Will no-doc loans be back?
One of the most controversial loans of the mortgage boom was the no-documentation, or stated income loan. Just like the name suggests, borrowers didn't have to provide proof of their income.
They were also known as "liar loans" because many people told outrageous stories about how much they made so they could qualify for homes they couldn't afford on paper.
This week, the San Francisco Chronicle looks at no-doc loans, and the story ends with this:
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.
"As with injuries, as with your credit, as with the economy, time heals all wounds," he said.
But if you were injured skiing on one leg, maybe you wouldn't want to try that again. Or perhaps you would conclude - I'll just have to be more careful next time.
The Chronicle looks at one side of this coin -- yes, lending standards need to be stricter, but you can't throw the baby out with the bath water. It hurts the economy. One California mortgage broker says this:
The real problem wasn't any particular type of loan but a lack of accountability that allowed lenders to push risky mortgages off their books by packaging them and selling them to third parties.
"There was no responsibility up the chain," he said. "The guy who made the loan couldn't care less if the loan went bad, because nothing happened to him. If loans go bad, a price should be paid by everyone."
The Chronicle gives an example of a couple with high credit scores and high income who couldn't get refinancing recently because they own their own businesses. But Calculated Risk points out why this misses the point:
The problem is: Stated income loans were borrower underwritten loans, not lender underwritten 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.
Calculated Risk also points to the powerful words of long-time mortgage banker Tanta, a blogger who died of cancer last year. Here's what Tanta wrote about stated-income loans in 2007:
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."
Poll question, then -- should stated income loans be banned altogether? Why or why not?