I have enormous respect for Jack Guttentag. He's incredibly knowledgeable, been around this business forever, and is curmudgeonly in a very Tanta-like way. And yet, in this case, I pretty much find myself agreeing with Tanta.
Look, people, I had to do something while Blogger was on the cruise to Aruba. I published it the minute Google let me back behind the wheel so you all would have something to read.
The interruption of service you have recently experienced was a test of the Financial Information Interruption Service. In the event of a financial emergency the F.I.I.S. may be activated for the duration of the emergency. Thank you for your cooperation in this test. Administrator, F.I.I.S.
And really, Tanta, as you know, the majority of people are not in these "odd situations" in which it's time-consuming to verify income and assets. Most people get W-2s and file tax returns. If you can't locate your last two W-2s and 1040s, and your last few paycheck stubs, maybe you're not mature and organized enough to own a house. Maybe in a few years.
This may cause george W. bush to address the nation from Crawford tonight. Better run to CVS and buy some OFF Clean Feel Skintastic Insect repellent the new formula not oily or greasy.
Well put Tanta. I agree with you; we should approach underwriting with more care. I think through '07 and '08 we'll see what the SILs are really made of when they continue to reset.
Stated income loans go hand-in-hand with the down payment issue. If there is a claim that W2s do not fairly represent your income, then how about putting out the cash that proves you had the income?
And I call BS on the medical student example-what resident in their right mind would commit to a new house during their residency, when it is not entirely clear where they will be working for the next few years?
investors couldn't buy them if lenders didn't originate them, but lenders will originate them because investors will buy them so they don't have to hold the credit risk.
...and investors buy them because they aren't experts in mortgage credit underwriting, and when HPA is going up you all make money. hooray!
this fellow says that 90% of subprime loans were fraudulent and 50% overstated income by 50% or more!
I think SILs are just another iteration of the perverse incentive structure in the current and recent mortgage market. Having lenders portfolio all SILs would probably prevent all but actually reasonable ones being made.
Profs live in the academic world, not the real one. As a result of the constant intellectual pissing matches they often try so hard to present an original "brillant" argument that they often completely disregard common sense, and they do so at their peril.
Some good points here tanta but I would respectfully disagree with most.
Wife and I bought a house. We got a 10 year fixed loan qualifying under my "stated income" because she was unemployed for 6 months. We refied within 6 months to a 30 year fixed under her credit score because we received a better rate. We supplied bank statements showing significant assets. The equity position was $350K at that time of the refi and has obviously decreased. The sky is not falling like you all think. Yes, parts of san diego are in full foreclosure crisis mode ie- south bay, imperial beach, chula vista, and parts of oceanside where idiots with zero income and assets were given loans by greedy and imprudent mortgage brokers addicted to volume. Well, those mortgage brokers are now working at home cheapo (if they are lucky) and those homeowner (loosely phrased) are now renting or homeless. Too effing bad for them.
Oh, don't get me started on why we have to do "stated assets" because in 2007 it's too difficult to dowload a bank statement from the internet. I mean, that takes like a couple of minutes and a laser printer, and that's just ridiculous red tape and "regulatory burden."
Great work Tanta! Another thoroughly entertaining, yet extremely informative post. Ahh, but this makes too much sense. So, how much money do you think Mr. Guttentag receives from the "Up-Front mortgage brokers" he endorses? He's a joke.
To compliment you, I think your writings are HOT! If I wasn't such an old man (13yrs in dog years), I would, like you know, get the lead out of my pencil.
I don't understnd. If I'm willing to lend money to someone on their personlity without docs, it should be illegl. or I "invest" in this mortgge pool it shouldn't be permitted?
Is your solution more regulation? More government involvement? Your thoughts make all the sense in the world. Of course, eventually, lenders will take massive losses and will not likely make stated income loans in the future. But wouldn't a truly free market be a better solution than more regulations? By free market, I mean one in which Fannie/Freddie, the Fed, and the ability to create credit through fractional reserve banking do not exist. Money is so incredibly cheap and easy today and has been for years. This is the true problem, and the government's massive behemoths are to blame.
can one of you old-timers explain how the resolution trust corp and these investor fund thingies they established worked in more UberNerdly detail for me please?
The RTC used equity partnerships to achieve a superior execution through maintaining upside participation in the portfolios. Prior to introducing the equity partnership program, the RTC had engaged in bulk sales of asset portfolios. The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for unknowns regarding the assets, and to reflect uncertainty at the time regarding the real estate market. By retaining an interest in asset portfolios, the RTC was able to participate in the extremely strong returns being realized by portfolio investors. Additionally, the equity partnerships enabled the RTC to benefit by the management and liquidation efforts of their private sector partners, and the structure helped assure an alignment of incentives superior to that which typically exists in a principal/contractor relationship.
I think the market has probably made any regulatory move moot. In the short term, these loans will probably be impossible to get. Then in the intermediate term, someone like Buffett will come in and make money doing SILs for people that pose almost no risk, and things with SIL will be kind of where they were 5-10 years ago.
I'm as free market as they come, but if we are going to have bailouts (or the spectre of bailouts), we should also regulate/ outlaw the practices which led to such bailouts. I'd prefer no bailouts and freedom of contract, but I'd rather have both bailout and corresponding restrictions on freedom of contract than bailouts alone.
Underwriting a stated income loan without verifying a borrowers assets is like building a golf course and not verifying that golf balls are available. Poor example but you get my drift.
As an active real estate broker for longer than I care to remember I must step in and make a comment. I usually agree with you Tanta. I beg to differ on this one. I like to look at loans like cars. There are many different types of vehicles designed to suit different needs and tastes. Loans are very similar. Loans underwritten with a stated income guideline fill particular needs for particular borrowers. And, as such, are useful and could be an important mechanism in the scheme of things. They can be risky vehicles (no pun intended) granted. But, the market should price that in. It now appears that it failed to do so. And, so we play the blame game. These type of loans, if I remember correctly, have always been around. They called them "hard money" loans. I guess the politically correct name became "subprime". A problem that I see, but that is never mentioned is "borrower ignorance". Borrowers somehow are seemed as these innocent sacrificial lambs. As consumers it behooves us to at least read what the &*#$ we are signing. People are too lazy, dumb and or believe that the government or someone will step in and save them from their selves. A lot of people that bought homes had no business doing so. It only was beneficial to everybody else involved. Now there is talk of Bush asking that HUD look into doing FHA refi's for those souls facing foreclosure. Yeah, right, while they are at it they can get me my X-mas gift now. I say, long live the SI! Consumer beware!
Clyde,
Sure, there is a ton of speculation. The one "fact" I can offer about these regulator reports is.... they scream unplanned obsolescence on the date of the release due to the fast moving events in today's global market. You ask about 10 when the number now may be 15, 20 or more. That's my $00.02.
I remember buying my first house. The Bank wanted everything in writing. They even called my employer to verify employment. Not that I was a risky or shady person, but rather, they were anal about who they lent (their shareholders money) money to. They also spent time with me showing me how house payments worked, possible house repair costs, taxes and utilities. At the time I was a young white collar upstart and I did not like the exercise. But, in hindsight, it was a very valuable lesson - do not live beyond your means.
IMHO, stated income lending is dumb and risky and if a financial institution works under this premise, fine. But they have to carry the risks, too. There is an art and science in underwriting (gained through experience over time) - something society seems to have abandoned along with common sense.
A little off topic: The WSJ has a great article on the new tougher underwriting standards of cc companies and along with how consumers continue to use plastic at an increasing rate. What completely shocked me in the article was AmEx asking a consumer for income verification; but good for them.
Todays factoid: 1/3 of all new automobile purchases in CA are financed w/ a home equity loan.
In all those words you wrote, you never did say what you are proposing for self-employed people who want to buy a house.
Self-employed people are the entrepreneurial backbone of our country. I've been self-employed for 25 years, and I can produce years of steady income on Schedule Cs and 1099s. But no W-2s.
If I were starting out today, there is no way I could afford to be self-employed because of the combined cost of the self-employment tax (double FICA) and medical insurance ($20,000+ for a family). Now you want to deny me a decent mortgage, too?
Without self-employed people, our economy truly is permanently screwed.
This is one of a half dozen CR/Tanta posts that should be printed and bound. Schumer, Dodd et al should be locked in a room and forced to read, then pass a comprehension test.
Any government "reforms" need to be based on the underlying realities.
I don't interpret Tanta's post as a proposal to outlaw alternative lender guidelines for loans to the wealthy or self-employed. She is calling out the "Professor" for using "stated income" as a euphemism for plain old-fashioned lying.
Tanta - Big problem is no doc/no down/teaser. But taking no doc out of the market with 20-30% equity cuts of a significant money supply to the real estate market that already has enough problems.
Next thing I know you'll be telling me that "Consumer Advocate" Harj Gill and http://www.americanmortgageeducatorsinc.com aren't the real deal. This was a hard lesson to read, Tanta but I'm glad you gave it to me straight... Such is a day in my life... :)~
"Todays factoid: 1/3 of all new automobile purchases in CA are financed w/ a home equity loan."
Can you share where that stat comes from? Who gathered the info? Are those people ready to refinance?
Also, Tanta, you're getting really corporationy on us here. Let's let the Man worry about his own pockets. If he wants to open them without prudent restrictions on how we reach in (It's not that far left? Really?) let's grab all we can while the getting is good. Then we can all drive BMWs and feel like we've "made it" because we say we have.
Agreed that entrepeneurs are the backbone of the country. However, when starting out, many are quite levered... do they need to be levered in a house too? I think psychologically they are better off renting in the beginning. And if they aren't "beginners" and they have a proven business, then they should be making quite a bit of money and shouldn't need a big mortgage. The successful self-employed SHOULD self-finance their personal lives, primarily as a hedge. Honestly, if you're making $500K, $1mm, or more/ year, what do you need a mortgage for? The Japanese call it savings. Just my .02 though.
Well, maybe folks should be able to print their own money to pay off mortgages. It'd eliminate payment problems, even encourage early pay offs and leave lots of money to pay off furnature, auto and college loans. The economy would boom.
Not much difference in that than stated income loans.
With regard to the self-employeed folks: Once one factors in the effects of real underwriting (the concept of people actually being able to pay off their loan is a new idea these days), very few of us, self-employeed or not, can afford to buy homes in most areas. Housing prices will have to return to a point where salaries can support them.
A previous poster asked "why should it be illegal/not allowed to lend people money on stated income loans?" basically saying it is the banks money so they should be allowed to take the risk. The problem is that they are NOT taking the risk: they package all the risk up into cruddy securities, go to their crook pals at the ratings agency and get a AAA rating, and then stuff it in your retirement account. THAT is what is wrong about this; that and massive amounts of obvious fraud in the industry combined with the fact that the more money is given away freely, the higher housing prices rise, thus encouraging more fraud and more stated income nonsense, and so on.
It's one thing to lend your own money out in a stupid fashion, but it is another thing to lend out other people's money (people with savings in a bank, etc.) or to package up the risk and sell it somebody else (mortgage backed securities in retirement accounts) after skimming off the top. If the mortgage originators had to keep the loans for 5 years, I bet almost none of this nonsense would have happened.
Stated income may be useful in some cases, but come on; in many of the worst Bubble Lands, stated income made up 20%+, if not higher, of the loans. There can't be that many people who are suddenly self-employeed yet can't find any proof of it, etc.
Of course, stated income is just part of the problem. The clowns also gave money away with no down payment requirements, and then let them borrow too much house on the stated income. I can't imagine what can go wrong when somebody making $50,000 a year lies and claims to make $100,000 and then gets a loan for a $500,000 house (that isn't really worth that much) with no money down. . . and yet that is what has been repeated all over this nation.
Sunshine as disinfectant. Thank you Tanta for putting a light on that dark place the dear Professor has inserted his head.
How's this for a regulatory suggestion. When the loan is resold only verified income can be included in the loan docs. If the loan is "stated income" then the line for verified income is $0. Simple change, major impact.
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I get your point, but I think there is a way to handle stated income. Increase the down payment to 30 or 40%.
No, I'm afraid that you are not getting my point.
If you have a good credit history and verified assets and are putting 30-40% down, then I might well qualify you at what appears to be a DTI of 68% (based just on 24-month averaging of what you draw out of your Schedule C business).
This kind of thing has always gone on.
Why are you hiding your tax returns from me?
Really, folks. There are people who take money out of the business in order to buy a big house rather before the business can handle that kind of outlay. It is a mistake that first-time entrepreneurs have been known to make.
Just give me the tax returns. That's all I want. If you refuse to do that, I will assume that you are hiding something. Why wouldn't I? You are.
Free market when it comes to housing? You must be kidding.
The US govt. can't leave the American Dream to free markets. USG's involvement in housing shows a morally bankrupt econo-political system at full display for any one to observe. Of course, all along it was serving various business interests in the name of "helping people realize the American dream." Bunch of born-and-bred liars.
USG a govt. of the crooks, by the crooks, and for the crooks! That is the plainest truth about our econo-political system. The rest are sassy details about who all are doing it and to whom.
Tanta,
I think a lot of these people defending stated income/stated assets are those who cheat on their taxes, and thus, can't share their tax returns. They're not showing that income to Uncle Sam, either.
Take a look at the Broker Grapevine.....brokers looking for a home for their loan scenarios. Just scan down to see how many are high LTV stated income requests. Don't these people read??
And Frank - Hard Money was an equity loan where the LTV was 50% or so. Bet the "lender" was making was borrower would default and they pick up a property for 50% of value.
That has nothing to do with Stated Income lending. What we have learned from the current mess is they were a major contributor to the problem and had prudent underwriting been in play, maybe the big mess we are in would be a tad smaller.
But the fat guy on the DITECH television commercials said we could reduce mortgage application paperwork!
Neal:
".....And I call BS on the medical student example-what resident in their right mind would commit to a new house during their residency, when it is not entirely clear where they will be working for the next few years?"
A typical residency lasts 3 to four years. Over the last decade residents have not been immune to the inculcation of consumers to the "buy now or be priced out forever" and "don't waste money on rent" and the rule of thumb that many people use that if you are in one location for more than three years, it is better to buy than rent if the real estate pirces are going up.
Many medical residents have purchased homes during their residencies for these reasons, right or wrong. But they certainly wouldn't need a stated income loan, based on what Tanta outlined in her post.
its the price thats the problem
I concur with ponderingmess,
underwriting makes no sense at all
if your collateral is overvalued
by upwards of 20% conservatively.
"[downloading a bank statement] takes like a couple of minutes and a laser printer"
I have been amazed what stuff (copies, unsigned printouts on stock paper) passes as a "document" in the US of A, or alternatively as original information when verbally stated. I'm actually wondering how many butts are actually covered and how far waving an uncertified copy in front of a judge will go as proof of due diligence.
OTOH requiring "real" (third-party) documentation would drive up transaction costs considerably and probably invalidate many business models. Not just for-profit business, but also public sector business.
Tax forms only tell part of the story. Especially for the self employed. Being self employed is not only a matter of income but of managing (mitigating) taxes. A person could have a healthy six figure income but by using allowable financial planning tools a taxable income can be reduced to a minumum or near zero. These tools are generally provided/developed to enduce self employment, savings, and ongoing concern issues.
cm, we used to accept actual bank statements in lieu of the old "VOD" (verification of deposit mailed by the lender to the bank, who filled it out and mailed it back to the lender, and the borrower never touched it).
For most purposes that works fine. But we got the most recent three months' statements, not one. And we did some plausibility analyses.
