Stated income loans may be eliminated
Everyone is aware of the “mortgage meltdown” that has impacted between (depending on who you hear it from) between 2 and 5 percent of the mortgages out there. As a result state and the federal governments have been searching for ways to fix the problem.
As can be expected, when the government tries to solve a problem it is using every available option including, it seems, surface-to-air missiles, to over-fix much of what is not broken in the mortgage business.
The latest attempt is HR-3915, introduced by Barney Frank. The bill has several goals that are admirable, but it is clearly authored and passed by those who do not have an inkling of how the mortgage industry works, and it is very bad news for many homeowners. In my opinion will do vastly more harm than it does good. In addition, it replicates many positive actions that have already been taken by state governments, including Colorado, and also sets up many standards that the states have considered but wisely refrained from.
Most notably, and one that has been among the least discussed in the media is the virtual elimination of stated income loans. Stated income loans are ones where the borrower chooses not to disclose his actual adjusted gross income to the lender, but otherwise demonstrates his ability to repay.
These loans have been around for at least 20 years. Typically the borrower also pays a higher interest rate and has other requirements in terms of a pristine credit history, a demonstrated ability to handle the proposed payments and in many cases, a given amount of liquid assets that would be larger than required for a full doc loan. Historically they worked very well for many self-employed people or those whose income was difficult to document.
In Colorado, it is estimated by many lenders that about 50 percent of the home mortgages originated in the last five years have been some form of stated income. I would estimate that for local families dealing with the high cost of housing here, many more stated income loans have been made than conventional mortgages.
The reason for this is that typically homeowners in this area pay more of their income towards housing expense than do residents of most other areas. Also, in a full doc situation lenders are often restricted on many aspects of counting a person’s income.
For example, let’s assume you have roommates and have for many years. Your plan for making your house payment is to rent out two of your rooms for maybe $700 a month and clearly you should not have a problem doing that. But under typical loan guidelines prescribed by the Feds, a lender cannot generally count that income because it is not a common thing throughout the country.
Also, you might well work as a ski instructor during the winter, pick up a few shifts waiting tables or bartending now and then and be a river guide during the summer. In the meantime you may also pick up a few hundred a month keeping an eye on a ski client’s vacation home, and do some other odd jobs now and then. I am sure everyone knows someone in the Valley who operates this way, and it is part of the character and color of the town we all love and we need people like that to keep the place running.
Under typical guidelines I would have a heck of a hard time putting all that income together in a form that would satisfy an auditor should your loan file get pulled for audit somewhere down the road when it was sold to FNMA or FHMC (who probably buy over 90 percent of the conforming loans in this country).
So for the last 20 years people who sound like the above scenario could get stated income loans whereby we did validate the actual job history but the borrower states his approximate income. Personally I have closed hundreds of loans like this and to my knowledge only two have ever gone into foreclosure ” and that was unrelated to the situation at the time of the loan application.
But the U.S. House of Representatives wishes to essentially ban stated income loans by requiring lenders to “establish the ability to repay using verifiable information.” The bill does not specify what exactly “verifiable information” should consist of, but the general interpretation out there is that borrowers will have to show two years of tax returns with income coming from consistent and ongoing sources (such as the same job or career for two years) and that bottom line income will be the number used.
The reason for this is that unfortunately there have been some very bad actors in the mortgage industry both at the origination level and at the lender level who really abused the concept of stated income loans. There are reported cases, for example, of clerks at chain stores who claimed to be making $100 an hour and nobody questioned it. When the clerk suddenly ended up in foreclosure who was really to blame? Some would say the clerk should have known full well she could not have afforded the payments proposed; others would point the finger at the loan originator who made up the number ” and others would point the finger at the lender who made money approving the loan and reselling it as part of a bundle of loans on Wall Street with little or no recourse.
However in getting rid of the abuses made by a few, an entire class of homeowners who can handle the payments and would never even consider being a day late on anything are being boxed into their current loans. Many will, I fear, not be able to refinance their homes for some time or move up to a better home as their economic situation improves. Indeed many may be forced to sell their homes when their loans adjust and they cannot refinance to a lower payment.
This legislation has passed the House of Representatives, and Congress is now considering a version of it, and then George W. will have to sign it into law. Being election season many politicians want to be known as saviors and this bill mistakenly purports to do just that, even though its unintended effects may be devastating to millions of homeowners who were never in trouble.
Chris Neuswanger is a loan officer at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.
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Are we seeing more bears because there are more bears on the valley floor, or because we’re all spending more time at home? It could be a bit of both.