Tanta: Are you saying that all "stated" is bad and that there are no legitimate reasons for stated income loans? Like when the borrowers are self-employed with many different entities on their 1040's? I was taught, 17 years ago, that stated was for documentation-heavy files of qualified borrowers, not to boost income or make-up assets. - The big problem was that "stated income" loans became liar loans, as lenders encouraged fraud. Maybe not in so many words, but they sure didn't penalize anyone when fraud was detected, esp if the originator produced volume - More than one wholesale AE from big Name lenders would tell me to make up reserves or income, because,"we don't verify that." - It was like being in a game with two sets of rules, and I played by the ole rules.
I hope they do go back and prosecute the many loans based on fraud, but it'll be some 22 yr old LO that ends up holding the bag, not a branch manager of a big lender or a regional VP of a bank. - The guidelines for underwriting stated income loans was there, it was just that no one enforced it...not when production bonuses hung in the balance.
That's the problem with letting C students manage risks of any kind: financial, engineering, medical, environmental, you name it. All they can manage to do is work through a checklist. Every item construed as being on the checklist is evil incarnate, with punishments, hearings, nasty letters, etc. Everything else is just ignored.
Naturally this drives away the A students that you'd prefer ran the show, while letting scoundrels make the liveliest sort of mischief.
I was taught, 17 years ago, that stated was for documentation-heavy files of qualified borrowers, not to boost income or make-up assets.
Er... If the file is documentation-heavy, wouldn't it not be the "stated income" loan we all know and love? Or is the file full of information about the borrower other then their income?
I was taught, 17 years ago, that stated was for documentation-heavy files of qualified borrowers
OK, let's call it straight, because it's confusing the civilians.
If you have a big thick file full of tax returns and P&Ls and auditor's letters and a very complicated picture on income, and you really think this is a good loan but you're having a hard time getting exact documentation of cash flow, and you arrive at a number that seems to make sense, is consistent with the verified information, and lets you calculate DTIs that you can then measure, you are not "stating income," you are "being a mortgage underwriter."
Calling that "stated income" is stupid. It's not. It's "calculated income," and my way of calculating income--stand back, everyone--might not be some simple-minded reading of a box on a 1099. That's what I get paid the big bucks for.
We are talking here about "stated income" meaning I, underwriter, never see those tax returns and other piles o' docs, because the borrower just "states" a GMI number on the application.
So the whole "heavy file" thing, once again, is a red herring.
Why do examiners and auditors pass over the "Type 1" loans with such... trust ? There mere fact that those loans are there should invite inspection (and close inspection). If I were an auditor, I'd look at those even more than the Type 2 loans (assuming I had a choice of course).
The first time I read about "stated income" loans I didn't believe the story.
I couldn't imagine that any institution would lend hundreds of thousands of dollars without requiring proof of income. The last time I got a mortgage it was 1998. It was my third mortgage, and I had to prove my income. I expected it, and it was no problem for me.
If someone borrows money on a "stated income" basis and then defaults on the loan, the lender (and holder of the bond backed by the loan) deserves whatever the hell happens. It boggles my mind to hear that such a stupid, reckless invitation to fraud is even legal, let alone practiced by banks.
I gather/guess from the context that drdebt9 meant to say what would otherwise be documentation-heavy files.
One interesting phenomenon were experience with regards to stated income and the like, is that many states are passing draconian-style legislation. Pro-consumer statutes to be sure, although one tiny little problem
Tanta carries an underwriters bias to the extreme and seems to have been the victim of over-zealous QC write ups and general paranoia that are big corporate staples. Stated income loans do have a place in the world. Many times if you take a self employed borrower and give their tax returns to 3 different underwriters, you will get 3 different income figures. The point is this: When to pass go and collect $200 and keep the pieces moving around the board. Stated income loans have been abused, without a doubt. The single biggest risk factor is LTV. If the LTV is reasonable and the self employed borrower has plenty of seasoned cash reserves and excellent credit and is a move up buyer, why ask any more questions? Stated income for wage earners was clearly insane.