The thing about that download? Well. I'll tell you that back in the old days, it was No Fun to review bank statements. You'd get a list of check numbers and some balances. That was better than nothing, but still.
These days? With direct deposit and debit card usage? I can pick out a lot of liar loans on a W-2 borrower in about six seconds. That direct deposit thing's a killer.
So we went to SISA (stated income/stated asset). Wonder why.
My credit union sends me statements on colored watermarked paper. Clever credit union. Still, I could sit in the lender's office, in front of the loan officer, log onto my account, and print out a current statement in six seconds.
Bacon fat,
I sent your question over to an ex-RTC friend who also spent some considerable time at FDIC and is now retired. He would know better since I never worked for RTC thankfully.
Further on..."The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for "unknowns" regarding the assets..." Bottom line: Lots of fraud in the S&Ls, many missing files, shredded doc, files mixed with other unrelated files and doc. Legal papers missing. Borrowers in prison or scheduled for trial. Criminal restitutions out the ying yang - still collecting on those deadbeats when I left FDIC in 2005 - billions owed to this day. Also, buyers would tell RTC anything to get lowest possible price and RTC would cave to get rid of the crap and resposibility. Hard for buyers to do due diligence back in those days from combo of S&L messy files and RTC messy files. Less automation back then too. More when old-timer RTC friend responds back to me. Go eat a BLT.
Regarding non-W2 income, I suppose people are paying taxes and can submit tax returns, or have the respective tax agencies issue documents showing declared income for a reasonable fee.
As for future income after a career upgrade, I am reminded that when I came to this country as a well-paid professional but without "credit history", I was offered 16%+ car loans. Fortunately I had relocation fully paid by my employer and could scrape together enough cash.
Well Barely, I'm with Tanta that stated income is not the answer to that problem. Lay all your cards on the table and the bank assess the risk of the loan.
The current (complete lack of) standards in SI lending encourages lying, fraud, and ultimately, poor decision making.
Giacutter, any and all of the toxic loan types worked in rising market, abetted by the pressure that "prices will always go up". If you can count on a 10% increase in property value each year then buying for 3 years makes economic sense.
The question is what will work going forward with a slowing economy, greater job insecurity and static or falling house prices.
Barley: Well, what's good for the goose must be good for the gander. From what I know about US tax law, you can "shelter" income from taxes but still have to report it. If you can hide it from the tax man, you can hide it from the lender too when things get tough and you decide to pull a bankruptcy or loan mod.
Well Barely, I'm with Tanta that stated income is not the answer to that problem. Lay all your cards on the table and the bank assess the risk of the loan.
Analyzing the true income of small businesses and owners is painfully simple. The only exceptions are cases where that person is either not reporting income (usually cash) or processing personal expenses through his business.
IRS liens also get in ahead of everyone else's. I have no desire to own a $450,000 second lien behind the Federales. If you're lying to IRS, I don't know why I shouldn't conclude that you are lying to me, or at least willing to lie to me.
Otherwise, let us not fall into the trap of arguing that lending guidelines should be set to accommodate people who don't need loans. That never works out well.
By the way . . . lying about your income to get a mortgage happens to be a federal crime punishable by up to 30 years in prison . . .
Title 18, U.S. Code, Section 1344:
BANK FRAUD DEFINITION & PUNISHMENT
Whoever knowingly executes, or attempts to execute, a scheme or artifice
1) to defraud a financial institution; or
2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody of or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; shall be fined not more than $1,000,000 or imprisoned for more than 30 years, or both.
18 U.S. C. §1014:
False Statements to a Financial Institution
Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of . . . a Federal Reserve bank, a small business investment company, as defined in section 103 of the Small Business Investment Act of 1958 (15 U.S.C. 662), or the Small Business Administration in connection with any provision of that Act, a Federal credit union, an insured State-chartered credit union, any institution the accounts of which are insured by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, any Federal home loan bank, the Federal Housing Finance Board, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Farm Credit System Insurance Corporation, or the National Credit Union Administration Board, a branch or agency of a foreign bank . . . shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Will the feds go after loan liars? I don't know . . . but years ago when I was involved in a civil RICO claim by a bank against a real estate developer I talked to an FBI agent who was complaining about having to knock on doors of "low doc" loan borrowers who were being investigated for bank fraud after being egged on by mortgage brokers to overstate their income . . .
Tanta or anyone care to comment on an S&L bank with this kind of exposure? The portfolio looks pretty rotten to me. I'm pretty sure a lot of us know who this is.
......
At September 30, 2004, $10.8 billion or 85% of the adjustable rate mortgages in our loan portfolio were subject to negative amortization, of which $33 million represented the amount of negative amortization included in the loan balance. The amount of negative amortization was virtually unchanged from the June 30, 2004 level.
fast fwd >>>>
At June 30, 2007, $8.9 billion or 76% of our residential one-to-four unit loans held for investment were subject to negative amortization, of which $377 million or 4.2% represented the amount of negative amortization included in the loan balance subject to negative amortization. .. In addition, $2.3 billion or 19% of our residential one-to-four unit loans held for investment represented loans requiring interest only payments over the initial terms of the loans, generally the first three to five years.
- 89% of our real estate loans were concentrated and secured by properties located in California, principally in Los Angeles, San Diego, Orange, Santa Clara and Riverside counties;
- 82% of our residential one-to-four unit loans were underwritten based on borrower stated income and asset verification and an additional 8% were underwritten with no verification of either borrower income or assets; and
- the loans are relatively new and unseasoned, as 11% of our residential one-to-four unit loans were originated in 2007, with an additional 28% originated in 2006 and 33% in 2005.
Tanta: What do you mean "don't need loans"? That somebody is "self" employed doesn't imply they make loads of money. I know people who have to go on contract gigs because they cannot find permanent employment at comparable terms. They are just regular workers.
Tanta - I think you could start a new business. I don't believe anyone wants to find out 6 months after signing that - uh oh - I can't make this payment. I think there needs to be a mortgage service that looks at your income/expenses and tells you point blank what you can afford.
Like I've said, I always believed the bank had a mathematical formula to determine your limits. Obviously that's been corrupted, and now not only do house prices not have any relation to reality, but monthly payments really have no relation to reality either.
"Tanta's Mortgage Reality Service -- Taking the Unreal out of Real Estate"
Banker, if a self-employed person is doing just fine reporting no taxable income, fine. They can pay cash, or plop down 50% of the purchase price. It ought to be easy for them to save it, considering the tax savings.
Stated income loans make a mockery of the entire underwriting process. They have their place. They go well with 40% plus downpayments.
I wonder if anyone would try to justify a company filing "stated" with the SEC? You could certainly make all the same arguments for it. If you are using public markets, the reality is that quite a few people are incurring risk from your behavior who may have no direct involvement.
Low downpayment stated income loans are imploding regardless of FICO right now. They always will. They always have. It just takes a few years, because every time loans on such terms are offered, a big RE price inflation results, thus creating an incentive for more borrowers to lie, and the race to the top, followed by that long fall, begins.
I wonder if anyone would try to justify a company filing "stated" with the SEC? You could certainly make all the same arguments for it. If you are using public markets, the reality is that quite a few people are incurring risk from your behavior who may have no direct involvement.
Ran across something on another blog on Wells Fargo using level 3 accounting, mark-to-whatever you want. Can't remember where, but it was today
I've also found that 90% of sole proprietors overstate their income to themselves.
BTW: The other 10% who constantly think they're poor generally become the most successful.
cm, I'm not talking about just plain old self-employed people like, um, myself.
What happens in these conversations is that someone always brings up the folks who have elaborate tax shelters, six layers of LLCs, and beucoup money in the brokerage account as an example of someone who "needs" a SIL.
No, they sound like they don't "need" a loan at all. They may want one. If they're as good as they represent themselves to be, I'll happily make them one.
We had fun a while ago with some dude who wrote MarketWatch's advice columnist bitching about being required to pay PMI on a 90% loan, even though he had the cash in his bank account to buy the property outright.
We suggested that he either pay the MI or pay the cash.
He suggested that the presence of the cash meant that the lender could conclude that he would never default, and went on to argue that lenders' guidelines should all be 100% "borrower-specific." This is just a way to argue that people in the top-tier of risks shouldn't have to follow any rules. I am unsympathetic.
It seems to me that Mr. Guttentag is a smart guy. His only flaw is that he seems to be solidly on the side of anyone who wants a mortgage.
I mean, it's cheesy to say that medical resident needs to get a mortgage now!
What's the problem with waiting 3 years and buying when they actually earn that big salary? Why not give 17 year olds from wealthy homes mortgages? Statistically, they should be doing pretty well in 5 - 10 years.. why should they have to suffer all those years waiting for the day when they will realize their destiny as a high salaried citizen?
Why not just gear up and give them another loan for the children they are going to have? Those kids will be high earners to.
He seems to be suggesting that it's somehow wrong to require borrowers to have a verifiable record of earning money. Just because someone started earning a lot of money, right now!, they don't necessarily deserve to load up on debt asap.
As MaxedOutMomma mentioned, if they're generating a lot of cash off the books.. then it should not be a big deal paying most of the price up front.
"Agreed that entrepeneurs are the backbone of the country. However, when starting out, many are quite levered... do they need to be levered in a house too? I think psychologically they are better off renting in the beginning. And if they aren't "beginners" and they have a proven business, then they should be making quite a bit of money and shouldn't need a big mortgage. The successful self-employed SHOULD self-finance their personal lives, primarily as a hedge. Honestly, if you're making $500K, $1mm, or more/ year, what do you need a mortgage for?"
Gamma's comments would be bigotry if they weren't so stupid. Self-employed people include your doctor, dentist, lawyer, plumber and store owners. They have the same levels of income, experience and borrowing needs as W-2 workers. Often, they have no choice about being self-employed, it's just the way their professions work.
I have no doubt that the current mortgage environment is going to penalize self-employed people severely, just because they are self-employed. Tanta's post just made me more aware that this is another potential drag on housing and the economy. There are more than 15 million self-employed people in the U.S, and the vast majority of all business owners (especially women and minorities) are self-employed.
In our system, self-employed means you operate a business for profit but file taxes as an individual.
Self-employed people include your doctor, dentist, lawyer, plumber and store owners. They have the same levels of income, experience and borrowing needs as W-2 workers. Often, they have no choice about being self-employed, it's just the way their professions work.
rich,
I'm still confused to why this is even an issue.. any of those people you listed should have tax forms verifying the amount of money they pay themselves at the end of each year.
If they don't, then they're liars, dummies or just starting out. Why should they get a mortgage?
The last time I checked self employment didn't prevent you from getting a conforming loan...you just need to show a history of income. Most underwriters will even offset some monthly debt obilgations if they are listed as business expenses on your returns. I don't think no SIL's means no reasonable financing for self employed.
Rich,
If you can indeed produce all those Schedule C's and 1099's then it really isnt a stated income or liar loan. The Schedule C's and the 1099's are the verification. The problem is the people who have w2 income that get liar loans, or banks not asking to see the 1099's. There might be a place for stated income loans, but it is a very small niche market, anything over 0.001% of mortgages granted as stated income should raise a big red flag to the Fed.
right, i know about the legislation, i thought you might be suggesting it was better left to the lenders, who to my mind have messed up incentives. the little devil sitting on your left shoulder normally wins. he's just more fun.
--
"It's one thing to lend your own money out in a stupid fashion, but it is another thing to lend out other people's money (people with savings in a bank, etc.) or to package up the risk and sell it somebody else (mortgage backed securities in retirement accounts) after skimming off the top."
I have noticed three references to "stupid." Aren't we dealing with morally bankrupt people all along the chain? Screw someone in the chains and make money; that seems to have been the mantra for many middle people without uttering it in public.
What we have witnessed in America, for the past dozen bubble years, is severe decline in morality. It was led by bankers and financiers with help from the govt. and the Fed.
We all see the same problems but with a different angle.
Heard back from that old RTC fart. Quick huh? We can still get our groove on when we need to. He said, "This is correct for the most part. I don't remember when they started the so-called "equity" sales, but they retained an interest in portfolios of loans and REO that they sold through joint ventures -- but also shared disproportionatley in losses due to any number of reasons, one of the biggest of which was that the loan or REO might not be what it was represented to be (I wrote about that/gave examples). The real winners were the buyers, who were also participants in the joint ventures. They had almost no risk because most of the exposure risk was carried by the government (the RTC). The JVs were usually written where the private party had a greater ownership interest but almost no risk for losses. Pretty neat when you think about it.
RTC also "guaranteed" their loan and REO sales to the extent that they issued reps and warranties, something FDIC never used to do. FDIC Asset Marketing employees used to complain about that, but what it did was get the assets off the books of the receiverships faster and, of course, at far below market prices. I don't think all that many assets were repurchased on the basis of the reps and warrants that were issued. Having spent many years at FDIC and some five years at RTC, the differences in operations were stunning. I like to say that FDIC would sit on something for years while value dwindled away, often spurning what really were good offers. RTC, on the other hand, literally sometimes "gave away" good assets. No one ever had to wait around for a decision from the bureaucratic maze that FDIC lived in.
They codified in the Asset Management and Disposition Manual what for years had been sometimes practiced by FDIC but was never reduced to writing. The AMDM covered almost every possible scenario... and over time it was rewritten and changed to reflect the statutory push to end the RTC in 1995. For example, appraisals were "written down" constantly after very short marketing periods, which resulted in some very good quality assets being sold for pennies on the dollar. Loans and REO and the like. Some offices used cash incentives to relators and brokers on assets that RTC actually had to write checks on. ... anything to get them sold. And, the Affordable Housing Program was extremely generous... FDIC essentially copied the contracting and affordable housing programs originated at RTC. A lot of those old dudes don't like to admit it, but that's how it went down."
BTW I knew something criminal was up on our last purchase when they wouldn't look at income tax returns. They pushed us into a no-doc loan. We wanted the property so we agreed. Weird.
Guys, I am going to ask this question again: How come the banks dont need 'regulations' when it comes to biz. loans? If you think that whats going on now in the mortgage biz. is bad, just wait for the gov. to get in. I know it is crazy, but believe me it is nothing compare to what the VA and FHA did in the late 90s and early 2000s. Let`s think about secondary markets for a little bit. In this day and age, if the banks had the right product for the right price
The solution is the IRS should only require stated income on tax returns -- and of course, they should hire all the unemployed mortgage approval people as auditors. Then we all could live happily ever after!
"But wouldn't a truly free market be a better solution than more regulations? By free market, I mean one in which Fannie/Freddie, the Fed, and the ability to create credit through fractional reserve banking do not exist. Money is so incredibly cheap and easy today and has been for years. This is the true problem, and the government's massive behemoths are to blame."
While that arguement does have a certain Ron Paul like intelectual consistency, I think it fall flat when met with reality. First, no modern economy can run w/o fractional reserve banking. Would you also do away with the FDIC? If deposits are insured, then it is up to the gov't to make sure that they are not being frittered away. If we were to do away with the FDIC, then bank runs would once again become common and the economy would be extraordinarilly instable. Even the most prudent and conservative of banks can not withstand a run.
would they need Fannie, Freddie, and other idiotic GSE? I don`t think so. Maybe there is a reason why bank keep 'some' of the mortgages, even if they could dump them to Fannie & Co.
The FEDS will NOT go after liar loans because there are too many of them and FED staffing could not possibly handle the crush of work in additon to its other pressing work. The most egregeous examples might feel the sting of the law but otherwise don't expect much on liar loans. Too busy on more important matters like the elections.
Great post, I may have disagreed with you on the workout thread, but hey, good underwriting skills don't necessarily translate to the nuts and bolts of a default resolution [/end backhanded compliment].
