ethical concerns. He felt banks had a fundamental duty to direct savings to the activities that people wanted based on their free choices in the market. In other words profitable loans that can be repaid out of earnings. He also had major issues with selling loans to people who couldn’t afford the payments. He disliked preying on their naive assumption that the bank wouldn’t lend them money if they couldn’t afford the loan payment without severe sacrifice and any unexpected expense would cause financial catastrophe.
Now that Maria and Mario were qualified for a loan, they went to the builders to see what was available. The first builder they went to had some two family houses in their price range. They thought the fixtures were a little more fancy then they needed and rooms on the small side. The second builder’s houses had a little larger rooms and Mario and Maria had a choice of fixtures. They decided to go for the lower priced fixtures, but insisted on wood floors instead of carpet, even though it was a bit cheaper to have carpeted floors.
They put down a deposit and the builder said the house would be ready in time for them to move in right after their wedding. Mario and Maria also had to find a renter for the second apartment. Mario was observant on the job site and took union training courses. Over time he picked up how to perform the skills needed for residential house maintenance and improvements. The new skills also allowed him to ask and get a higher labor payment and not have to pay someone to fix the inevitable maintenance issues that come with owning a building.
Ryan’s research into SFHAX piqued his interest. He made an appointment with SFHAX to learn more about them and also to see if they were interested in any of the bank’s products. It seemed to him that SFHAX had a lot of money passing through it and would probably be interested in cash management products, payroll and lines of credit.
For now SFHAX said they were set with their payroll processor and cash management options, but they said his bank might be interested in lending to its Employer Members. SFHAX did not extend credit. The money for payroll and expenses had to be in the Employer Member’s account a specified number of days before the Employee Members were paid. SFHAX told Ryan they had a program where they would refer their Employer Members to banks who could extend credit to cover mismatches in invoicing and payroll requirements. Since Ryan was trained in economics he asked what was an Economist Member of SFHAX.
SFHAX said that firms and academics could become Economist Members if they wanted access to the data that SFHAX had on labor payments, by time of year and qualification. He found out the membership fee was reasonable. He was thinking ahead, he wanted to work on commercial and industrial loans. He thought the information SFHAX provides would give the bank the ability to better check the labor cost assumptions of the loan applicants.
Copyright 2014-2020 Richard A. Cornell, PE