Banking exists to serve the general economy and the general public. It exists to grease the wheels of business and commerce. It does not exist to please anal retentive underwriters trying to justify their miserable existence by playing Sherlock Homes and solving the crime of applying for a home loan. Over-zealous regulators who have been discovered to have been sleeping on the job have let the cows out of the barn... Now they come running to secure the barn door and lock out the cows in the process. The cows will then starve in the cold and more of the herd will be lost due to sheer stupidity of regulators and underwriters who are paid by the hour. Whether they make a mistake or not, they are still paid for their "work".
Sales managers were in the drivers seat until recently. That was a mistake. It is just as big of a mistake to put underwriters in the drivers seat without some sort of counter-balance or a compression in credit will exacerbate the economic situation.
Why do examiners and auditors pass over the "Type 1" loans with such... trust ? There mere fact that those loans are there should invite inspection (and close inspection).
OK, so, say you look at them. What do you see? A GMI number on the application. What part of the underwriting analysis are you reviewing here, the ability to divide debt by income and get a ratio? There's nothing to review when there's nothing verified.
It's just too circular to make any sense. If you assumed that stated income is a risk on any loan, regardless of other loan characteristics, then you just wouldn't do it.
In other words, the Number 1 loan is not an exception. It meets the lender's published guidelines for "stated income loans." No examiner who signed off on the freakin' credit policy that was approved by the board of directors can wade through loans and fault them for following that policy. So when I talk about "stated income loans," I mean in fact that the policy is to accept statements of income by the borrower and never see docs. There is no way to subject those to meaningful review. Meanwhile, however, they're prettying up the DTI averages.
Tanta carries an underwriters bias to the extreme and seems to have been the victim of over-zealous QC write ups and general paranoia that are big corporate staples.
Excuse me? I've never been the "victim" of the QC department. I'm the one over there demanding that the QC people do their damned jobs, even if that pisses off the underwriters.
Your rant makes no sense unless we assume that there was, once upon a time, before the stated income craze, a situation in which self-employed borrowers just didn't get mortage loans, or didn't get enough loans.
Care to cough up any evidence for that?
If there is no real problem to be "solved" with stated income, then we see what the agenda is here: to in fact "grease wheels." Well, no, that's not what safety and soundness regulations are for, to make sure that every nitwit entrepreneur gets a mortgage from a bank.
You know you're in the presence of ideological nonsense when we start complaining that underwriters are paid salaries, and actually get paid for denying loans as well as for approving them. Gasp! Risk managers get paid too, even though they occasionally have to say no to a deal. You think their salary should be docked when they do that?
It isn't a game of monopoly, everbody just acted for years like it was. It's a bit late in the day to be talking about keepin' the game going when we're reaping the results of not taking risk management seriously.
Meanwhile, however, they're prettying up the DTI averages.
Which is where the problem lies (I think). There is only one DTI average... and everyone seems to be assuming its a golden number. The DTI off those Type 1 loans is mucking up the 'trustfulness' of the DTI averages (even tho no one sees that until its too late). If the Type 1 loans were required to contribute to the average calculation as 100% DTI, I bet lots of those would get written as Type 2 instead.
Its like some guys are robbing the bank and they walk past the guard carrying these big heavy sacks. The guard's cover is "they didn't show me a note that said they were robbing the bank, so I let them pass".
"Line 22 on the 1040 is total income, and line 37 is adjusted gross income. I'm not seeing the problem."
Not to defend our sales manager friend, but there are/may be one-time expenses, depreciation, depletion..
On another note, I wonder why the loan mods are less common than we would like? Is it perhaps because the greeter at Walmart doesn't want to fess up that he doesn't really make $10k/mo.
daveNYC, it is actually a little bit more complicated than that. And you will get different underwriters giving you different numbers.