"It should be time-consuming, and it should be more expensive, in terms of transaction costs, than getting a $200 Barnes and Noble Master Card at the counter so you can get 10% off your copy of Elvis, Jesus, and Coca-Cola. It does not have to be draconian, just sensible."
The point I had been making is that if you lend someone more money than they've likely seen in one place in their entire life and you require less documentation than it takes to get a Sears card, that's your perogative. If you expect me to have any sympathy for you when the shit hits the fan, you're living in a dream world.
In commercial space you have the benefit of a true first loss buyer (they don't get paid out of securitization arbitrage, it's not their origination book they are buying) so you actually get very thorough loan level due diligence on each asset in the pool. The kick out rate hovers between 5-10% and there is no shot that a loan with incomplete or optimistic financials gets done.
I wish that policy makers had taken the view that home ownership is a privelege that one acquires generally after years of saving and financial prudence, not a right guaranteed to all who happen to live here. To here some people spin it (pre turmoil) you'd swear to god that only a complete bigot and heartless capitalist would fail to see the wisdom in making a $400k loan to someone that has no track record of financial responsibility, few current means and no real prospects for financial mobility.
Should a lender be allowed to demand full documentation to make any loan? Yes, of course. Should all lenders be forbidden to make a loan without full documentation? That is the question, and argueing from the position of a lender (e.g. as underwriter) doesn't shed much light on the issue. We must argue from a position of public policy: Is it in the public interest to allow undocumented income for qualifying purposes, e.g. for supporting current house prices, or to disallow all of it, e.g. for stabilizing the future market for mortgages or houses or for making undocumented income less valuable? I can think of, at least, one mortgage where the lender would probably like to make the loan even without documentation: if the borrower has a high downpayment, like 40%.
In either case, it was immoral. Deception is the greatest American value to get elected and to get ahead in the race for money and sex. Race to the bottom (in morality) is on and has been on for a while
I can see why Americans are scared when I talk of morality. It is very hard to deal with. How is a blind faithful to defend an immoral system?
It is the Morality, Stupid! (That caused the housing bubble and the mess that is following).
Why is it that several here have asked why a self-employed person cannot document income and the only response so far has been that the small businessman is the backbone of America?
Gary, what I am trying to say is this: if the bank cant dump the loan to some sort of GSE, believe me, the loan officer is going to make sure that you can pay back that loan. His or her job will be on the line. I own a small import- export biz. and I have a little bit of experience. Dont take me wrong, I don`t blame them. I would do the same, if my money or job were on the line.
lama, it's not just that backbone of the American Way thing.
Three or four people, at least, have piped up with this big downpayment loan thing. It's such an ingrained bit of religious belief in the world that a big downpayment (verified source of funds?) means you should be able to state your income that you can't shake people out of it.
Have you guys ever heard of money-laundering? It happens. Not every borrower, obviously, is a money launderer. The ones who make big downpayments and refuse to hand over documents are much, much more likely to be money-launderers than the people who don't make big down payments, you see. Because. The latter have no money to launder. You know.
It all sounds to me like the people who know perfectly well that they aren't terrorists, and who therefore should be allowed to board a plane without going through the metal detectors.
Get over it. Stand in lines. Show ID. Wait your turn. You do things like this every day of your life.
Yet when, once every seven years or so you buy a house, you just can't be inconvenienced by having to make copies of your income verification?
Supporting Tanta's point that full doc does not prevent underwriters from considering future income, more than 15 years ago, the mortagage darl ages, I supose, I was applying for a mortgage with income just borderline to afford it. I was due for a scheduled raise three months hence and the lender had me get a letter from from employer that on such a and such date my salary would rise to such and such, thus documenting that future increased income and I got the loan.
The mortgage professor seems to imply that full doc =inflexible, while no doc equals flexible, but that s clearly false.
The Morgij Perfesser just had his A$$ handed to him. That was a terribly disappointing article by Guttentag. His website is full of great advice for homebuyers and has the best set of loan calculators on the web. He's always seemed sensible and fairly cautious. Maybe he's a pod person.
If there are not prudent standards of fractional reserve banking versus imprudent ones then i am a Dutchman!
By the way are you still believing that counter party risk is not something the highly sophisticated and liquid American banking system needs to be concerned about.
JR in BIG D, the point about hard money loans is that they are made in a "risk" environment. And as such, carry high interest rates. That is the deterrent! And I say that had SI loan products had accurately and ethically been marked to market the resulting pricing would have in of itself been the safety. Hard money loans, as you pointed out, are low LTV. As should be SI loan products.
I disagree that there is something inherently neferious about this type of loan, though.
The original post said: "Full documentation generally requires that applicants show that the income they claim was actually earned in each of the two prior years. This is usually done by presenting W-2s or tax returns for two years. Self-employed borrowers usually have the most trouble meeting this requirement; stated-income loans were originally designed to deal with them, but other legitimate cases quickly emerged."
In my experience, mortgage lenders are more wary of taking tax returns of self-employed people than W-2 employed. In essence, they have to take the self-employed person's word that the income is valid, the same as the IRS does. With W-2 income, there is a third-party verifier, the employer. Also, lenders believe (true or not) that self-employment income is less stable than W-2 income.
The key point is that the mortgage dry-up may be worse than we thought if lenders are more reluctant to lend on favorable terms to qualified self-employed people. There's more of us than you think.
The Big Picture Truth-in-Lending Disclosure Failure Leads to Mortgage becoming "UnSecured"
What happens if a lender fails to comply with the TILA rules? The borrowers are allowed to RESCIND THE LOANS AND VOID THE MORTGAGES ON THEIR HOMES. The mortgage lender is then just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Who ever files first (Credit card, auto finance, doctors, etc.) has first priority.
A couple have danced around the point, but lets be clear here.
Someone who is self employed, "needs" a stated income loan, and cannot provide proof, via tax returns, that they have sufficient income to qualify for a given mortgage payment is:
Not actually making enough income to qualify for the mortgage payment.
Earning income that is not being reported to the IRS (cash, or washing personal expenses through the business.)
Sheltering said income from the IRS, with the help of a very creative accountant.
In the case if point 1, it should be obvious why this loan should not be made.
In points 2 and 3, the unspoken objection that most self employed folks have, and the high pitched wailing you are hearing, is the folks realizing that if they want a loan based on an annual income of, say, $250,000, and it has to be verified, that means they will have to report, AND PAY TAXES on this amount.
To this point, the calculus has been easy: Any rational self employed borrower would gladly pay a point or two higher on their mortgage rather than report and pay taxes on their actual income.
It's never about the fact that self employed finances are so endlessly layered and complicated that income is impossible to quantify - there are spreadsheets for that sort of thing, and it isn't hard.
Here's what it's about: Ending stated income would end this little "have your cake and eat it too" party the self employed have been enjoying.
I doubt that the W2 set will be calling their senators to preserve this particular dodge; and I write this from the perspective of a guy that believes it is one's civic duty to minimize exposure to taxes through every IRS allowable method.
Another story. We had a sale fail two years ago, the day after the funding was approved, just before recording. Our escrow officer said she'd never heard of that in 20+ years.
I agree with Tanta completely. The Doc is an idiot. Yahoo has this fool representing them as an expert? Please... He sounds like the problem behind the current market. BTW, read my comment at Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More
I think it's the assumed sense of entitlement I find most appalling from "The Professor."
Maybe the medical resident could wait 6 months or so, you know, get a feel for her new responsibilities, etc. before leaping into the housing purchase before getting her life started.
Jeebus, at every education level you can find people who are as good with money as I am with a branding iron (keep in mind, I'm from New Jersey where children believe meat comes from the store on a styrofoam tray).
Even if your not buying a house being good at record keeping isn't a skill they hand out with your college degree. I know that Bank of America actually pays for seminars and follow-up one-on-one counseling for young employees interested in buying a home. If financial institutions think their young managers (IN THE FREAKING BANKING INDUSTRY) can benefit from counseling, what does that say for non-financial professionals? In addition to educating them, it gives them some time to get their financial records in order, which is probably half the point.
Frank......guess we agree to disagree. True, hard money loans have high rates but that will not stop any borrower who is that desperate. Anyone making a loan based purely on equity is not underwriting a risk, they are making an investment that could/will result in a huge return in a fairly short period of time.
Stated Income - I see no reason to allow them at all. Ability to repay is one of the cornerstones of making loans. I would much rather grant an approval with a much higher back ratio if everything else was in line. Basic underwriting adds back in depreciation and that sort of expense, but the expenses to a BFS are real. That money must be spent to keep the doors open. No net income=no ability to pay.
I guess I learned a long time ago that an 850 FICO does not guarantee repayment.....best intentions in the world cannot overcome not enough income to make the payment.
Also to those commenting on huge liquid assets as a compensating factor....they can evaporate overnight or be moved to the Caymans. If they are borrowing instead of using them instead of the loan, you can bet the borrower knows something you don't.
And isn't Gresham's Law about bad money driving out good? Seems appropriate where the lender's thought having both sides of 20/80 was safer than having 100%?!! I think SIL's with only 80% would have not have contributed as much to this mess. But then, I'm ignoring my practical knowledge of the world which is: given time, the brainy boys will diversify risk to zero, or less than zero, and then we all suffer. Must be quantum mechanical probability.
I'll tell ya, Mike M (11:42 a.m.) knows what's what. The problem is the government... the problem is always the government and it's damn regulations... like that one against killing... I tell ya there'd be a lot more people alive today if the government would just stop regulating killing.
How do these people manage to get dressed in the morning?
I can understand why it's not always appropriate to ask for W2's from a borrower. Not everyone is an "employee". I have worked as an independent contractor and have been paid on 1099s. So I didn't have any W2s to show. Boohoo.
HOWEVER, what I DID have was a bank account. I had invoices and checks that matched them. Also, I paid taxes!! I think most people (except the super rich of course) actually pay taxes. I have several years of tax returns, all showing a good income regardless of W2 status.
I also had cash for a down-payment. That would seem necessary as it's obviously the case that if you're not on W2 then you're income is somewhat less reliable.
The problem here is NOT that SILs are bad. It's that SILs should still require proof that you pay taxes, proof that you have some reserves and some form of down-payment in your house such that the bank can not have to care too much even if you don't pay.
"What we have witnessed in America, for the past dozen bubble years, is severe decline in morality. It was led by bankers and financiers with help from the govt. and the Fed.
We all see the same problems but with a different angle.
Jas
Jas Jain | 08.22.07 - 1:33 pm |"
Jas, don't you ever get TIRED of spewing the same self-righteous babble? I'd like to ask you to just, kinda, ummm, shut the hell up, please?
It's getting really boring. I suggest you start a blog on the lack of morality in the US and feel free to post to your heart's content.
--
In Bloomberg TV report, an hour ago, some one commented that some clients are telling the banks, "Take these MBSs out of our hands and dump them on Fed's window."
Evidence will keep mounting that what we have is a govt. of the crooks, by the crooks, and for the crooks. And crooks got the control of the govt., so American People can't do a damn thing, can they?
Free market, my foot. Peoples govt., my foot. Denial and delusion are the only things that the American People have to deal with the ugly situation. Vote? LOL!
--
Matthew: Jas, don't you ever get TIRED of spewing the same self-righteous babble?
Matthew, Matthew, Matthew. Do you know any history of the US before the 20th Century? Obviously, you cant because the New England colonies were founded by self-righteous babblers! They were practically theocracies. Not to neglect, the Civil War was fought by self-righteous babblers too.
Morally-challenged people must surely hate my guts.
Why is it that several here have asked why a self-employed person cannot document income and the only response so far has been that the small businessman is the backbone of America?
If we were in Japan, the cry would be that the owner of the small rice farm was the backbone of the nation. In Mexico it would be -- I dunno, maybe the guy harvesting maize on an ejido.
Every society has its sacred occupations. Here, it's the small-biz owner, the fireman, the soldier. None of those people can do any wrong. All are moral exemplars of the highest order; none woudl ever cheat on taxes, molest a child, or torture an innocent civilian. They're the backbone blah blah blah blah blah.
As far as I know, the majority of Americans work for companies that employ 100 or more people. Big corporations are the economic backbone of our country.
You are such a dork.....and I have sympathy for those that are closest to you. I don't know what you are mad about, but dude, get some counseling. Or take that Lithium every day.
A few things:
1. I'm a Doctor.
2. I was a resident at one time
3. I was a med student before that.
4. I was self employed
going through Med school and residency (and then Fellowship), many of my colleagues got home loans, even in High COL areas.
They didn't require stated income.
They simply showed the lenders what they were making at the time, and also we all got letters when we matched that showed what our income would be in residency and fellowship. the lender used those to qualify us for loans.
And then after that, many of us (including me) were self employed for a while.
none of us (including me) had any trouble getting loans for a home... and this was before the loose lending extravaganza of the 2000s...
we simply showed our W2s from residency, our bank accounts, and all our relevant tax records (1099's and such)
thus, don't cry for the doctors/residents... they'll get their loans!
I have to agree with others. People want stated income because they're cheating the tax man, so can't produce their tax documents. Either that, or their income is too variable... making them a risk.
JR in BIG D, You're right, no FICO can guarantee future payment. However, just because someone chooses to SI does not automatically signal a default. People tend to act in ways to preserve or increase their level of comfort. If it had been really "uncomfortable" there would not have been this monster "unwind". Cash, Treasury Bills and other highly liquid assets rarely "evaporate". And, I believe, that just as ability to pay should be a factor, LTV (a low one) is definetly a much better hedge than whether income was verified or not. At the end of the day if the lender has to foreclose and there is equity, solutions will definetly be available. No equity and you are almost certainly going to have another REO on the books
When you foreclose, you have a REO on the books regardless of LTV. Your ultimate loss is determined by the LTV. Lower LTV's mean no loss to the lender, but a huge loss to the borrower. And if there are enough of them, a huge loss to the real estate market and economy in general. Not to mention what a REO does to the security it was put in.....when REO, it must come out thus impacting the yield.
The discussion, IMHO, is to examine the mortgage business and try to make sense of where we are today and what the drivers were that got us here. Stated Income loans were certainly a big factor. True, many times stated was but one of a series of layers in the risk of the deal. At the origination level, we need to control what we can, and verifying income is one of them.
I am reminded of the old days - 10 or so years ago, when an underwriter wanted to see the tax returns if for nothing else but to verify there would not be a tax lien filed after the loan was made. That's the kind of thing that puts some borrowers in the tank.....and to me, the risk is the same whether the borrower is well-heeled or just getting by. Well-heeled means a larger potential bite, and the IRS collectors are like everyone else in the collection business - go after the big balances or those that have "assets" to pay.
Sorry Frank - I appreciate your thoughts and comments, but I still think verification is a good thing.
Damn, Tanta, you had me worshipping at your shrine until you compared your right as a lender to see my documentation with the govt's "right" to engage in Security Theater.
As you point out, a mortgage is an infrequent, often life-altering event. And when asking someone to lend me a few hundred grand, I am prepared to give up any semblance of privacy -- certainly about my finances.
On the other hand, I fly more than a dozen times a year. I guess if planes were hijacked at, say, even .001% of the rate of mortgage defaults, I might feel differently about proving I'm not a terrorist every time I want to go from LA to SF.
I am a layman. I cannot believe that 100 percent loans, with adjustable rate mortgages, with teaser rates at the beginning, then ballooning after 2-5 years, with stated income and no documentation were offered to anyone. The model if there was one is that the value of homes would rise, so that either it could be refinanced or foreclosed or sold if the borrower could not pay. There are a lot of idiots with spreadsheets and computer programs that tell them this kind of lending is ok, because it is based on new technology.
