I just read an article that is titled "Taking a hard line on rewriting the bankruptcy code" by Edward L. Glaeser, a professor economics at Harvard University. I am in awe at how well it summed up the mortgage crisis in one short article. I am a retired mortgage broker and a writer for several web sites about mortgage related matters and have yet to communicate with clarity the message as well as he did. If you are interested in a real strategy for ending the mortgage crisis I suggest that you Google the article title.

He writes "The current proposal for the Federal Housing Administration to increase its refinancing of troubled mortgages is an example of honest redistribution. The FHA can issue mortgages and resell them in a transparent way that aids those with the most need."

As a fiscal conservative I am usually opposed to most government actions that may result in a back-handed hand-out however in this case I am in complete agreement. Something must be done immediately to defuse the mortgage crisis and it has to be void of partisan agendas.

Funding HUD so that it has the ability absorb additional losses will allow homeowners in bad mortgages to transition to better ones. Once these homeowners are in better mortgages this will drastically cut the foreclosure/default rates. Then give HUD the additional capital to ride out the increased defaults and hold these groups of loans until securitized. This will be much more effective than mandating a hand-full of programs that meet the needs of a very few of the homeowners caught up in this crisis.

This will allow lenders to weed-out the loans that they are holding in their portfolios, effectively making their portfolios more marketable. Once these lenders have a more marketable group of loans (less defaults) they too can sell their loans and return the flow of money to the industry. In the same breath it will give a well needed shot in the arm to the retail mortgage industry. Although I believe that HUD should place specific details on the amount of closing costs and interest rate mark-up that will be allowed.

As you may have guessed, there is one part of Dr. Glaeser’s article that I have a different point of on. Directly following the previous quote he said "…Moreover, the FHA can access Social Security records so that it can avoid bailing out those borrowers who misrepresented their incomes on their mortgage applications." This is a common position from those whose perspective is financially or economically based.

Coming from the retail end of the mortgage business I have a slightly different opinion. What is meant by "borrowers who misrepresented their incomes" is what mortgage lenders call "stated" income loans; these are loans that do not require proof of income." I believe that "stated" income loans are a necessary part of the mortgage business and here is why.

Over the years taxes have steadily risen for everyone but have been particularly hard on the self employed. In lieu of the tax hikes, congress engineered deductions and write-offs for small businesses to use in order to offset the additional tax burden. On average, small business owners will pay over half of their income that they are unable to write off on their tax returns. Without these deductions many self employed small businesses owners would be in serious jeopardy of having to close their doors.

Unfortunately, Freddie Mac, Fannie Mae and FHA (Conventional Mortgages) will only recognize the adjusted gross income that is left after deductions when underwriting a mortgage. Everyone knows that self employed, small business owners make more money than they show at the "end of the day" on their taxes. If the underwriting guidelines were changed to calculate income from a gross revenue formula like they do for wage earners we wouldn’t have a need for stated income documentation loans. Self employed borrowers do not have the luxury of showing a W2 as wage earners do and are therefore unable to prove enough income to qualify for most mortgages.

Stated income loans were born out of a necessity to accommodate small business owners who found their selves in this predicament. Admittedly, they were abused and ultimately share a large part of the blame for why we are in the financial mess we are today. However, if we adopt a universal threshold for debt to income ratios without addressing the underwriting guidelines for conventional mortgages we will cripple small business and the mortgage industry.

The common response to this is "why don’t all of the small business owners claim more income in order to qualify for loans and mortgages?" This is a good argument; however in all fairness self employed, small business owners have endured the brunt of the tax increases over the years. A large percentage of these businesses live and die by these tax deductions. We will effectively be raising taxes on small business owners by asking them to disallow bona-fide tax deductions and claim more income.

Think about the billions of extra tax revenues Uncle Sam would earn as a result of the increased tax burden on small business owners. Are we to believe that law makers are unaware of this "unintended" tax as a result of the new mortgage reform laws? Also think about the hundreds of thousands of small businesses that are scraping by right now that would join the ranks of the self employed if their taxes were doubled. I guess the government could use the extra income to pay unemployment benefits, but isn’t that called socialism?