My all time favorite true story in this regard involved a loan to a borrower whose occupation was self-employed charter fishing boat captain. We had tax returns for the last two years, showing just enough income to cover loan payments, assuming a big down payment. We required that big down payment in the commitment letter, and as usual included the condition that the loan couldn't close until the borrower provided additional documentation of the source of funds for the down payment.
So the guy comes in to close, and the closer asks for the verification of the funds, and he hands over a bill of sale showing that he had sold a non-cash asset, and was using the proceeds for the home purchase. The closer wasn't sure it was OK, so she faxed it to the underwriter to approve.
The underwriter about died, because the asset that was sold to make the down payment was. . . a fishing boat.
Now, wouldn't you go back and make some changes to the income picture of a charter fishing boat company that just sold its boat?
You get that kind of stuff with self-employed borrowers. You have to watch out for it, and yes, underwriters do calculate income they think makes sense, whether it shows up that way on the tax returns or not. The whining you're hearing from Charles is a loan officer who hates this, because his deals don't get done.
i remember walking into work for the first time, not knowing anything in particular about mortgages, and picking up my brand new shiny copy of HMBS to start learning. i got to the section on 'alternative mortgage products' and learned that there are such things as 'stated income' loans, and even no doc loans, and i was like, 'you can do that? oh well, it's in the book, i guess they know what they're doing...
The underwriter about died, because the asset that was sold to make the down payment was. . . a fishing boat.
Maybe that was just the backup boat.
I get your point, and to some extent his. Funny how your example to support his point that determining income is difficult, is a good argument for more documentation, not less. Probably not what Mr. Murata has in mind.
Actually, it was his only boat. When challenged to explain how the business was going to operate without the boat, he explained that he was going to lease a boat for a while until he could buy a new Bigger and Better Boat, to make mo' better money.
So the underwriter says fine, get me the cost of a lease on another boat, and when those expenses got added back in, the deal went to hell.
As we knew it would. I had my doubts--I got called into this because the borrower was "connected" and a food-fight was going on over it--that the bill of sale wasn't just a fraud, and that the boat was going to be "bought back" after the loan closed, with money the government and I weren't supposed to know about. But there's the problem with tax cheats: they can't qualify on their tax returns. So, fine. Buy a house for cash.
"Your rant makes no sense unless we assume that there was, once upon a time, before the stated income craze, a situation in which self-employed borrowers just didn't get mortage loans, or didn't get enough loans.
Care to cough up any evidence for that?"
How about myself? I spent about 3 years renovating a very run down large property in London with the occasional help of one person. I began with a large cash reserve but no income. Every now and then i needed more cash to continue.
Prior to the mid 1980's it was impossible to finance this kind of thing unless you got a secured overdraft which meant you needed an established income flow in and out of the bank. Then came the American banks and it became very easy to get mortgages with or without income if you had the low LTV.
When i bought my first house in 1983 the agent really could not believe that a house in that condition could be bought using a mortgage. At that time lenders wanted gaurantees that even in the event of an economic disaster a property could be quickly sold. This house had no modern wash facilities other than the sink in the kitchen. It was though obviously worth the money i was prepared to pay for it but the tick box at the traditional lender required a bathroom.
Times have changed.
If joe public can get a mortgage with no money down then the stated guy should also be getting a better deal.
shorter Charles: The income of some self- employed people is just too complicated for underwriters to calculate acuratey; so the lender should just take the borrower's word for it.
Hard money lenders do that. That is not a business I'm in.
Part of the definition of "residential mortgage loan" is "financial deal in which profit comes from repayment of debt."
You can't walk up to me and say, I'm putting down 50% (or more) in cash (but I won't tell you where I got it) and I won't tell you if I can make the payments. You want that kind of deal, go to a hard money lender or Vinny. Maybe you should see a commercial lender if you've got one of those really sophisticated stories that some dumb underwriter like me can't follow. All I know is, the interest rates on residential home mortgages are too low for those kinds of deals.
Which is why all the gamesters want them, but that doesn't mean we need to give it to them.
tanta "It's calculated income". Exactly. Calculated backwards from [purchase price minus 5% (or less) downpayment in monthly payment] plus 70% so there's plenty of cushion.