PLEASE PLEASE PLEASE take the original post, print out 5 copies, and send them in their entirety to your senators, congresscritter, and to the chair and ranking member of the senate finance committee.
Every day I read in the press about some congresscritter or senator spouting off about the housing market, etc. They are so desperate to appear to be doing something--anything!--that they are coming up with a whole slew of bad ideas and very, very few good ones. You have a good idea, based on years of experience and prudent study. Please share with them. If we're going to have some senator try and pass a highly publicized law to make this whole pile of stinking corpse lilies smell turn into at least durian fruit (and maybe a rose), it would be just lovely to have a good, sound idea be turned into a highly publicized law.
"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."
No you do not make the rules, we give you the rules and you obey them.
Frankly, your obsession with how things were done in 1962 gets a bit tiresome. Still using a typewriter, I gather?
The averaging of income is really a underwriting hack job, and is a sign of a clerk trying to be an underwriter.
The point made by the "professor" that some folks earning more in overtime or commissions or bonuses than they did 6 months ago need SILs because "underwriters" like you would just apply second grade math and insight instead of professionally underwiting the risk appropriately.
"Stated Income - I see no reason to allow them at all. Ability to repay is one of the cornerstones of making loans. I would much rather grant an approval with a much higher back ratio if everything else was in line. Basic underwriting adds back in depreciation and that sort of expense, but the expenses to a BFS are real. That money must be spent to keep the doors open. No net income=no ability to pay."
Amen,Tanta.anyone curious about Fraud in SIL's should check out MBARL.org.And Tana,I am sure yu are aware that borrowers were required to sign an IRS form 4506 when obtaining an SIL,and lenders can now get a response from the IRS in 48 hours...you default,the lender sends in the 4506,the recovery team gives a polite call about the aaaahh,discrepancy ,mmmm, between your stated income and your tax return and asks very sweetly if it was due to Tax fraud,or mortgage fraud? fraud can also be real awkward for folks seeking a discharge in bk,and here in california might just turn that purchase money mortgage into a recourse loan....oops.
Producer: Get a clue - I don't care how much bonus money, overtime, or whatever you CLAIM to get: if you are actually making that kind of money, you can produce the tax returns to prove it UNLESS you are lying on your taxes or you NEVER MADE that type of money!
Sorry, but I am not going to buy into some BS such as, "Uhhh... I know my tax forms say I make $50,000 a year, but I really also make an extra $25,000 in bonuses/overtime each year, but I have no proof." BULL! Either the person is lying on their taxes (in which case they are a criminal and who knows what else they are lying about) or lying about the extra money (in which case they can't afford the house). That isn't "the way things were done in 1962" but is a FACT. In the US, if you have ANY real sort of income - income large enough to matter when buying a house - there will be documented proof of it.
As for nonsense such as, "Well, I THINK I'll be getting a huge bonuse or lots of overtime." To that, I say, "Fine, bring me the proof when it happens." No proof of the ability to pay off the loan = no loan when things are done correctly.
Anonymous, I wasn't trying to argue that taking one's shoes off at the security station in the airport accomplishes anything important.
I was simply observing that we do not let people skip these things because "they know deep inside they are not terrorists."
I am not a terrorist, but I don't spend my time arguing with United about my knitting needles. I just pack them in the checked bags and bring a book. I do not think we are at such great risk of having a plane hijacked by some little old lady with a set of #6 fine gauges that we should outlaw knitting on board, but the rules say otherwise so I knuckle under to the rules. I do not claim that the rules are OK for most little old ladies but not for me, so I should get the exception.
That was my point. Frankly I'd like to see the Dept of Homeland Security and the TSA and all the other crazy people turned out and set to making copies of tax returns for a living, but that is of course an opinion.
In regard to mortgage money laundering, it's more common than it used to be, but not so common that every single loan should be subject to six anti-laundering hoops to jump through in addition to normal scrutiny. But verifying the source of everyone's income, regardless of how much income you require to qualify someone for a loan, seems like a fairly tame hoop that can weed out the money launderers. I consider it of the nature of walking through the metal detectors, not the cavity search/prove you're not the Joe Smith on the "no fly list" Kafkaesque crap.
Producer, have I told you lately what terrible reading skills you have? Probably not.
If I refuse to use the income from a job you got ten minutes ago because I have no reason to believe it is stable or likely to continue, but I do offer to use the average of what you made at your last easily-re-obtainable job on the theory that you could go back to it at any time, and if after you qualify on the "fallback" income I agree to make a loan for you, I fail to see how I have "hacked" anybody or anything.
Please don't be such a dweeb. You give the mortage business a bad name.
Civilians, please take note of the point of the Taco Bell example. I am not picking on people who work at Taco Bell, Goddess love them.
I'd qualify anybody in the universe over the age of 16 at the average of what Taco Bell paid in the last two years, whether you ever worked there or not, docs unseen.
Most people prefer to prove they have better employment prospects than that.
"Producer: Get a clue - I don't care how much bonus money, overtime, or whatever you CLAIM to get: if you are actually making that kind of money, you can produce the tax returns to prove it UNLESS you are lying on your taxes or you NEVER MADE that type of money!
I would be more than happy to elighten you on how tax returns are not cash flow documents and the cases where just adding back depreciation doesn't work...
"I have no reason to believe it is stable or likely to continue"
That is the crux of the case...if my company laid off half it's work force 6 months ago and they want me to work serious ovt to cover the gaps indefinitely, you are going to average ovt over 24 months(the clerks way) but I actually earn more and should continue to do so...that forces the borrower to a SIL... higher rate, lower ltv,
"That isn't "the way things were done in 1962" but is a FACT. In the US, if you have ANY real sort of income - income large enough to matter when buying a house - there will be documented proof of it."
That is a very simple way of looking at things...you are a simple person, no?
Originators, roughly including and starting with lead generators, loan officers, loan processors, lender reps, initial underwriters, and funders generally get paid by closing and have virtually no real exposure after the fact, except getting sued by an ailing or defunct correspondent who no longer have a broker agreement worth fighting to preserve, for the broker, or worth enforcing for the corresepondent.
If, if, if. If I had used your example, the post would have been written by you.
You are telling me my example makes no sense because you are substituting a different scenario.
You totally missed the "sometimes this is a rule" and "if this is the guideline" part to make it sound like I only qualify people with a 24-month average. That makes you either a bad reader or a dweeb.
"You totally missed the "sometimes this is a rule" and "if this is the guideline" part to make it sound like I only qualify people with a 24-month average. That makes you either a bad reader or a dweeb.
I don't care which."
The name calling does not eliminate the fact that that's what you would do because that is the underwriting requirement set forth by most lenders selling to Fannie or Freddie. I am not substituting a scenario, the issue remains one of increased bonus, overtime or commissions with out a history of it.
You know, if underwriters were like Tanta, we would not have this problem in the first place. Unfortunately, basically the "No Income Vierification" game was being played by the banks to Wall Street just as much as from the borrowers to the originators. The banks / hedges would mark to market the CDO's at a certain "future value" even though the bond has not been seasoned or tested. Then the hedge, bank etc. would borrow against that to leverage other instruments. Same as the homeowner that would mark to market their "future income" on a loan app. Same concept, different entities, same result. The banks even had a "fico score" and that was the S&P rating agency. The only part that is disgusting about this is that the borrower at the bottom will be homeless, and the lender just either has to mark to market and take a loss, or file chapter 11 and CEO walks with Millions.
"As far as I know, the majority of Americans work for companies that employ 100 or more people. Big corporations are the economic backbone of our country."
I have a question for this guy...Have you heard of a small business that was started in the 70's in New Mexico and later moved to Washington because the idiots in New Mexico thought they were too small? I won't tell you the name of the company or it's founder, but it is now one of the biggest of the big companies you speak of. I see the point in your post, but I think that passing judgement on small business as apposed to big business is a fools game as most big businesses started very small and would not be big business if not given breaks along the way.
I am a German who lives in the US since 1998. I purchased a house in Bethesda, Maryland in 2000. Since 2006 I follow housing blogs predicting and the downfall and now -finally commenting it.
I worked for two German banks in Germany so I know a bit about mortgage lending in both Germany and the US.
Germany is the only major developed country with no residential housing bubble since 1945 (and to my knowledge there was none before that). There are reasons for that:
1) Maxium Loan-to-Value (LTV) in Germany is 60%. Not 80%. Not 100%. Not 103%. Just 60%. This is not a result of internal banking emails or banking supervisory "guidelines". Instead, it is a written in a law (Hypotekenbankgesetz).
2) No-doc loan. The fact that no-documentation liar lions are permitted in the US has not ceased puzzling me.
In Germany, it is simple: no-doc is illegal.
It is safest and most reliable way for bank to lose its licence if the banking supervisory authority (BFin, Berlin) can not find lending documentation when conducting an inspection.
It is the safest and most reliable way for a branch manager to get fired when an internal inspection finds that documenation of a borrowers economic situation is incomplete. Internal inspections occur regularly.
Again, the requirement is written in a law (KWG Kreditwesengesetz, "Lending Law). Article 18 demands that each bank must insist that a borrower "lays bare his economic situation". Tax return, account statement, etc.
I fully concur with the post that it wrong to waive verification of income or assets.
In the US, the Fed could have stopped this by, e.g., simply issuing a memo demaning that banks that are members of FDIC are not allowed to make loans to borrowers about which they do not know either income or asset or employment.
Here is the corrected version of the post above without the typos (apologies):
I am a German who lives in the US since 1998. I purchased a house in Bethesda, Maryland in 2000. Since 2006 I follow housing blogs predicting the downfall and now -finally - commenting it as it unfolds.
I worked for two German banks in Germany so I know a bit about mortgage lending in both Germany and the US.
Germany is the only major developed country with no residential housing bubble since 1945 (and to my knowledge there was none before that). There are reasons for that:
1) Maximum Loan-to-Value (LTV) in Germany is 60%. Not 80%. Not 100%. Not 103%. Just 60%. This is not a result of internal banking emails or banking supervisory "guidelines". Instead, it is a written in a law (Hypothekenbankgesetz).
2) No-doc loan. The fact that no-documentation liar lions are permitted in the US has not ceased puzzling me.
In Germany, it is simple: no-doc is illegal.
It is the safest and most reliable way for a bank to lose its licence if the banking supervisory authority (BFin, Berlin) can not find lending documentation when conducting an inspection and concludes this is done routinely.
It is the safest and most reliable way for a branch manager or loan officer to get fired when an internal inspection (conducted by her own employer) finds that documenation of a borrowers economic situation is incomplete. Internal inspections occur regularly.
Again, the requirement is written in a law (KWG Kreditwesengesetz, "Lending Law). Article 18 demands that each bank must insist that a borrower "lays bare his economic situation". This includes tax return, account statement, etc.
I fully concur with the post that it is wrong to waive verification of income or assets. The result since 2003 (when this mutual mortgage fraud committed by borrowers, brokers and lenders really took off) was that at the very same time house prices exploded. This was the time,when the slime was put into sub-prime so that this segment would truly live up to its promise. Remember: a true sub-prime borrower is a borrower that is not creditworthy.
In the US, the Fed could have stopped this by, e.g., simply issuing a memo demaning that banks that are members of FDIC are not allowed to make loans to borrowers about which they do not know either income or asset or employment.
The vexing question is: why not?
Interestingly, home ownership peaked in 2004, i.e. one to two years EARLIER than house prices (which peaked between 2005 (in California) to 2006 (rolling East to the East Cost).
In Germany, homeownership is approx. 40%. At the same time, German save 8-12% of their net income.
Reasons: Bank request 25-30% downpayment (the difference between the downpayment and the 60% max. first morgage comes from a second mortage that is usually 10-15% of the purchase price).
Many renters in Germany are not poor. Quite often, they have significant net wealth: Stock, bonds, life
Where to begin?
ah, now I know what happened.. Tanta single handedly brought down blogger with another superpost.
"It's too much knowledge.. we can't handle the load!! EMERGENCY SHUTDOWN! SHUTDOWN NOWNOW! BEFORE A CRITICAL MELTDOWN!!"
Damn Straight!
Sounds reasonable
I have enormous respect for Jack Guttentag. He's incredibly knowledgeable, been around this business forever, and is curmudgeonly in a very Tanta-like way. And yet, in this case, I pretty much find myself agreeing with Tanta.
Look, people, I had to do something while Blogger was on the cruise to Aruba. I published it the minute Google let me back behind the wheel so you all would have something to read.
And what do I get? Whining.
To see how dumb the "Prof" really is, look back to his last months post. I question his academic credentials.
After reading this month's, I am even more convinced that he cannot buy a clue even with a 0 down, stated-income ARM loan.
He needs a career change. Outhouse attendant?
The interruption of service you have recently experienced was a test of the Financial Information Interruption Service. In the event of a financial emergency the F.I.I.S. may be activated for the duration of the emergency. Thank you for your cooperation in this test. Administrator, F.I.I.S.
The Prof is pwn3d!
And really, Tanta, as you know, the majority of people are not in these "odd situations" in which it's time-consuming to verify income and assets. Most people get W-2s and file tax returns. If you can't locate your last two W-2s and 1040s, and your last few paycheck stubs, maybe you're not mature and organized enough to own a house. Maybe in a few years.
"I pretty much find myself agreeing with Tanta." - mort_fin
"And what do I get? Whining." Tanta
Man, you've got a high bar!
This may cause george W. bush to address the nation from Crawford tonight. Better run to CVS and buy some OFF Clean Feel Skintastic Insect repellent the new formula not oily or greasy.
I got drunk and didn't show up to take any tests, but think I deserve an "A" in the professor's class.
Great stuff Tanta. Thank you.
Well put Tanta. I agree with you; we should approach underwriting with more care. I think through '07 and '08 we'll see what the SILs are really made of when they continue to reset.
Stated income loans go hand-in-hand with the down payment issue. If there is a claim that W2s do not fairly represent your income, then how about putting out the cash that proves you had the income?
And I call BS on the medical student example-what resident in their right mind would commit to a new house during their residency, when it is not entirely clear where they will be working for the next few years?
Jack has just lost a number of fans.
jb
well it's a chicken/egg situation.
investors couldn't buy them if lenders didn't originate them, but lenders will originate them because investors will buy them so they don't have to hold the credit risk.
...and investors buy them because they aren't experts in mortgage credit underwriting, and when HPA is going up you all make money. hooray!
this fellow says that 90% of subprime loans were fraudulent and 50% overstated income by 50% or more!
Subprime mortgage problems and the myth of AAA rated securities made out of subprime mortgage CDOs | Blown Mortgage
I think SILs are just another iteration of the perverse incentive structure in the current and recent mortgage market. Having lenders portfolio all SILs would probably prevent all but actually reasonable ones being made.
Tanta,
Couldn't agree with you more. And you made the case so clearly, I cannot add anything more.
Let's hope your message gets to the right desk-tops.
Thanks
Profs live in the academic world, not the real one. As a result of the constant intellectual pissing matches they often try so hard to present an original "brillant" argument that they often completely disregard common sense, and they do so at their peril.
And what do I get? Whining.
hehe, I like the long posts.
But, you have to admit, it's funny to imagine the computers grinding to a halt because you bested them with superior information processing skills.
Sort of like a modern version of the "human versus machine" stories during the industrial revolution.
"Lord! Lord! Keyboard be the death of me."
Of course, in my version, you win.
So it's a good thing.
