Jumat, 23 Januari 2009


Traditional mortgage lending practices of yester-year required that borrower’s prove sufficient income when taking out a loan. Over the years, taxes have risen for small business owners at staggering rates, far above what they have for W2 employees. At the same time the self employed borrower's “provable” income has dwindled proportionately. Under traditional banking rules most of the self-employed people wouldn’t be able to qualify for business loans or mortgages. This would ultimately force small business owners out of business and cripple our would economy.

This new business paradigm literally forced the banking industry to create lending products that catered to small business owners who could not prove all of their income. These products were called “stated” income loans and did not require borrowers who had good credit to prove their income. These products originally required good credit and sufficient assets in order to qualify for them. Responsible guidelines and common sense underwriting kept default rates on these products in line with conventional mortgages. Unfortunately, as competition for this segment of borrowers stiffened between lenders the stringency to qualify for these mortgages softened, thus the mortgage crisis.

It is exactly this type of loan that our law-makers are trying to do away with through legislation. The new mortgage bill being bounced around has specific remedies for irresponsible lending. Meaning, if a bank loans you money and it can be proven in court (attorneys like this law by the way) that the bank was irresponsible in doing so they could be penalized. The definition of “irresponsible” is did the borrower have the capacity to repay the loan, meaning did they prove enough income. This bill will kill stated income loans, period.

So where does this leave the responsible self employed borrowers who needed these loans to live and operate their businesses? This leaves them with higher taxes. Should this bill pass self employed borrowers will be forced to claim more income each year on their tax returns in order to qualify for car loans, mortgages and even business loans. This will negate any of the loop-holes and deductions they were promised in lieu of higher taxes.

This means the government will rake in billions in extra revenue as a result of this bill. For example, let’s assume that a small business owner claimed $40,000 in income last year after deductions and business expenses. If she was in a 40% tax bracket she would pay roughly $16,000 in taxes. Under the new banking guidelines that same business owner may have to claim $80,000 In order to qualify for mortgages, car loans and business loans. Assuming she’s in the same tax bracket, she would now have to pay $32,000 in taxes.

Multiply $32,000 by 23 million business owners and that’s one huge pay-day for USA. You can bet that the Senators pushing this bill through congress are well aware of this left handed tax raise. You will never hear them mention it either, I wonder why?. You will hear about the naughty lenders that put good wholesome red blooded Americans in the street through predatory lending practices. You will never hear about the 20 million business owners who paid their mortgages on time and actually need these loans to stay in business.

So, most people are aware that you can reduce your taxes by deducting expenses and qualified charitable contributions. What most people don’t realize is that small business owners live and die by those deductions. Tax rates have risen on the self employed more than any other segment in our society. To counter these tax hikes, legislators created more “loop-holes” write off’s and deductions for small business owners to use.

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