Charles Murata Tanta carries an underwriters bias to the extreme and seems to have been the victim of over-zealous QC write ups and general paranoia that are big corporate staples.
Awww, this is a ludicrous comment - the entire comment, although I'm not going to embarrass you by reposting it. She's not paranoid, she's the adult explaining why you don't drink and underwrite to a room of hormonal teenaged LO's who believe they are immortal.
There's no way to grease the wheels of commerce by writing bad loans, buddy. In fact, writing bad loans in large numbers is a way to lock up the wheels of commerce.
Returning to Underwriting 101 for
The Minimally Banking Competent, methods of calculating actual cashflow available to service the debt in such situations will vary to suit with the other factors in the analysis. The idea that anyone - borrower included - is well served by not doing the analysis is idiotic.
Everything that everyone always writes about such situations is a red herring, IMO. If one institution is using a tighter analysis than another, it may be because it is a bit overextended. OK, then go to another institution; depending on their individual situations institutions may have different risk tolerances.
In such situations the underwriter will look at the debt that the borrower has been servicing as well as income, for example. The underwriter will take anything into account that does show that the borrower can make the payments, including, but not limited to, the fact that ordinary living expenses may be much lower than the norm because in this case the person's home is also their office and their primary transportation is largely charged off as a business expense, etc.
I am so sick of this type of twisted logic. Just because previous loans on the books with 45% DTIs and documented offsetting factors are performing well does not mean that you can assume 45% DTIs are not a risk factor and therefore you can write all you want of these loans without verifying offsetting factors. Instead, if you try it you will discover that you have remarkably disappointing losses a few years down the road.
Until the adults get back in control of the industry, I suppose we will have to listen to such nonsense. In the meantime, I note with deep satisfaction that my banks who were sticking to the old, antiquated, paranoid underwriting ways are now picking up business again and suddenly expanding; that even in Florida, which is well and truly into a recession, they have the money to lend, and that, for some odd reason, their brilliantly innovative competitors do not.
I'm sure it has nothing to do with imploding loan cargoes that those brave exploratory ships the NINA, the SISA and the SIVA brought back from the newly discovered Land of LaLa Lending. Maybe cosmic rays or Martian invasions account for the difference? Only Fitch, Moody's and S&P can tell us for sure.
Over-zealous regulators who have been discovered to have been sleeping on the job have let the cows out of the barn... Now they come running to secure the barn door and lock out the cows in the process.
I don't see this as whining, I see it as a statement of fact. We're in the process of witnessing an over-reaction by both lenders and regulators that will make things worse not better.
Your rant makes no sense unless we assume that there was, once upon a time, before the stated income craze, a situation in which self-employed borrowers just didn't get mortgage loans, or didn't get enough loans.
Care to cough up any evidence for that?
There have always been and will always be good loans that don't meet underwriters' criteria. Case in point: when I bought the house where I now live twenty years ago, I inflated my income to qualify for the mortgage. The reason I did so was because I was told that the rent I intended to collect from roommates would not be taken into consideration because the property was an SFR. So I lied about my other sources of income, collected rent from my roommates, and paid off the note in full ten years later.
There will always be a significant number of potential borrowers who fail the various "metrics" of over-automated underwriters. Locking them out of the market will only worsen what is already destined to be a truly nasty economic downturn. I vote with Charles on this one.
(i) Months and years after the fact, it becomes a hard and expensive case to make.
(ii) There is only pressure to prosecute if defaults hit a very high level (but then there will be far too many to handle).
(iii) If defaults do go through the roof then lots of actual fraud will surface, with the same people involved in scores or hundreds of defaulted mortgages. Those are the only ones who will face prosecution (other than the odd accident).
As a former mortgage fraud investigator in previous cycles, I can say you are just wrong about this.