Some good points here tanta but I would respectfully disagree with most.
Wife and I bought a house. We got a 10 year fixed loan qualifying under my "stated income" because she was unemployed for 6 months. We refied within 6 months to a 30 year fixed under her credit score because we received a better rate. We supplied bank statements showing significant assets. The equity position was $350K at that time of the refi and has obviously decreased. The sky is not falling like you all think. Yes, parts of san diego are in full foreclosure crisis mode ie- south bay, imperial beach, chula vista, and parts of oceanside where idiots with zero income and assets were given loans by greedy and imprudent mortgage brokers addicted to volume. Well, those mortgage brokers are now working at home cheapo (if they are lucky) and those homeowner (loosely phrased) are now renting or homeless. Too effing bad for them.
Oh, don't get me started on why we have to do "stated assets" because in 2007 it's too difficult to dowload a bank statement from the internet. I mean, that takes like a couple of minutes and a laser printer, and that's just ridiculous red tape and "regulatory burden."
Great work Tanta! Another thoroughly entertaining, yet extremely informative post. Ahh, but this makes too much sense. So, how much money do you think Mr. Guttentag receives from the "Up-Front mortgage brokers" he endorses? He's a joke.
Tanta says, "And what do I get? Whining."
To compliment you, I think your writings are HOT! If I wasn't such an old man (13yrs in dog years), I would, like you know, get the lead out of my pencil.
Old Ma
long live viagra
I don't understnd. If I'm willing to lend money to someone on their personlity without docs, it should be illegl. or I "invest" in this mortgge pool it shouldn't be permitted?
FDIC
Quarterly Banking Profile
Second Quarter 2007
Better than the final Harry Potter and many more dead bodies and blood.
http://www2.fdic.gov/qbp/2007jun/qbp.pdf
"The Mortgage Professor" KOed by Tanta in the first round.
Yup you backed up "No way that kind of hubris is going unpunished today".
Is your solution more regulation? More government involvement? Your thoughts make all the sense in the world. Of course, eventually, lenders will take massive losses and will not likely make stated income loans in the future. But wouldn't a truly free market be a better solution than more regulations? By free market, I mean one in which Fannie/Freddie, the Fed, and the ability to create credit through fractional reserve banking do not exist. Money is so incredibly cheap and easy today and has been for years. This is the true problem, and the government's massive behemoths are to blame.
--
Stated Income was an invitation to lies and fraud. In some cases the brokers filled in, or changed, the income.
Unless we ask certain difficult questions about Americans and our govt. we will never find out all the truth as to what was behind all this.
Q: What does all this say about the morality of various players, US govt. down to the J6P that "bought" properties?
Focusing on the root causes,
Jas
FFDIC,
Any speculation as to the identities of the 10 problem thrifts ?
VIVA VIAGRA
Why are there only men in this commercial? Is that pixie dust on my 22" monitor?
YouTube
- Broadcast Yourself.
can one of you old-timers explain how the resolution trust corp and these investor fund thingies they established worked in more UberNerdly detail for me please?
The RTC used equity partnerships to achieve a superior execution through maintaining upside participation in the portfolios. Prior to introducing the equity partnership program, the RTC had engaged in bulk sales of asset portfolios. The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for unknowns regarding the assets, and to reflect uncertainty at the time regarding the real estate market. By retaining an interest in asset portfolios, the RTC was able to participate in the extremely strong returns being realized by portfolio investors. Additionally, the equity partnerships enabled the RTC to benefit by the management and liquidation efforts of their private sector partners, and the structure helped assure an alignment of incentives superior to that which typically exists in a principal/contractor relationship.
I think the market has probably made any regulatory move moot. In the short term, these loans will probably be impossible to get. Then in the intermediate term, someone like Buffett will come in and make money doing SILs for people that pose almost no risk, and things with SIL will be kind of where they were 5-10 years ago.
I'm as free market as they come, but if we are going to have bailouts (or the spectre of bailouts), we should also regulate/ outlaw the practices which led to such bailouts. I'd prefer no bailouts and freedom of contract, but I'd rather have both bailout and corresponding restrictions on freedom of contract than bailouts alone.
Underwriting a stated income loan without verifying a borrowers assets is like building a golf course and not verifying that golf balls are available. Poor example but you get my drift.
As an active real estate broker for longer than I care to remember I must step in and make a comment. I usually agree with you Tanta. I beg to differ on this one. I like to look at loans like cars. There are many different types of vehicles designed to suit different needs and tastes. Loans are very similar. Loans underwritten with a stated income guideline fill particular needs for particular borrowers. And, as such, are useful and could be an important mechanism in the scheme of things. They can be risky vehicles (no pun intended) granted. But, the market should price that in. It now appears that it failed to do so. And, so we play the blame game. These type of loans, if I remember correctly, have always been around. They called them "hard money" loans. I guess the politically correct name became "subprime". A problem that I see, but that is never mentioned is "borrower ignorance". Borrowers somehow are seemed as these innocent sacrificial lambs. As consumers it behooves us to at least read what the &*#$ we are signing. People are too lazy, dumb and or believe that the government or someone will step in and save them from their selves. A lot of people that bought homes had no business doing so. It only was beneficial to everybody else involved. Now there is talk of Bush asking that HUD look into doing FHA refi's for those souls facing foreclosure. Yeah, right, while they are at it they can get me my X-mas gift now. I say, long live the SI! Consumer beware!
Clyde,
Sure, there is a ton of speculation. The one "fact" I can offer about these regulator reports is.... they scream unplanned obsolescence on the date of the release due to the fast moving events in today's global market. You ask about 10 when the number now may be 15, 20 or more. That's my $00.02.
I remember buying my first house. The Bank wanted everything in writing. They even called my employer to verify employment. Not that I was a risky or shady person, but rather, they were anal about who they lent (their shareholders money) money to. They also spent time with me showing me how house payments worked, possible house repair costs, taxes and utilities. At the time I was a young white collar upstart and I did not like the exercise. But, in hindsight, it was a very valuable lesson - do not live beyond your means.
IMHO, stated income lending is dumb and risky and if a financial institution works under this premise, fine. But they have to carry the risks, too. There is an art and science in underwriting (gained through experience over time) - something society seems to have abandoned along with common sense.
A little off topic: The WSJ has a great article on the new tougher underwriting standards of cc companies and along with how consumers continue to use plastic at an increasing rate. What completely shocked me in the article was AmEx asking a consumer for income verification; but good for them.
Todays factoid: 1/3 of all new automobile purchases in CA are financed w/ a home equity loan.
Tanta,
In all those words you wrote, you never did say what you are proposing for self-employed people who want to buy a house.
Self-employed people are the entrepreneurial backbone of our country. I've been self-employed for 25 years, and I can produce years of steady income on Schedule Cs and 1099s. But no W-2s.
If I were starting out today, there is no way I could afford to be self-employed because of the combined cost of the self-employment tax (double FICA) and medical insurance ($20,000+ for a family). Now you want to deny me a decent mortgage, too?
Without self-employed people, our economy truly is permanently screwed.
This is one of a half dozen CR/Tanta posts that should be printed and bound. Schumer, Dodd et al should be locked in a room and forced to read, then pass a comprehension test.
Any government "reforms" need to be based on the underlying realities.
Frank & Rich:
I don't interpret Tanta's post as a proposal to outlaw alternative lender guidelines for loans to the wealthy or self-employed. She is calling out the "Professor" for using "stated income" as a euphemism for plain old-fashioned lying.
OT but,
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If your a contrarian it appears the correction is not over. Cash is high yes but 51% Stocks- OUCH
I get your point, but I think there is a way to handle stated income. Increase the down payment to 30 or 40%.
This should always be about lenders not providing risky loans. If the down payment is high enough and appraisals are honest, I do not see a problem.
Tanta - Big problem is no doc/no down/teaser. But taking no doc out of the market with 20-30% equity cuts of a significant money supply to the real estate market that already has enough problems.
Wow Tanta!
Next thing I know you'll be telling me that "Consumer Advocate" Harj Gill and
http://www.americanmortgageeducatorsinc.com aren't the real deal. This was a hard lesson to read, Tanta but I'm glad you gave it to me straight... Such is a day in my life... :)~
"Todays factoid: 1/3 of all new automobile purchases in CA are financed w/ a home equity loan."
Can you share where that stat comes from? Who gathered the info? Are those people ready to refinance?
Also, Tanta, you're getting really corporationy on us here. Let's let the Man worry about his own pockets. If he wants to open them without prudent restrictions on how we reach in (It's not that far left? Really?) let's grab all we can while the getting is good. Then we can all drive BMWs and feel like we've "made it" because we say we have.
Make sure the anti-lying rules apply to offshore profits and outsourcing practices and war profiteering that have put us where we are.
Rich-
Agreed that entrepeneurs are the backbone of the country. However, when starting out, many are quite levered... do they need to be levered in a house too? I think psychologically they are better off renting in the beginning. And if they aren't "beginners" and they have a proven business, then they should be making quite a bit of money and shouldn't need a big mortgage. The successful self-employed SHOULD self-finance their personal lives, primarily as a hedge. Honestly, if you're making $500K, $1mm, or more/ year, what do you need a mortgage for? The Japanese call it savings. Just my .02 though.
Well, maybe folks should be able to print their own money to pay off mortgages. It'd eliminate payment problems, even encourage early pay offs and leave lots of money to pay off furnature, auto and college loans. The economy would boom.
Not much difference in that than stated income loans.
A few thoughts:
It's one thing to lend your own money out in a stupid fashion, but it is another thing to lend out other people's money (people with savings in a bank, etc.) or to package up the risk and sell it somebody else (mortgage backed securities in retirement accounts) after skimming off the top. If the mortgage originators had to keep the loans for 5 years, I bet almost none of this nonsense would have happened.
Sunshine as disinfectant. Thank you Tanta for putting a light on that dark place the dear Professor has inserted his head.
How's this for a regulatory suggestion. When the loan is resold only verified income can be included in the loan docs. If the loan is "stated income" then the line for verified income is $0. Simple change, major impact.
Just pulled this from the net:
Stated Income Loan and No Doc Loan Assistance
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\tLoan amounts of up to $2,000,000 and Higher Jumbo Loans
\tStated Income Mortgage and No Doc Products Available for Primary Residences, Second Homes, and Investment Properties
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\tStated Income Loan
Request a free stated income mortgage rate quote
Call us toll free at 877-RATE-LOW (877-728-3569) for a consultation
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AAXA has helped thousands of self employed borrowers with their home financing needs. The beauty of stated income products is that you simply state your income and lenders place added weight on your credit scores. This added emphasis does not mean that you have to have perfect credit. AAXA works with lenders that offer stated income products to customers with scores down to the upper 500s (640 minimum for 100% financing).
We have access to hundreds of great no doc mortgage and stated products so you can count on us to help you find the perfect program for you and your family. From Flexible option ARM financing to traditional fixed rate mortgage products, we have what you are looking for. Call AAXA toll free at 877-RATE-LOW (877-728-3569) to speak with a Loan Advisor and explore your options.
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Who are these people?
I get your point, but I think there is a way to handle stated income. Increase the down payment to 30 or 40%.
No, I'm afraid that you are not getting my point.
If you have a good credit history and verified assets and are putting 30-40% down, then I might well qualify you at what appears to be a DTI of 68% (based just on 24-month averaging of what you draw out of your Schedule C business).
This kind of thing has always gone on.
Why are you hiding your tax returns from me?
Really, folks. There are people who take money out of the business in order to buy a big house rather before the business can handle that kind of outlay. It is a mistake that first-time entrepreneurs have been known to make.
Just give me the tax returns. That's all I want. If you refuse to do that, I will assume that you are hiding something. Why wouldn't I? You are.
--
GD: "I'm as free market as they come..."
Free market when it comes to housing? You must be kidding.
The US govt. can't leave the American Dream to free markets. USG's involvement in housing shows a morally bankrupt econo-political system at full display for any one to observe. Of course, all along it was serving various business interests in the name of "helping people realize the American dream." Bunch of born-and-bred liars.
USG a govt. of the crooks, by the crooks, and for the crooks! That is the plainest truth about our econo-political system. The rest are sassy details about who all are doing it and to whom.
Jas
Tanta,
I think a lot of these people defending stated income/stated assets are those who cheat on their taxes, and thus, can't share their tax returns. They're not showing that income to Uncle Sam, either.
Take a look at the Broker Grapevine.....brokers looking for a home for their loan scenarios. Just scan down to see how many are high LTV stated income requests. Don't these people read??
And Frank - Hard Money was an equity loan where the LTV was 50% or so. Bet the "lender" was making was borrower would default and they pick up a property for 50% of value.
That has nothing to do with Stated Income lending. What we have learned from the current mess is they were a major contributor to the problem and had prudent underwriting been in play, maybe the big mess we are in would be a tad smaller.
Is AAXA Discount Mortgage a subsidiary of the French (?) insurance company AXA?
But the fat guy on the DITECH television commercials said we could reduce mortgage application paperwork!
Neal:
".....And I call BS on the medical student example-what resident in their right mind would commit to a new house during their residency, when it is not entirely clear where they will be working for the next few years?"
A typical residency lasts 3 to four years. Over the last decade residents have not been immune to the inculcation of consumers to the "buy now or be priced out forever" and "don't waste money on rent" and the rule of thumb that many people use that if you are in one location for more than three years, it is better to buy than rent if the real estate pirces are going up.
Many medical residents have purchased homes during their residencies for these reasons, right or wrong. But they certainly wouldn't need a stated income loan, based on what Tanta outlined in her post.
its the price thats the problem
I concur with ponderingmess,
underwriting makes no sense at all
if your collateral is overvalued
by upwards of 20% conservatively.
declining asset prices make it moot.
Go Browns!
Risk should be viewed as a kind of drug: you just can't shake the habit:
Expired
"[downloading a bank statement] takes like a couple of minutes and a laser printer"
I have been amazed what stuff (copies, unsigned printouts on stock paper) passes as a "document" in the US of A, or alternatively as original information when verbally stated. I'm actually wondering how many butts are actually covered and how far waving an uncertified copy in front of a judge will go as proof of due diligence.
OTOH requiring "real" (third-party) documentation would drive up transaction costs considerably and probably invalidate many business models. Not just for-profit business, but also public sector business.
the solution is easy. when making a loan, just remember this catchy tune:
YouTube
- Drugs Drugs Drugs: Which are good? Which are bad?
and replace "drugs" with "loans", and "mom or dad" with "Tanta".
Tax forms only tell part of the story. Especially for the self employed. Being self employed is not only a matter of income but of managing (mitigating) taxes. A person could have a healthy six figure income but by using allowable financial planning tools a taxable income can be reduced to a minumum or near zero. These tools are generally provided/developed to enduce self employment, savings, and ongoing concern issues.
and speaking of aruba, let's all kick back with a mai tai and listen to the sweet sounds of the beach boys:
YouTube
- Broadcast Yourself.
cm, we used to accept actual bank statements in lieu of the old "VOD" (verification of deposit mailed by the lender to the bank, who filled it out and mailed it back to the lender, and the borrower never touched it).
For most purposes that works fine. But we got the most recent three months' statements, not one. And we did some plausibility analyses.
The thing about that download? Well. I'll tell you that back in the old days, it was No Fun to review bank statements. You'd get a list of check numbers and some balances. That was better than nothing, but still.
These days? With direct deposit and debit card usage? I can pick out a lot of liar loans on a W-2 borrower in about six seconds. That direct deposit thing's a killer.
So we went to SISA (stated income/stated asset). Wonder why.
