Friday, July 09, 2010

This is NOT a liar loan

by Calculated Risk on 7/09/2010 01:38:00 PM

The following article confuses "liar loans" with underwriting based on the "Three C's": creditworthiness, capacity, and collateral.

From Forbes: 'Liar Loans' Make a Comeback

Did you think the housing collapse killed off "liar loans"--those infamous bubble-era mortgages for which people were allowed to get creative in portraying their ability to make the payments? Well, they're back, and that may be a good thing.
First, this article doesn't provide evidence that liar loans have made a comeback, although low-doc loans based on collateral are being offered. And, second, if "liar loans" were coming back that would be a BAD BAD thing.

From the article:
Case in point: One of [Dave] Dessner's people is toiling now on a loan application from a hedge fund manager wishing to borrow $800,000 against a $4 million home purchase. The hedge's fund did poorly last year, so as a sign of good faith for his investors he's drawing no salary. Good for his business, perhaps, but rotten for a conventional mortgage application.

This guy made $5 million in 2007 and 2008. He's liquid for $10 million, and he's borrowing 20% LTV (loan-to-value)," says Dessner. A no-doc loan to that kind of borrower shouldn't be political dynamite ...
This is not stated income (liar loan) or even no-doc. The lender has apparently verified the borrower's collateral (a 20% LTV), and has verified the borrower's capacity ("liquid for $10 million"), and I assume the borrower's credit is solid.

The above example sounds like solid underwriting.

Tanta explained why there is no need for stated income better than I can (see below), but low-doc based on collateral are not "liar loans". The article even quotes Dessner on this distinction:
Dessner insists it would be a mistake to associate the loans GuardHill and its bank network are originating with the doomed liar loans ... "I'd be on my soapbox railing against those loans," says Dessner. "The people in government who are now screaming about liar loans aren't looking at the quality of the loans we're making."
He isn't making stated income loans, so I'm not sure why the headline and lead paragraph are so misleading.

From Tanta:
  • Just Say No To Stated Income

  • Reflections on Alt-A