"Banking exists to serve the general economy and the general public. It exists to grease the wheels of business and commerce. It does not exist to please anal retentive underwriters trying to justify their miserable existence by playing Sherlock Homes and solving the crime of applying for a home loan."
This must be baffle them with BS week. I laugh at that, this dude funny maybe he one of those A students.
I'm sure it has nothing to do with imploding loan cargoes that those brave exploratory ships the NINA, the SISA and the SIVA brought back from the newly discovered Land of LaLa Lending. Maybe cosmic rays or Martian invasions account for the difference? Only Fitch, Moody's and S&P can tell us for sure.
We go "full doc," and the underwriter does a complete income analysis. In writing, on the sacred 1008 (the Underwriting Transmittal in the file), the underwriter fully discusses the business and its cash flow, noting that a 24-month averaging of income is producing a DTI of 68%. However, the underwriter believes that cash flow trend is positive, that there are documented reasons to believe it will continue, that the borrower has sufficient personal cash assets not needed for the business to supplement income for debt service, and hence this high DTI is justified. The 1008 of course is countersigned by a senior credit officer, because it is an exception to normal lending rules--the DTI is too high--and also because we are doing our required Fair Lending monitoring, making sure that the exceptions we make are made fairly, not just to rich white folks or folks in certain zip codes, but to anyone who qualifies for them."
This is a fallacy in a never never world so any sense or logic in your whole essay abruptly stops there.
4shzl, when you lie on a mortgage app you commit a federal crime and you take a huge personal risk. What if something had happened? What if your plan didn't work out?
Charles and you are dead wrong because the purpose of pooling (mortgages sold) risk is to produce pools with aggregated risks that will support low interest rates, thus supporting the entire economy.
Look, banks I deal with write loans that are extremely, sublimely subprime on the face of it (based on, say, on FNMA standards), but they do so with very careful underwriting and they manage the risks very carefully, and thus they write with much lower interest rates than one would have to demand to pool these loans. And eventually, virtually all of their loans perform, and the borrowers end up being prime or near prime with genuine equity, and those loans get recycled out to the vast universe of conforming, usually FNMA, with even lower interest rates.
There are very good reasons to slot borrowers into the types of loan programs best suited for them, because frankly, a borrower who does have the income to support their loan should not have to be essentially subsidizing individuals who don't. Nor should that borrower be subjected to the type of oversight and documentation necessary to properly underwrite the type of borrower who is high risk. Trying to aggregate high risk loans with low risk loans is totally unfair to the low risk borrower.
Jeez, MOM, I live in a state that is utterly dependent on folks that have committed "federal crimes," just like you do. Picked any citrus, lately, MOM? Would you like to give it a try?
I hate to be the one to break it to you, but the "Leave It To Beaver" world that the banking industry is positioned to serve ain't comin' back. The cash economy is enormous, and will only get larger. Reality is undocumented -- get used to it.
Why not just say no to the self-employed if they cannot clearly document their ability to meet their loan payments? If that means a lot of the self-employed cant get buy a house, then so what? Go to do something else. I cannot understand this American obsession with owning residential real estate. Whats the problem with renting? Sometimes renting is much better deal than owning. I could buy for cash, but I dont because residential real estate is currently way over priced
Banking exists to serve the general economy and the general public. It exists to grease the wheels of business and commerce. It does not exist to please anal retentive underwriters trying to justify their miserable existence by playing Sherlock Homes and solving the crime of applying for a home loan.
I used to be a reporter, and this statement reminds me of a couple guys I interviewed a long time ago for a story about commercial real estate. It was during the '80s when the S&Ls were shoveling cash out to anyone and everyone.
One interviewee was the president of a local bank. He wasn't making those loans because he thought the whole thing was a stupid bubble. My God, he told me, they're writing long-term leases for under $10 a square foot. It'll be great for the tenants but I'm sure glad I don't hold the mortgages!
So I go to the developers and one of them pats me on the head and says, young man, the people who write these leases are sophisticated people and they wouldn't write them if they didn't make sense. In other words, take it on faith.
