Mike and Barbara Stanbro have stellar credit and a hearty retirement nest egg. He put in 30 years working high-paying tech jobs and came out of retirement in March for a six-figure consulting gig with a booming local tech firm.

So how is it that their longtime bank turns them down for a $10,000 line of credit?

And why can't they refinance a mortgage that's half the value of their Yamhill County home?

The reason serves a warning to any baby boomer or retiree who thinks, to counter the shocks of the recession, they might want to start their own small business or re-enter the work force as a consultant. Be prepared for a credit environment in which entrepreneurial income can actually count against you.

Here's the cautionary tale:

The Stanbros retired early -- she in 2004 at 50, he in May 2007 at 55 -- sitting on a seven-figure nest egg, a rolling seven-acre spread in the wine country with a view of the Cascades and plans to spend winters in warmer locales.

"We have both worked hard so that we would be able to retire young," Barbara told The Oregonian in an e-mail. Mike had climbed the ranks to direct software engineering at both Synopsis Inc. and Credence Systems Corp. Barbara earned a master's degree and worked as a licensed clinical social worker.



Short-term work

Last year, of course, the couple saw their nest egg drop nearly 40 percent with the plunging market. Mike knew his skills were still ripe, so in March he began consulting for Flir Systems Inc. The Wilsonville thermal-imaging camera maker, growing both sales and profits, is a rare bastion of corporate stability.

"We don't need for him to work for very long," Barbara explained. "We just didn't want to keep taking distributions from our retirement account because it was eroding the principal."

That same month, they decided to take advantage of the drop in mortgage interest rates and applied for a $300,000 refinance. They planned to use the proceeds to pay off a $200,000 balance on a $350,000 home equity line of credit at Wells Fargo, where they'd banked since 1981.

Their trouble started when the mortgage broker called Wells Fargo to verify the payoff amount. Wells Fargo froze their line of credit to make sure they didn't exceed the stated payoff.

The Stanbros had used that line not only to buy their fifth-wheel trailer and the truck that towed it but as overdraft protection on their checking account. At the bank's suggestion, they tried to keep that overdraft protection by opening a $10,000 personal line of credit.

This might seem a bit too complicated. They took the home equity loan so they wouldn't erode their nest egg, which will have to see them through many years ahead. Did they really need the line of credit? Maybe not, Barbara said, but they weren't used to tracking their monthly expenses closely.



Denied

The subsequent denial by Wells Fargo incensed the couple.

"With 28 years of good credit with the bank, we are now informed that we are not trustworthy," said Barbara, noting the bank had received $25 billion from the U.S. Treasury to foster lending. "I am so angry I could spit."

They worried it spelled doom for their refi, too. A May 30 e-mail from Safe Harbor Mortgage Co. in Lake Oswego confirmed their fears.

"Changing from a W-2 employee to a 1099 contract employee has caused a major obstacle for the underwriter," wrote Rosa Garza, a senior mortgage consultant with the Lake Oswego-based lender. "Although you have been an Engineer for 30 years, have substantial income and savings, underwriting is requiring a two year history of the 1099 income."

The Stanbros are understandably angry. Between the value of their home and their retirement portfolios, their assets are four times the value of the refi they seek.

"From where we sit, this looks like discrimination against retired people," Mike wrote in an e-mail to Garza.

In response, a spokesman for Wells Fargo said the bank can't consider stock holdings for an unsecured line of credit.

"We have no guarantees the customer will use those investments to pay back the loan," Tom Unger, a Wells Fargo spokesman, explained in an e-mail. "We wish we could have done more to help these customers."

From the perspective of Fannie Mae, Freddie Mac and the Federal Housing Administration -- federal entities that insure or purchase most refinanced loans -- a lot can go wrong in the first months of self-employment, lenders note.

That's why lenders say the Stanbros "have to season their income," said Frank Frazzitta, president and owner of two-year-old Safe Harbor Mortgage.



Options dwindle

At one time, the Stanbros could have tried something called a "stated income loan," also known as a "liar loan." But lenders won't touch those now because abuses -- by subprime lenders and unfit borrowers alike -- during the credit-crazed days partly led us to the current economic crisis.

Now, as Robin Helt, a mortgage production manager at First Tech Credit Union, points out, "The people who could truly take advantage of it and use it wisely are wiped out by the bad apples who abused it."

This roadblock is something other baby boomers and seniors could encounter. Many are being forced back to work after their retirement accounts dropped while others are considering consulting the next logical progression from long careers working for someone else. The U.S. Bureau of Labor Statistics expects consulting jobs to account for one-third of the 4 million new professional and business services jobs expected through 2016.

As of May 31, nearly 750 clients had used services at Portland Community College's Small Business Development Center. That approaches the 900 served in all of 2008, said director Tom Lowles. The Stanbros' experience miffed him, too.

"I'm irritated and appalled, frankly," Lowles said. "In the good old days ... I can't imagine they'd be turned down. They were throwing the money out the door before."

What can you do to avoid this fate?

Get your financial ducks in a row. You're going to need two years of self-employed income before most lenders will give you money. Or, you'll need to shop around and settle for a loan at a higher interest rate.

Don't disclose the new business if you don't have to. Helt of First Tech suggests the Stanbros apply for the loan without claiming the income; that is, don't even mention it on the form.

But Barbara said this scenario would have meant a refi payment of nearly 40 percent of their retirement disbursements and disability income, so she's not sure they would qualify.

Take retirement account or annuity distributions consistently. Showing that you've drawn from an IRA regularly over 12 months will help you get a loan sooner, First Tech's Helt said.

Try a small community bank. Jeff Sumpter, founder and chief lending officer at Lewis & Clark Bank, a 2 1/2-year-old bank in Oregon City, said his bank would lend to the right person and consider self-employment an advantage.

"We're not operating off of some check sheet," Sumpter said. "We try to know the customer, know the person and make a decision."

The trade-off is you'll pay a higher interest rate. Because the smaller bank keeps your loan on its books, there's no secondary market buyer to help defray its risk. And the bank needs to recover enough money to pay interest to its own bank depositors.

"You can find big differences in community banks, where I might make a loan where a bank across the street does not," Sumpter said. "What we're really trying to do is have them as customers."

Plan ahead. Make sure you can manage your current debts for two years. "You probably want to have that particular plan in place before you retire rather than right after," Frazzitta said.

Why? "You're going through a period of great change," he added. And change spooks lenders these days.

Of course, this economy has undergone tremendous change -- change few retirees could have foreseen. So it's not surprising the Stanbros would be caught in this situation.

For now, the Stanbros have left Wells Fargo and scrapped plans to refinance, hoping to pay off their debts once their nest egg recovers. Their credit score has fallen from 840 to 796 thanks, presumably, to inquiries from lenders. They don't want to ding it any further.

"I feel like it's a missed opportunity (to save money) through no fault of our own," Barbara said of the experience.

Read Ms. Stanbro's account of their failed loan applications and other reader comments here.

Brent Hunsberger does not give individual financial advice but welcomes comments or questions about his column or blog.

Reach him at 503-221-8359 or brenthunsberger@news.oregonian.com