My credit union sends me statements on colored watermarked paper. Clever credit union. Still, I could sit in the lender's office, in front of the loan officer, log onto my account, and print out a current statement in six seconds.
Bacon fat,
I sent your question over to an ex-RTC friend who also spent some considerable time at FDIC and is now retired. He would know better since I never worked for RTC thankfully.
Further on..."The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for "unknowns" regarding the assets..." Bottom line: Lots of fraud in the S&Ls, many missing files, shredded doc, files mixed with other unrelated files and doc. Legal papers missing. Borrowers in prison or scheduled for trial. Criminal restitutions out the ying yang - still collecting on those deadbeats when I left FDIC in 2005 - billions owed to this day. Also, buyers would tell RTC anything to get lowest possible price and RTC would cave to get rid of the crap and resposibility. Hard for buyers to do due diligence back in those days from combo of S&L messy files and RTC messy files. Less automation back then too. More when old-timer RTC friend responds back to me. Go eat a BLT.
Regarding non-W2 income, I suppose people are paying taxes and can submit tax returns, or have the respective tax agencies issue documents showing declared income for a reasonable fee.
As for future income after a career upgrade, I am reminded that when I came to this country as a well-paid professional but without "credit history", I was offered 16%+ car loans. Fortunately I had relocation fully paid by my employer and could scrape together enough cash.
Well Barely, I'm with Tanta that stated income is not the answer to that problem. Lay all your cards on the table and the bank assess the risk of the loan.
The current (complete lack of) standards in SI lending encourages lying, fraud, and ultimately, poor decision making.
Ban it.
Giacutter, any and all of the toxic loan types worked in rising market, abetted by the pressure that "prices will always go up". If you can count on a 10% increase in property value each year then buying for 3 years makes economic sense.
The question is what will work going forward with a slowing economy, greater job insecurity and static or falling house prices.
Barley: Well, what's good for the goose must be good for the gander. From what I know about US tax law, you can "shelter" income from taxes but still have to report it. If you can hide it from the tax man, you can hide it from the lender too when things get tough and you decide to pull a bankruptcy or loan mod.
Well Barely, I'm with Tanta that stated income is not the answer to that problem. Lay all your cards on the table and the bank assess the risk of the loan.
Isn't SIL an automatic flag?
Correction/clarification: FORCE the Banker to assess the risk of the loan.
Analyzing the true income of small businesses and owners is painfully simple. The only exceptions are cases where that person is either not reporting income (usually cash) or processing personal expenses through his business.
IRS liens also get in ahead of everyone else's. I have no desire to own a $450,000 second lien behind the Federales. If you're lying to IRS, I don't know why I shouldn't conclude that you are lying to me, or at least willing to lie to me.
Otherwise, let us not fall into the trap of arguing that lending guidelines should be set to accommodate people who don't need loans. That never works out well.
By the way . . . lying about your income to get a mortgage happens to be a federal crime punishable by up to 30 years in prison . . .
Title 18, U.S. Code, Section 1344:
BANK FRAUD DEFINITION & PUNISHMENT
Whoever knowingly executes, or attempts to execute, a scheme or artifice
1) to defraud a financial institution; or
2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody of or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; shall be fined not more than $1,000,000 or imprisoned for more than 30 years, or both.
18 U.S. C. §1014:
False Statements to a Financial Institution
Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of . . . a Federal Reserve bank, a small business investment company, as defined in section 103 of the Small Business Investment Act of 1958 (15 U.S.C. 662), or the Small Business Administration in connection with any provision of that Act, a Federal credit union, an insured State-chartered credit union, any institution the accounts of which are insured by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, any Federal home loan bank, the Federal Housing Finance Board, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Farm Credit System Insurance Corporation, or the National Credit Union Administration Board, a branch or agency of a foreign bank . . . shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Will the feds go after loan liars? I don't know . . . but years ago when I was involved in a civil RICO claim by a bank against a real estate developer I talked to an FBI agent who was complaining about having to knock on doors of "low doc" loan borrowers who were being investigated for bank fraud after being egged on by mortgage brokers to overstate their income . . .
Tanta or anyone care to comment on an S&L bank with this kind of exposure? The portfolio looks pretty rotten to me. I'm pretty sure a lot of us know who this is.
......
At September 30, 2004, $10.8 billion or 85% of the adjustable rate mortgages in our loan portfolio were subject to negative amortization, of which $33 million represented the amount of negative amortization included in the loan balance. The amount of negative amortization was virtually unchanged from the June 30, 2004 level.
At June 30, 2007, $8.9 billion or 76% of our residential one-to-four unit loans held for investment were subject to negative amortization, of which $377 million or 4.2% represented the amount of negative amortization included in the loan balance subject to negative amortization. .. In addition, $2.3 billion or 19% of our residential one-to-four unit loans held for investment represented loans requiring interest only payments over the initial terms of the loans, generally the first three to five years.
- 89% of our real estate loans were concentrated and secured by properties located in California, principally in Los Angeles, San Diego, Orange, Santa Clara and Riverside counties;
- 82% of our residential one-to-four unit loans were underwritten based on borrower stated income and asset verification and an additional 8% were underwritten with no verification of either borrower income or assets; and
- the loans are relatively new and unseasoned, as 11% of our residential one-to-four unit loans were originated in 2007, with an additional 28% originated in 2006 and 33% in 2005.
Tanta: What do you mean "don't need loans"? That somebody is "self" employed doesn't imply they make loads of money. I know people who have to go on contract gigs because they cannot find permanent employment at comparable terms. They are just regular workers.
Tanta - I think you could start a new business. I don't believe anyone wants to find out 6 months after signing that - uh oh - I can't make this payment. I think there needs to be a mortgage service that looks at your income/expenses and tells you point blank what you can afford.
Like I've said, I always believed the bank had a mathematical formula to determine your limits. Obviously that's been corrupted, and now not only do house prices not have any relation to reality, but monthly payments really have no relation to reality either.
"Tanta's Mortgage Reality Service -- Taking the Unreal out of Real Estate"
Banker, if a self-employed person is doing just fine reporting no taxable income, fine. They can pay cash, or plop down 50% of the purchase price. It ought to be easy for them to save it, considering the tax savings.
Stated income loans make a mockery of the entire underwriting process. They have their place. They go well with 40% plus downpayments.
I wonder if anyone would try to justify a company filing "stated" with the SEC? You could certainly make all the same arguments for it. If you are using public markets, the reality is that quite a few people are incurring risk from your behavior who may have no direct involvement.
Low downpayment stated income loans are imploding regardless of FICO right now. They always will. They always have. It just takes a few years, because every time loans on such terms are offered, a big RE price inflation results, thus creating an incentive for more borrowers to lie, and the race to the top, followed by that long fall, begins.
I wonder if anyone would try to justify a company filing "stated" with the SEC? You could certainly make all the same arguments for it. If you are using public markets, the reality is that quite a few people are incurring risk from your behavior who may have no direct involvement.
Ran across something on another blog on Wells Fargo using level 3 accounting, mark-to-whatever you want. Can't remember where, but it was today
I've also found that 90% of sole proprietors overstate their income to themselves.
BTW: The other 10% who constantly think they're poor generally become the most successful.
The solution to all this is lawsuits for violation of Truth in Lending Act(TILA)...
http://www.mortgagebankers.org/files/Conferences/2007/2007LIRC/LitigationPanel2007OutlinePart1.pdf
http://www.law.widener.edu/faculty/hb/barros/AvC_opinion.pdf
Appellate court ruling:
http://www.responsiblelending.org/pdfs/Andrews-amicus-5-8-07-FINAL-Filed-version.pdf
cm, I'm not talking about just plain old self-employed people like, um, myself.
What happens in these conversations is that someone always brings up the folks who have elaborate tax shelters, six layers of LLCs, and beucoup money in the brokerage account as an example of someone who "needs" a SIL.
No, they sound like they don't "need" a loan at all. They may want one. If they're as good as they represent themselves to be, I'll happily make them one.
We had fun a while ago with some dude who wrote MarketWatch's advice columnist bitching about being required to pay PMI on a 90% loan, even though he had the cash in his bank account to buy the property outright.
We suggested that he either pay the MI or pay the cash.
He suggested that the presence of the cash meant that the lender could conclude that he would never default, and went on to argue that lenders' guidelines should all be 100% "borrower-specific." This is just a way to argue that people in the top-tier of risks shouldn't have to follow any rules. I am unsympathetic.
It seems to me that Mr. Guttentag is a smart guy. His only flaw is that he seems to be solidly on the side of anyone who wants a mortgage.
I mean, it's cheesy to say that medical resident needs to get a mortgage now!
What's the problem with waiting 3 years and buying when they actually earn that big salary? Why not give 17 year olds from wealthy homes mortgages? Statistically, they should be doing pretty well in 5 - 10 years.. why should they have to suffer all those years waiting for the day when they will realize their destiny as a high salaried citizen?
Why not just gear up and give them another loan for the children they are going to have? Those kids will be high earners to.
He seems to be suggesting that it's somehow wrong to require borrowers to have a verifiable record of earning money. Just because someone started earning a lot of money, right now!, they don't necessarily deserve to load up on debt asap.
As MaxedOutMomma mentioned, if they're generating a lot of cash off the books.. then it should not be a big deal paying most of the price up front.
s/to/too
Does anyone else think that it is surreal that this is even up for debate?
If someone isn't reporting their income to the Feds, doesn't giving them a loan on their stated income smack of aiding and abetting?
shouldn't banks require PMI on SIL?
"Agreed that entrepeneurs are the backbone of the country. However, when starting out, many are quite levered... do they need to be levered in a house too? I think psychologically they are better off renting in the beginning. And if they aren't "beginners" and they have a proven business, then they should be making quite a bit of money and shouldn't need a big mortgage. The successful self-employed SHOULD self-finance their personal lives, primarily as a hedge. Honestly, if you're making $500K, $1mm, or more/ year, what do you need a mortgage for?"
Gamma's comments would be bigotry if they weren't so stupid. Self-employed people include your doctor, dentist, lawyer, plumber and store owners. They have the same levels of income, experience and borrowing needs as W-2 workers. Often, they have no choice about being self-employed, it's just the way their professions work.
I have no doubt that the current mortgage environment is going to penalize self-employed people severely, just because they are self-employed. Tanta's post just made me more aware that this is another potential drag on housing and the economy. There are more than 15 million self-employed people in the U.S, and the vast majority of all business owners (especially women and minorities) are self-employed.
In our system, self-employed means you operate a business for profit but file taxes as an individual.
shouldn't banks require PMI on SIL?
Sure they should.
There's just sometimes a little problem with getting the MIs to be stupid enough to write the policy.
i'm unclear what the conclusion was. who's supposed to stop them from making stated income loans again? themselves? investors? congress?
Self-employed people include your doctor, dentist, lawyer, plumber and store owners. They have the same levels of income, experience and borrowing needs as W-2 workers. Often, they have no choice about being self-employed, it's just the way their professions work.
rich,
I'm still confused to why this is even an issue.. any of those people you listed should have tax forms verifying the amount of money they pay themselves at the end of each year.
If they don't, then they're liars, dummies or just starting out. Why should they get a mortgage?
There is proposed legislation in Congress right now that would prohibit federally-regulated lenders from offering SILs.
There are a few states who are considering it for non-federally-regulated lenders.
Minnesota actually just passed a state law prohibiting stated income lending.
Yes, it is a question of law and regulation, not just "market preference."
The last time I checked self employment didn't prevent you from getting a conforming loan...you just need to show a history of income. Most underwriters will even offset some monthly debt obilgations if they are listed as business expenses on your returns. I don't think no SIL's means no reasonable financing for self employed.
"I don't think no SIL's means no reasonable financing for self employed"
Correct, it just means no more fraud.
Rich,
If you can indeed produce all those Schedule C's and 1099's then it really isnt a stated income or liar loan. The Schedule C's and the 1099's are the verification. The problem is the people who have w2 income that get liar loans, or banks not asking to see the 1099's. There might be a place for stated income loans, but it is a very small niche market, anything over 0.001% of mortgages granted as stated income should raise a big red flag to the Fed.
right, i know about the legislation, i thought you might be suggesting it was better left to the lenders, who to my mind have messed up incentives. the little devil sitting on your left shoulder normally wins. he's just more fun.
--
"It's one thing to lend your own money out in a stupid fashion, but it is another thing to lend out other people's money (people with savings in a bank, etc.) or to package up the risk and sell it somebody else (mortgage backed securities in retirement accounts) after skimming off the top."
I have noticed three references to "stupid." Aren't we dealing with morally bankrupt people all along the chain? Screw someone in the chains and make money; that seems to have been the mantra for many middle people without uttering it in public.
What we have witnessed in America, for the past dozen bubble years, is severe decline in morality. It was led by bankers and financiers with help from the govt. and the Fed.
We all see the same problems but with a different angle.
Jas
Thick sliced Bacon Dreamz,
Heard back from that old RTC fart. Quick huh? We can still get our groove on when we need to. He said, "This is correct for the most part. I don't remember when they started the so-called "equity" sales, but they retained an interest in portfolios of loans and REO that they sold through joint ventures -- but also shared disproportionatley in losses due to any number of reasons, one of the biggest of which was that the loan or REO might not be what it was represented to be (I wrote about that/gave examples). The real winners were the buyers, who were also participants in the joint ventures. They had almost no risk because most of the exposure risk was carried by the government (the RTC). The JVs were usually written where the private party had a greater ownership interest but almost no risk for losses. Pretty neat when you think about it.
RTC also "guaranteed" their loan and REO sales to the extent that they issued reps and warranties, something FDIC never used to do. FDIC Asset Marketing employees used to complain about that, but what it did was get the assets off the books of the receiverships faster and, of course, at far below market prices. I don't think all that many assets were repurchased on the basis of the reps and warrants that were issued. Having spent many years at FDIC and some five years at RTC, the differences in operations were stunning. I like to say that FDIC would sit on something for years while value dwindled away, often spurning what really were good offers. RTC, on the other hand, literally sometimes "gave away" good assets. No one ever had to wait around for a decision from the bureaucratic maze that FDIC lived in.
They codified in the Asset Management and Disposition Manual what for years had been sometimes practiced by FDIC but was never reduced to writing. The AMDM covered almost every possible scenario... and over time it was rewritten and changed to reflect the statutory push to end the RTC in 1995. For example, appraisals were "written down" constantly after very short marketing periods, which resulted in some very good quality assets being sold for pennies on the dollar. Loans and REO and the like. Some offices used cash incentives to relators and brokers on assets that RTC actually had to write checks on. ... anything to get them sold. And, the Affordable Housing Program was extremely generous... FDIC essentially copied the contracting and affordable housing programs originated at RTC. A lot of those old dudes don't like to admit it, but that's how it went down."
BTW I knew something criminal was up on our last purchase when they wouldn't look at income tax returns. They pushed us into a no-doc loan. We wanted the property so we agreed. Weird.
Guys, I am going to ask this question again: How come the banks dont need 'regulations' when it comes to biz. loans? If you think that whats going on now in the mortgage biz. is bad, just wait for the gov. to get in. I know it is crazy, but believe me it is nothing compare to what the VA and FHA did in the late 90s and early 2000s. Let`s think about secondary markets for a little bit. In this day and age, if the banks had the right product for the right price
Oooops, maybe not criminal, just unethical.
The solution is the IRS should only require stated income on tax returns -- and of course, they should hire all the unemployed mortgage approval people as auditors. Then we all could live happily ever after!
Broker, what the hell are you talking about? There are few businesses more regulated and thoroughly audited than C&I lending.