So I quoted both of them and went on to other things. Five or six years later, after I had moved to a different career, I was reading a story about the S&L collapse and the commercial real estate collapse, so I thought I'd check up on these people.
I call back to my old newspaper and ask what's become of these people. Oh, the banker was fine, I was told. Just chugging along. The developer was in jail.
Odd, Producer, Tanta's "never never world" is one that seems very familiar to me. And please note, Tanta's lending world is mostly at the opposite end of the spectrum from mine.
It's not that banks I deal with don't originate conforming, it's just that I have relatively little time allocated to that, because conforming is pretty cook-book. And there's everything right with that. I spend most of my time on the non-conforming side, but everything Tanta has written makes sense to me.
Well, there are other things as well. Like anon above a few years ago I was rebuilding my old house. Got it very cheap, good location, just needed a lot of work. As I had just retired from my company I had some excess cash plus did some add'l work for another company (under the table so to speak).
Anyway a year later I sold the old house make quite a large sum. So I decided to move to another part of the country and in this case buy another house but with a mortgage. Except I had no verifiable income. I wanted to save most of the profit I made on the prior house sale and reinvest it.
It took a while but I finally found a bank that accepted the fact that if (and when) I started drawing my pension plus applying for social security I would have an acceptable (and verifiable) income sufficient to pay the mortgage. And, of course, they took my investments into account.
BTW, they required every financial disclosure known to man before they went along with the deal. But it worked out OK in the end.
I appreciate the other concerns that are voiced here, but I really am stuck on the tax evasion issue. If this type of loan is done by or sold to an entity with public insurance (FDIC with its ultimate federal guarantee or the implied Fannie/Freddie guarantee), then the tax PAYERS are being defrauded. Either the IRS is not collecting the taxes due, or the tax PAYERS are being lied to in terms of income that does not exist.
As for the case of 4shzl and the renters, it's no different to me than a student about to graduate college trying to use their projected salary. Why should the bank take that risk unknowingly? If they accept the risk, I assume that they will charge a higher interest rate to make it worth their while. I'm OK with paying more to get better services. Option 2 is to have the borrower wait a little while. If you are willing to live with the inconvenience of renters living in your house, then I think it isn't too much of a stretch to hold on a little longer.
I don't expect much of the fraud will be made right, and I expect a bailout. And I still pay my taxes (every bit that I understand that the government expects). I'm not sure why, but it's probably because I don't want to let my parents down. I guess drinks are on me for those truly enjoying this party.
Too bad no legislator has thought to link bailout to reconciliation of under-reported tax liability from the initial loan documents. If the Wal-Mart greeter wants to stay in his $550K home with a government bailout, then I expect them to cough up the under-paid taxes. If that doesn't work, we can take the home to make up the difference and sell it to settle the tax liability. Given that choice, I think the lenders would work harder to modify loan terms for the accomplices in the initial fraud, and absolutely stop origination of stated income garbage for future fraud. Win-win. Probably cause a depression though. Then again, we would create plenty of government jobs trying to track down the unpaid taxes.
4shzl: Jeez, MOM, I live in a state that is utterly dependent on folks that have committed "federal crimes," just like you do. Picked any citrus, lately, MOM? Would you like to give it a try?
Well, dang, since my Congress Critters haven't responded sanely to my letters about just this subject, I guess I'll run off and borrow a million dollars on a fraudulent loan app. How does one injustice redress the other? The world of LaLa immigration law produces just as much economic harm as LaLa Lending, because both cause us not to recognize true costs. (Note the careful, clever reference to Tanta's point about inadequate reserves.) In fact, if more people thought like Tanta we would not have such a situation.
Regardless, I'm in peril of liking you because you do realize the injustice of declaring people illegal who are needed economically and thus blinked at by the law, so that we can more effectively exploit them. The profits are just as illusive and short-term as those deriving from securitized stated loans.
The reason I pointed out that you committed a federal crime and that many people will in fact get bitten by such a step is because hundreds of people read this blog and the comments, and I don't want them thinking that this is a good thing to do. It isn't.
