Thursday, July 09, 2009

Missing the Point on Stated Income Loans

by Calculated Risk on 7/09/2009 09:43:00 PM

This article quotes a couple of mortgage brokers who somehow think the loss of stated income loans is a bad thing - and one who thinks they will "re-emerge over the next six months" ...

From James Temple at the San Francisco Chronicle: Undocumented income makes it hard to get a loan

With more than $300,000 in combined annual income, tens of thousands of dollars in the bank and credit scores that top 800, Jennifer France and her partner would seem like ideal candidates for a mortgage refinance.

But when they applied to swap an interest-only loan on their nearly $1 million San Carlos home for a 30-year fixed that locked in today's low rates, they were summarily denied. The reason: effectively, because both operate their own businesses.
A few years ago, theirs would have been the ideal scenario for a stated-income or no-documentation loan, which allowed individuals with ample but unconventional sources of income to secure home loans. But after untold numbers of borrowers lied about their financial wherewithal to buy homes they couldn't afford, often with a wink and nod from mortgage brokers, nearly all lenders stopped offering what became known derisively as "liar loans." Now even the well-qualified borrowers for whom the products were first intended can't get them.
This misses the point. It wasn't that stated income loans were "liar loans", although that is a fun name. The problem is: Stated income loans were borrower underwritten loans, not lender unwritten loans.

The borrowers above weren't denied because they "operate their own business". They were denied because they didn't meet the underwriting standards of the lender.

And a couple of posts from Tanta on the subject in 2007:

Just Say No To Stated Income. Excerpt:
Every lender can make an exception to the two-year average rule-of-thumb for determining "qualifying income." If you just stopped being Nurse Sue and became Assistant Professor of Nursing Sue, and you spent the last two years renting while you were building up your credentials for that career move, waiting to buy until it made more financial sense for you, and you can give me the W-2s, rental history, and employment agreement with Nursing U to prove it, I won't just make you a loan, I'll cut your cake and give you a big warm hug because you're my kind of borrower.

If you've been behind the counter at Taco Bell for the last two years, but just recently got put on the payroll at your brother-in-law's new vitamin supplement marketing startup company, and now you'd like to do a cash-out refi to make a little investment with? You will be "qualified" on your average Taco Bell income for the last two years. I'm the underwriter. I make the rules. You do not get to "underwrite yourself" by deciding that my rule on qualifying income is "unfair" to you and therefore you can get around them by "going stated."
And What's Really Wrong With Stated Income .

And from the article:
Chris George, president of CMG Mortgage in San Ramon, predicts that no-doc loans and other nontraditional mortgages will begin to re-emerge over the next six months, as creditors gain confidence.
Geesh - I hope not. Paging all regulators: Read Tanta's posts. Borrower underwritten loans should be permanently banned. Enough said.