All those false statment investigations went bye-bye real fast after 9/11 unless there was media attention, i.e. Enron.
Only now will they forcefully return due to public pressure and mass financial terrorist attacks.
"But wouldn't a truly free market be a better solution than more regulations? By free market, I mean one in which Fannie/Freddie, the Fed, and the ability to create credit through fractional reserve banking do not exist. Money is so incredibly cheap and easy today and has been for years. This is the true problem, and the government's massive behemoths are to blame."
While that arguement does have a certain Ron Paul like intelectual consistency, I think it fall flat when met with reality. First, no modern economy can run w/o fractional reserve banking. Would you also do away with the FDIC? If deposits are insured, then it is up to the gov't to make sure that they are not being frittered away. If we were to do away with the FDIC, then bank runs would once again become common and the economy would be extraordinarilly instable. Even the most prudent and conservative of banks can not withstand a run.
would they need Fannie, Freddie, and other idiotic GSE? I don`t think so. Maybe there is a reason why bank keep 'some' of the mortgages, even if they could dump them to Fannie & Co.
The FEDS will NOT go after liar loans because there are too many of them and FED staffing could not possibly handle the crush of work in additon to its other pressing work. The most egregeous examples might feel the sting of the law but otherwise don't expect much on liar loans. Too busy on more important matters like the elections.
Great post, I may have disagreed with you on the workout thread, but hey, good underwriting skills don't necessarily translate to the nuts and bolts of a default resolution [/end backhanded compliment].
"It should be time-consuming, and it should be more expensive, in terms of transaction costs, than getting a $200 Barnes and Noble Master Card at the counter so you can get 10% off your copy of Elvis, Jesus, and Coca-Cola. It does not have to be draconian, just sensible."
The point I had been making is that if you lend someone more money than they've likely seen in one place in their entire life and you require less documentation than it takes to get a Sears card, that's your perogative. If you expect me to have any sympathy for you when the shit hits the fan, you're living in a dream world.
In commercial space you have the benefit of a true first loss buyer (they don't get paid out of securitization arbitrage, it's not their origination book they are buying) so you actually get very thorough loan level due diligence on each asset in the pool. The kick out rate hovers between 5-10% and there is no shot that a loan with incomplete or optimistic financials gets done.
I wish that policy makers had taken the view that home ownership is a privelege that one acquires generally after years of saving and financial prudence, not a right guaranteed to all who happen to live here. To here some people spin it (pre turmoil) you'd swear to god that only a complete bigot and heartless capitalist would fail to see the wisdom in making a $400k loan to someone that has no track record of financial responsibility, few current means and no real prospects for financial mobility.
Should a lender be allowed to demand full documentation to make any loan? Yes, of course. Should all lenders be forbidden to make a loan without full documentation? That is the question, and argueing from the position of a lender (e.g. as underwriter) doesn't shed much light on the issue. We must argue from a position of public policy: Is it in the public interest to allow undocumented income for qualifying purposes, e.g. for supporting current house prices, or to disallow all of it, e.g. for stabilizing the future market for mortgages or houses or for making undocumented income less valuable? I can think of, at least, one mortgage where the lender would probably like to make the loan even without documentation: if the borrower has a high downpayment, like 40%.
--
"Oooops, maybe not criminal, just unethical."
In either case, it was immoral. Deception is the greatest American value to get elected and to get ahead in the race for money and sex. Race to the bottom (in morality) is on and has been on for a while
I can see why Americans are scared when I talk of morality. It is very hard to deal with. How is a blind faithful to defend an immoral system?
It is the Morality, Stupid! (That caused the housing bubble and the mess that is following).
Jas
Why is it that several here have asked why a self-employed person cannot document income and the only response so far has been that the small businessman is the backbone of America?
If this were a cocktail party, we could all migrate to the other side of the room from you-know-who.
Gary, what I am trying to say is this: if the bank cant dump the loan to some sort of GSE, believe me, the loan officer is going to make sure that you can pay back that loan. His or her job will be on the line. I own a small import- export biz. and I have a little bit of experience. Dont take me wrong, I don`t blame them. I would do the same, if my money or job were on the line.
lama, it's not just that backbone of the American Way thing.
Three or four people, at least, have piped up with this big downpayment loan thing. It's such an ingrained bit of religious belief in the world that a big downpayment (verified source of funds?) means you should be able to state your income that you can't shake people out of it.
Have you guys ever heard of money-laundering? It happens. Not every borrower, obviously, is a money launderer. The ones who make big downpayments and refuse to hand over documents are much, much more likely to be money-launderers than the people who don't make big down payments, you see. Because. The latter have no money to launder. You know.
It all sounds to me like the people who know perfectly well that they aren't terrorists, and who therefore should be allowed to board a plane without going through the metal detectors.
Get over it. Stand in lines. Show ID. Wait your turn. You do things like this every day of your life.
Yet when, once every seven years or so you buy a house, you just can't be inconvenienced by having to make copies of your income verification?
Make sure the anti-lying rules apply to offshore profits and outsourcing practices and war profiteering that have put us where we are.
and don't forget taxbreaks for trilllllllllionaires
and bailouts for friends of Kenny Boy
and bailouts for friends of friends of Kenny boy.
know any of those?
You win the Mercury Rising Quote of the Day award for the line, "It's like dropping acid without the amusement value," Tanta.
You may collect your award at the window.
Tanta says, "Why are you hiding your tax returns from me?"
Oh, come on, Tanta! How will drug dealers be able to buy that McMansion if you impose those kinds of requirements?
Supporting Tanta's point that full doc does not prevent underwriters from considering future income, more than 15 years ago, the mortagage darl ages, I supose, I was applying for a mortgage with income just borderline to afford it. I was due for a scheduled raise three months hence and the lender had me get a letter from from employer that on such a and such date my salary would rise to such and such, thus documenting that future increased income and I got the loan.
The mortgage professor seems to imply that full doc =inflexible, while no doc equals flexible, but that s clearly false.
The Morgij Perfesser just had his A$$ handed to him. That was a terribly disappointing article by Guttentag. His website is full of great advice for homebuyers and has the best set of loan calculators on the web. He's always seemed sensible and fairly cautious. Maybe he's a pod person.
Tanta-
You rock!
Bill
Dirk van Dijk
If there are not prudent standards of fractional reserve banking versus imprudent ones then i am a Dutchman!
By the way are you still believing that counter party risk is not something the highly sophisticated and liquid American banking system needs to be concerned about.
How times have changed
JR in BIG D, the point about hard money loans is that they are made in a "risk" environment. And as such, carry high interest rates. That is the deterrent! And I say that had SI loan products had accurately and ethically been marked to market the resulting pricing would have in of itself been the safety. Hard money loans, as you pointed out, are low LTV. As should be SI loan products.
I disagree that there is something inherently neferious about this type of loan, though.
The original post said: "Full documentation generally requires that applicants show that the income they claim was actually earned in each of the two prior years. This is usually done by presenting W-2s or tax returns for two years. Self-employed borrowers usually have the most trouble meeting this requirement; stated-income loans were originally designed to deal with them, but other legitimate cases quickly emerged."
In my experience, mortgage lenders are more wary of taking tax returns of self-employed people than W-2 employed. In essence, they have to take the self-employed person's word that the income is valid, the same as the IRS does. With W-2 income, there is a third-party verifier, the employer. Also, lenders believe (true or not) that self-employment income is less stable than W-2 income.
The key point is that the mortgage dry-up may be worse than we thought if lenders are more reluctant to lend on favorable terms to qualified self-employed people. There's more of us than you think.
The Big Picture
Truth-in-Lending Disclosure Failure Leads to Mortgage becoming "UnSecured"
What happens if a lender fails to comply with the TILA rules? The borrowers are allowed to RESCIND THE LOANS AND VOID THE MORTGAGES ON THEIR HOMES. The mortgage lender is then just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Who ever files first (Credit card, auto finance, doctors, etc.) has first priority.
A couple have danced around the point, but lets be clear here.
Someone who is self employed, "needs" a stated income loan, and cannot provide proof, via tax returns, that they have sufficient income to qualify for a given mortgage payment is:
In the case if point 1, it should be obvious why this loan should not be made.
In points 2 and 3, the unspoken objection that most self employed folks have, and the high pitched wailing you are hearing, is the folks realizing that if they want a loan based on an annual income of, say, $250,000, and it has to be verified, that means they will have to report, AND PAY TAXES on this amount.
To this point, the calculus has been easy: Any rational self employed borrower would gladly pay a point or two higher on their mortgage rather than report and pay taxes on their actual income.
It's never about the fact that self employed finances are so endlessly layered and complicated that income is impossible to quantify - there are spreadsheets for that sort of thing, and it isn't hard.
Here's what it's about: Ending stated income would end this little "have your cake and eat it too" party the self employed have been enjoying.
I doubt that the W2 set will be calling their senators to preserve this particular dodge; and I write this from the perspective of a guy that believes it is one's civic duty to minimize exposure to taxes through every IRS allowable method.
If you're laundering money do you need a loan for 60%? Can't you find a cheaper place?
Another story. We had a sale fail two years ago, the day after the funding was approved, just before recording. Our escrow officer said she'd never heard of that in 20+ years.
I agree with Tanta completely. The Doc is an idiot. Yahoo has this fool representing them as an expert? Please... He sounds like the problem behind the current market. BTW, read my comment at Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More
I think it's the assumed sense of entitlement I find most appalling from "The Professor."
Maybe the medical resident could wait 6 months or so, you know, get a feel for her new responsibilities, etc. before leaping into the housing purchase before getting her life started.
Jeebus, at every education level you can find people who are as good with money as I am with a branding iron (keep in mind, I'm from New Jersey where children believe meat comes from the store on a styrofoam tray).
Even if your not buying a house being good at record keeping isn't a skill they hand out with your college degree. I know that Bank of America actually pays for seminars and follow-up one-on-one counseling for young employees interested in buying a home. If financial institutions think their young managers (IN THE FREAKING BANKING INDUSTRY) can benefit from counseling, what does that say for non-financial professionals? In addition to educating them, it gives them some time to get their financial records in order, which is probably half the point.
Frank......guess we agree to disagree. True, hard money loans have high rates but that will not stop any borrower who is that desperate. Anyone making a loan based purely on equity is not underwriting a risk, they are making an investment that could/will result in a huge return in a fairly short period of time.
Stated Income - I see no reason to allow them at all. Ability to repay is one of the cornerstones of making loans. I would much rather grant an approval with a much higher back ratio if everything else was in line. Basic underwriting adds back in depreciation and that sort of expense, but the expenses to a BFS are real. That money must be spent to keep the doors open. No net income=no ability to pay.
I guess I learned a long time ago that an 850 FICO does not guarantee repayment.....best intentions in the world cannot overcome not enough income to make the payment.
Also to those commenting on huge liquid assets as a compensating factor....they can evaporate overnight or be moved to the Caymans. If they are borrowing instead of using them instead of the loan, you can bet the borrower knows something you don't.
Shorter Tanta: Show me the documentation. And don't tell me it doesn't exist -- it does, and I know where to look and what to look for.
Even Shorter Tanta: Anyone who'd lend on stated income would also give money to Nigerian e-mail scammers.
And isn't Gresham's Law about bad money driving out good? Seems appropriate where the lender's thought having both sides of 20/80 was safer than having 100%?!! I think SIL's with only 80% would have not have contributed as much to this mess. But then, I'm ignoring my practical knowledge of the world which is: given time, the brainy boys will diversify risk to zero, or less than zero, and then we all suffer. Must be quantum mechanical probability.
I'll tell ya, Mike M (11:42 a.m.) knows what's what. The problem is the government... the problem is always the government and it's damn regulations... like that one against killing... I tell ya there'd be a lot more people alive today if the government would just stop regulating killing.
How do these people manage to get dressed in the morning?
I can understand why it's not always appropriate to ask for W2's from a borrower. Not everyone is an "employee". I have worked as an independent contractor and have been paid on 1099s. So I didn't have any W2s to show. Boohoo.
HOWEVER, what I DID have was a bank account. I had invoices and checks that matched them. Also, I paid taxes!! I think most people (except the super rich of course) actually pay taxes. I have several years of tax returns, all showing a good income regardless of W2 status.
I also had cash for a down-payment. That would seem necessary as it's obviously the case that if you're not on W2 then you're income is somewhat less reliable.
The problem here is NOT that SILs are bad. It's that SILs should still require proof that you pay taxes, proof that you have some reserves and some form of down-payment in your house such that the bank can not have to care too much even if you don't pay.
"What we have witnessed in America, for the past dozen bubble years, is severe decline in morality. It was led by bankers and financiers with help from the govt. and the Fed.
We all see the same problems but with a different angle.
Jas
Jas Jain | 08.22.07 - 1:33 pm |"
Jas, don't you ever get TIRED of spewing the same self-righteous babble? I'd like to ask you to just, kinda, ummm, shut the hell up, please?
It's getting really boring. I suggest you start a blog on the lack of morality in the US and feel free to post to your heart's content.
Otherwise, please, just shut up.
--
In Bloomberg TV report, an hour ago, some one commented that some clients are telling the banks, "Take these MBSs out of our hands and dump them on Fed's window."
Evidence will keep mounting that what we have is a govt. of the crooks, by the crooks, and for the crooks. And crooks got the control of the govt., so American People can't do a damn thing, can they?
Free market, my foot. Peoples govt., my foot. Denial and delusion are the only things that the American People have to deal with the ugly situation. Vote? LOL!
Focusing on the root causes,
Jas
"It's that SILs should still require proof that you pay taxes"
Matthew......uhhhh, if you provide that proof, isn't that now a full doc loan?
Pink Floyd - Money!
YouTube -
--
Matthew: Jas, don't you ever get TIRED of spewing the same self-righteous babble?
Matthew, Matthew, Matthew. Do you know any history of the US before the 20th Century? Obviously, you cant because the New England colonies were founded by self-righteous babblers! They were practically theocracies. Not to neglect, the Civil War was fought by self-righteous babblers too.
Morally-challenged people must surely hate my guts.
Jas
Why is it that several here have asked why a self-employed person cannot document income and the only response so far has been that the small businessman is the backbone of America?
If we were in Japan, the cry would be that the owner of the small rice farm was the backbone of the nation. In Mexico it would be -- I dunno, maybe the guy harvesting maize on an ejido.
Every society has its sacred occupations. Here, it's the small-biz owner, the fireman, the soldier. None of those people can do any wrong. All are moral exemplars of the highest order; none woudl ever cheat on taxes, molest a child, or torture an innocent civilian. They're the backbone blah blah blah blah blah.
As far as I know, the majority of Americans work for companies that employ 100 or more people. Big corporations are the economic backbone of our country.
Jas,
You are such a dork.....and I have sympathy for those that are closest to you. I don't know what you are mad about, but dude, get some counseling. Or take that Lithium every day.
JR in Big D,
Seems like you are angry. That tells me that I must be telling some truths that you can't deal with.
People are mostly offended by truth or obscenities. I know that I never use obscenities.
Jas
A few things:
1. I'm a Doctor.
2. I was a resident at one time
3. I was a med student before that.
4. I was self employed
going through Med school and residency (and then Fellowship), many of my colleagues got home loans, even in High COL areas.
They didn't require stated income.
They simply showed the lenders what they were making at the time, and also we all got letters when we matched that showed what our income would be in residency and fellowship. the lender used those to qualify us for loans.