PS: It freezes here in GA, so no I haven't picked citrus. But I sure as heck did pick my own blueberries this year! It is hard, hot work but I bet I can beat you at it. You seem to be assuming that both Tanta and I are t----t-ssed bitches who don't care about reality, but actually both Tanta and I get our noses rubbed in economic and social reality all the time. The outcome is that we sometimes get accused of having pinko politics, and sometimes get accused of being regressive capitalist running dogs, when in fact we are only pragmatists who like to see things work out well for people.
The regulators can hardly claim to be shocked about the blossoming of these byzantine arrangements. The Bank of England pointed out in its twice-yearly financial stability review in April, that for banks in general, 'there has been a gradual shift towards an "originate and distribute" business model'. In other words, instead of taking money in from depositors, and then lending it out again (how dull), they have become mere conduits, gathering in willing customers and selling their loans to investors keen to take a slice of the profits.
By hiving off parcels of loans into separate legal entities, often registered offshore, banks are able to get a better credit rating, and hence borrow at a lower interest rate. Financial institutions which buy the loans are first in the queue in the event of a financial crisis, ahead of depositors. Many banks have also developed a lucrative sideline in setting up, and effectively underwriting, special purpose vehicles containing other people's assets, as well as their own. They take a fee for creating the vehicles, in return for agreeing to accept the risk if everything goes sour.
As the credit crunch hit last month, HBOS - the giant UK bank formed by the merger of Halifax and Bank of Scotland - was forced to announce that it would lend money to a so-called 'conduit fund' called Grampian, 'to repay maturing debt as market pricing was unacceptable'. This was code for a bailout: no other institution would lend the facility money.
No mention of Grampian is made in HBOS's 2006 annual report - an indication that the facility was held off-balance sheet. But investigations show that Grampian is a £28bn financing facility, which appears to have been arranged with the help of leading Channel Islands law firm Ogier, which refers to the arrangement on its website.
This complex financial merry-go-round has made a lot of people rich. Lawyers are happy, because they get paid for drawing up the complex contracts that create the vehicles; accountants are happy, because they get paid for auditing them; traders are happy, because they have lots of funky new products to sell - and consumers are happy, because they can carry on borrowing.
This is crazy. The only reason stated income exists is because it is other peoples money. If I worked my ass off for several hundred thousand dollars I sure as hell wouldn't lend it out on someone's statement of income. I have no doubt if the depositors sat in on the actual meetings where these loans took place they would jerk their money out. Insane!
There's no way to grease the wheels of commerce by writing bad loans, buddy. In fact, writing bad loans in large numbers is a way to lock up the wheels of commerce. - MOM
As a self-employed guy I've taken out a few loans over the years and we go Full Doc down at the local Boondocks County Nat'l Bank... We'd bring it all in and let the LO sort it out & they tell me how much I can borrow...
Then I take about half that much or less as my criteria of what I can afford is far less than what BCNB thinks I can afford.
I can't imagine doing the opposite - its terrible business strategy... not for the bank but for MY business.
All I can say is most of those so called independents who are filing 'stated' so they can get a bigger mortgage must have recently come from the corporate world where salaries are 'guaranteed'... at least until they aren't.
I tend to think you aren't really self-employed' until you've survived at least one fugly recession... do that and you're for real.
I've been through a couple and also some ugly regional events (like the farm crisis which for me was worse that any recession I've been involved with).
One thing for sure - you learn to hunker down and 'owning' a large home with a big mortgage makes that a very difficult prospect.
Reality is undocumented -- get used to it.
where do the two meet? at signing?
jeez, maybe if i just show up at the signing, no nothing, not even a photo, i can get the corner lot in brentwood.