And then after that, many of us (including me) were self employed for a while.
none of us (including me) had any trouble getting loans for a home... and this was before the loose lending extravaganza of the 2000s...
we simply showed our W2s from residency, our bank accounts, and all our relevant tax records (1099's and such)
thus, don't cry for the doctors/residents... they'll get their loans!
I have to agree with others. People want stated income because they're cheating the tax man, so can't produce their tax documents. Either that, or their income is too variable... making them a risk.
JR in BIG D, You're right, no FICO can guarantee future payment. However, just because someone chooses to SI does not automatically signal a default. People tend to act in ways to preserve or increase their level of comfort. If it had been really "uncomfortable" there would not have been this monster "unwind". Cash, Treasury Bills and other highly liquid assets rarely "evaporate". And, I believe, that just as ability to pay should be a factor, LTV (a low one) is definetly a much better hedge than whether income was verified or not. At the end of the day if the lender has to foreclose and there is equity, solutions will definetly be available. No equity and you are almost certainly going to have another REO on the books
Tanta,
I like your work, having worked all phases of loan origination and servicing, including underwriter, in a previous lifetime...
Many with assets, partnerships and trusts no NOT wish to divulge cash flows to anyone, much less the tax authority.
Its not the limited doc or stated income loans, its the NINJA loans.
No Income No Job or Assets.
These "fog a mirror" get a loan frauds are what has brought the house down.
Like a bad Texas hold-em game, or 21 where the idiot one ahead on the shoe is splitting 10's...
they never should have been given a seat at the table.
Jas,
Have a nice day.
Goodbye.
Frank,
When you foreclose, you have a REO on the books regardless of LTV. Your ultimate loss is determined by the LTV. Lower LTV's mean no loss to the lender, but a huge loss to the borrower. And if there are enough of them, a huge loss to the real estate market and economy in general. Not to mention what a REO does to the security it was put in.....when REO, it must come out thus impacting the yield.
The discussion, IMHO, is to examine the mortgage business and try to make sense of where we are today and what the drivers were that got us here. Stated Income loans were certainly a big factor. True, many times stated was but one of a series of layers in the risk of the deal. At the origination level, we need to control what we can, and verifying income is one of them.
I am reminded of the old days - 10 or so years ago, when an underwriter wanted to see the tax returns if for nothing else but to verify there would not be a tax lien filed after the loan was made. That's the kind of thing that puts some borrowers in the tank.....and to me, the risk is the same whether the borrower is well-heeled or just getting by. Well-heeled means a larger potential bite, and the IRS collectors are like everyone else in the collection business - go after the big balances or those that have "assets" to pay.
Sorry Frank - I appreciate your thoughts and comments, but I still think verification is a good thing.
Damn, Tanta, you had me worshipping at your shrine until you compared your right as a lender to see my documentation with the govt's "right" to engage in Security Theater.
As you point out, a mortgage is an infrequent, often life-altering event. And when asking someone to lend me a few hundred grand, I am prepared to give up any semblance of privacy -- certainly about my finances.
On the other hand, I fly more than a dozen times a year. I guess if planes were hijacked at, say, even .001% of the rate of mortgage defaults, I might feel differently about proving I'm not a terrorist every time I want to go from LA to SF.
I am a layman. I cannot believe that 100 percent loans, with adjustable rate mortgages, with teaser rates at the beginning, then ballooning after 2-5 years, with stated income and no documentation were offered to anyone. The model if there was one is that the value of homes would rise, so that either it could be refinanced or foreclosed or sold if the borrower could not pay. There are a lot of idiots with spreadsheets and computer programs that tell them this kind of lending is ok, because it is based on new technology.
Garbage in, Garbage out.
Tanta--
PLEASE PLEASE PLEASE take the original post, print out 5 copies, and send them in their entirety to your senators, congresscritter, and to the chair and ranking member of the senate finance committee.
Every day I read in the press about some congresscritter or senator spouting off about the housing market, etc. They are so desperate to appear to be doing something--anything!--that they are coming up with a whole slew of bad ideas and very, very few good ones. You have a good idea, based on years of experience and prudent study. Please share with them. If we're going to have some senator try and pass a highly publicized law to make this whole pile of stinking corpse lilies smell turn into at least durian fruit (and maybe a rose), it would be just lovely to have a good, sound idea be turned into a highly publicized law.
"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."
No you do not make the rules, we give you the rules and you obey them.
Frankly, your obsession with how things were done in 1962 gets a bit tiresome. Still using a typewriter, I gather?
The averaging of income is really a underwriting hack job, and is a sign of a clerk trying to be an underwriter.
The point made by the "professor" that some folks earning more in overtime or commissions or bonuses than they did 6 months ago need SILs because "underwriters" like you would just apply second grade math and insight instead of professionally underwiting the risk appropriately.
"Stated Income - I see no reason to allow them at all. Ability to repay is one of the cornerstones of making loans. I would much rather grant an approval with a much higher back ratio if everything else was in line. Basic underwriting adds back in depreciation and that sort of expense, but the expenses to a BFS are real. That money must be spent to keep the doors open. No net income=no ability to pay."
Apparently you have never filed S.E. or a 1120...
Amen,Tanta.anyone curious about Fraud in SIL's should check out MBARL.org.And Tana,I am sure yu are aware that borrowers were required to sign an IRS form 4506 when obtaining an SIL,and lenders can now get a response from the IRS in 48 hours...you default,the lender sends in the 4506,the recovery team gives a polite call about the aaaahh,discrepancy ,mmmm, between your stated income and your tax return and asks very sweetly if it was due to Tax fraud,or mortgage fraud? fraud can also be real awkward for folks seeking a discharge in bk,and here in california might just turn that purchase money mortgage into a recourse loan....oops.
Producer: Get a clue - I don't care how much bonus money, overtime, or whatever you CLAIM to get: if you are actually making that kind of money, you can produce the tax returns to prove it UNLESS you are lying on your taxes or you NEVER MADE that type of money!
Sorry, but I am not going to buy into some BS such as, "Uhhh... I know my tax forms say I make $50,000 a year, but I really also make an extra $25,000 in bonuses/overtime each year, but I have no proof." BULL! Either the person is lying on their taxes (in which case they are a criminal and who knows what else they are lying about) or lying about the extra money (in which case they can't afford the house). That isn't "the way things were done in 1962" but is a FACT. In the US, if you have ANY real sort of income - income large enough to matter when buying a house - there will be documented proof of it.
As for nonsense such as, "Well, I THINK I'll be getting a huge bonuse or lots of overtime." To that, I say, "Fine, bring me the proof when it happens." No proof of the ability to pay off the loan = no loan when things are done correctly.
Anonymous, I wasn't trying to argue that taking one's shoes off at the security station in the airport accomplishes anything important.
I was simply observing that we do not let people skip these things because "they know deep inside they are not terrorists."
I am not a terrorist, but I don't spend my time arguing with United about my knitting needles. I just pack them in the checked bags and bring a book. I do not think we are at such great risk of having a plane hijacked by some little old lady with a set of #6 fine gauges that we should outlaw knitting on board, but the rules say otherwise so I knuckle under to the rules. I do not claim that the rules are OK for most little old ladies but not for me, so I should get the exception.
That was my point. Frankly I'd like to see the Dept of Homeland Security and the TSA and all the other crazy people turned out and set to making copies of tax returns for a living, but that is of course an opinion.
In regard to mortgage money laundering, it's more common than it used to be, but not so common that every single loan should be subject to six anti-laundering hoops to jump through in addition to normal scrutiny. But verifying the source of everyone's income, regardless of how much income you require to qualify someone for a loan, seems like a fairly tame hoop that can weed out the money launderers. I consider it of the nature of walking through the metal detectors, not the cavity search/prove you're not the Joe Smith on the "no fly list" Kafkaesque crap.
Producer, have I told you lately what terrible reading skills you have? Probably not.
If I refuse to use the income from a job you got ten minutes ago because I have no reason to believe it is stable or likely to continue, but I do offer to use the average of what you made at your last easily-re-obtainable job on the theory that you could go back to it at any time, and if after you qualify on the "fallback" income I agree to make a loan for you, I fail to see how I have "hacked" anybody or anything.
Please don't be such a dweeb. You give the mortage business a bad name.
Civilians, please take note of the point of the Taco Bell example. I am not picking on people who work at Taco Bell, Goddess love them.
I'd qualify anybody in the universe over the age of 16 at the average of what Taco Bell paid in the last two years, whether you ever worked there or not, docs unseen.
Most people prefer to prove they have better employment prospects than that.
"Producer: Get a clue - I don't care how much bonus money, overtime, or whatever you CLAIM to get: if you are actually making that kind of money, you can produce the tax returns to prove it UNLESS you are lying on your taxes or you NEVER MADE that type of money!
I would be more than happy to elighten you on how tax returns are not cash flow documents and the cases where just adding back depreciation doesn't work...
"I have no reason to believe it is stable or likely to continue"
That is the crux of the case...if my company laid off half it's work force 6 months ago and they want me to work serious ovt to cover the gaps indefinitely, you are going to average ovt over 24 months(the clerks way) but I actually earn more and should continue to do so...that forces the borrower to a SIL... higher rate, lower ltv,
"Please don't be such a dweeb. You give the mortage business a bad name."
I love you too...
"That isn't "the way things were done in 1962" but is a FACT. In the US, if you have ANY real sort of income - income large enough to matter when buying a house - there will be documented proof of it."
That is a very simple way of looking at things...you are a simple person, no?
Originators, roughly including and starting with lead generators, loan officers, loan processors, lender reps, initial underwriters, and funders generally get paid by closing and have virtually no real exposure after the fact, except getting sued by an ailing or defunct correspondent who no longer have a broker agreement worth fighting to preserve, for the broker, or worth enforcing for the corresepondent.
if my company laid off half it's work force
If, if, if. If I had used your example, the post would have been written by you.
You are telling me my example makes no sense because you are substituting a different scenario.
You totally missed the "sometimes this is a rule" and "if this is the guideline" part to make it sound like I only qualify people with a 24-month average. That makes you either a bad reader or a dweeb.
I don't care which.
"You totally missed the "sometimes this is a rule" and "if this is the guideline" part to make it sound like I only qualify people with a 24-month average. That makes you either a bad reader or a dweeb.
I don't care which."
The name calling does not eliminate the fact that that's what you would do because that is the underwriting requirement set forth by most lenders selling to Fannie or Freddie. I am not substituting a scenario, the issue remains one of increased bonus, overtime or commissions with out a history of it.
You know, if underwriters were like Tanta, we would not have this problem in the first place. Unfortunately, basically the "No Income Vierification" game was being played by the banks to Wall Street just as much as from the borrowers to the originators. The banks / hedges would mark to market the CDO's at a certain "future value" even though the bond has not been seasoned or tested. Then the hedge, bank etc. would borrow against that to leverage other instruments. Same as the homeowner that would mark to market their "future income" on a loan app. Same concept, different entities, same result. The banks even had a "fico score" and that was the S&P rating agency. The only part that is disgusting about this is that the borrower at the bottom will be homeless, and the lender just either has to mark to market and take a loss, or file chapter 11 and CEO walks with Millions.
"As far as I know, the majority of Americans work for companies that employ 100 or more people. Big corporations are the economic backbone of our country."
I have a question for this guy...Have you heard of a small business that was started in the 70's in New Mexico and later moved to Washington because the idiots in New Mexico thought they were too small? I won't tell you the name of the company or it's founder, but it is now one of the biggest of the big companies you speak of. I see the point in your post, but I think that passing judgement on small business as apposed to big business is a fools game as most big businesses started very small and would not be big business if not given breaks along the way.
Stated Income was bad enough but the fraud on stated and full doc loans is over the top - this website is apparently still in business..
internet job opening consulting pay at verifyemployment.net
I am a German who lives in the US since 1998. I purchased a house in Bethesda, Maryland in 2000. Since 2006 I follow housing blogs predicting and the downfall and now -finally commenting it.
I worked for two German banks in Germany so I know a bit about mortgage lending in both Germany and the US.
Germany is the only major developed country with no residential housing bubble since 1945 (and to my knowledge there was none before that). There are reasons for that:
1) Maxium Loan-to-Value (LTV) in Germany is 60%. Not 80%. Not 100%. Not 103%. Just 60%. This is not a result of internal banking emails or banking supervisory "guidelines". Instead, it is a written in a law (Hypotekenbankgesetz).
2) No-doc loan. The fact that no-documentation liar lions are permitted in the US has not ceased puzzling me.
In Germany, it is simple: no-doc is illegal.
It is safest and most reliable way for bank to lose its licence if the banking supervisory authority (BFin, Berlin) can not find lending documentation when conducting an inspection.
It is the safest and most reliable way for a branch manager to get fired when an internal inspection finds that documenation of a borrowers economic situation is incomplete. Internal inspections occur regularly.
Again, the requirement is written in a law (KWG Kreditwesengesetz, "Lending Law). Article 18 demands that each bank must insist that a borrower "lays bare his economic situation". Tax return, account statement, etc.
I fully concur with the post that it wrong to waive verification of income or assets.
In the US, the Fed could have stopped this by, e.g., simply issuing a memo demaning that banks that are members of FDIC are not allowed to make loans to borrowers about which they do not know either income or asset or employment.
Here is the corrected version of the post above without the typos (apologies):
I am a German who lives in the US since 1998. I purchased a house in Bethesda, Maryland in 2000. Since 2006 I follow housing blogs predicting the downfall and now -finally - commenting it as it unfolds.
I worked for two German banks in Germany so I know a bit about mortgage lending in both Germany and the US.
Germany is the only major developed country with no residential housing bubble since 1945 (and to my knowledge there was none before that). There are reasons for that:
1) Maximum Loan-to-Value (LTV) in Germany is 60%. Not 80%. Not 100%. Not 103%. Just 60%. This is not a result of internal banking emails or banking supervisory "guidelines". Instead, it is a written in a law (Hypothekenbankgesetz).
2) No-doc loan. The fact that no-documentation liar lions are permitted in the US has not ceased puzzling me.
In Germany, it is simple: no-doc is illegal.
It is the safest and most reliable way for a bank to lose its licence if the banking supervisory authority (BFin, Berlin) can not find lending documentation when conducting an inspection and concludes this is done routinely.
It is the safest and most reliable way for a branch manager or loan officer to get fired when an internal inspection (conducted by her own employer) finds that documenation of a borrowers economic situation is incomplete. Internal inspections occur regularly.
Again, the requirement is written in a law (KWG Kreditwesengesetz, "Lending Law). Article 18 demands that each bank must insist that a borrower "lays bare his economic situation". This includes tax return, account statement, etc.
I fully concur with the post that it is wrong to waive verification of income or assets. The result since 2003 (when this mutual mortgage fraud committed by borrowers, brokers and lenders really took off) was that at the very same time house prices exploded. This was the time,when the slime was put into sub-prime so that this segment would truly live up to its promise. Remember: a true sub-prime borrower is a borrower that is not creditworthy.
In the US, the Fed could have stopped this by, e.g., simply issuing a memo demaning that banks that are members of FDIC are not allowed to make loans to borrowers about which they do not know either income or asset or employment.
The vexing question is: why not?
Interestingly, home ownership peaked in 2004, i.e. one to two years EARLIER than house prices (which peaked between 2005 (in California) to 2006 (rolling East to the East Cost).
In Germany, homeownership is approx. 40%. At the same time, German save 8-12% of their net income.
Reasons: Bank request 25-30% downpayment (the difference between the downpayment and the 60% max. first morgage comes from a second mortage that is usually 10-15% of the purchase price).
Many renters in Germany are not poor. Quite often, they have significant net wealth: Stock, bonds, life