I have worked as a loan broker for nearly 3 years,and I see no need for stated income loans.It's good paper or bad paper,if the borrower has unusual characteristics,and I have a newbie underwriter,I talk to the senior underwriter if there is a problem,or find a different lender.I have lost deals because the Borrower wanted to lie about occupancy or income.I always remind them that Mortgage Fraud is a Federal Felony,punishable by 10 years in the pen,which would probably mean 4 years served.visit one sometime.for a 1 hour tour.then tell me the risk is worth the potential reward.and as MOM and Tanta have mentioned our whole society will be paying for this systemic fraud for a long time.BTW after you get a reputation for being a straight shooter,the underwriters are a lot more likely to work with you...and tanta only about 85% of hard Money loans are predatory.
I'm sure it has nothing to do with imploding loan cargoes that those brave exploratory ships the NINA, the SISA and the SIVA brought back from the newly discovered Land of LaLa Lending.
MOM 10:53, you oughta get a colorful metaphor award for that one, no kidding. I bow in great respect.
There have always been and will always be good loans that don't meet underwriters' criteria.
Well, duh. Let me hasten to admit, as someone who has written credit policy for many years, that not even I am capable of writing a set of guidelines that captures every conceivable good loan out there. But capturing every single good loan out there without ever having to process an exception is not the goal of writing credit policy. If it were, all credit policies would be very short: "Any good loan can be done if it's a good loan. The end." Once you try to start specifying what is a good loan . . . you're into a basic problem. We tip our hats to this problem by calling these things "guidelines" instead of "laws of nature." Forgive me for being so snotty, but this objection is older than the hills and incredibly child-like.
Case in point: when I bought the house where I now live twenty years ago, I inflated my income to qualify for the mortgage. The reason I did so was because I was told that the rent I intended to collect from roommates would not be taken into consideration because the property was an SFR. So I lied about my other sources of income, collected rent from my roommates, and paid off the note in full ten years later.
So what is this an argument in aid of? Allowing stated income, or asking banks to be willing to consider rental income on an SFR? I see a great deal more wisdom in the latter than in the former.
As it happens, there are now--if there were not twenty years ago--plenty of first-time homebuyer loan programs that allow things like "boarder income" (call it "roommate income" if you want).
Of course, then we get bitching from the WASP contingent that this allows those infamous loans to brown people who allow their brown buddies to "over-occupy" SFDs. As far as I can tell, that complaint has squat to do with documentation, and everything to do with people who don't want bikes on balconies, laundry in the backyard, or too many Mexicans in one house.
Everybody who is trotting out the "people don't get prosecuted for stated income fraud" should bear a couple of things in mind:
That a law is not routinely enforced today is no guarantee that it will not become routinely enforced at some point in the future should priorities change.
Have fun explaining to the FC judge why you should not be ordered to pay a deficiency judgment because "these things don't get prosecuted."
Ditto with the BK judge: go try to get a cramdown on the grounds that nobody prosecutes stated income fraud.
How often is insider trading prosecuted? Are we all happy with the idea that Reg FD is not perfect, and so we all as individuals can just decide that our specific situation is "different," and trade however we want? I ask, again: do you like to do business with people who act the way you do?
I tend to think you aren't really self-employed' until you've survived at least one fugly recession... do that and you're for real.
I tend to be only self-employed when times are good. Once a recession (or a global financial crash) rears its head I find a full-time job and bank my self-employment income. I've been in this mode since Jan. 2006 and am currently hoping both sources of income survive the recession.
BTW, in 2002 I got a conventional fixed mortgage during one of my self-employment-only periods. That was a rectal exam to remember.
The parent of NetBank, a pioneer in Internet banking, filed for bankruptcy protection after the savings-and-loan became the first in three years to fail.
The filing in U.S. Bankruptcy Court by NetBank Inc. in Jacksonville, Florida listed assets of $87.2 million and debt totaling $42.4 million.
The bankrupt holding company plans to sell real estate it owns in Columbia, South Carolina and its captive reinsurance subsidiary M.G. Reinsurance Inc. The Chapter 11 filing occurred after a sale of the savings-and-loan fell through and it was taken over by the Federal Deposit Insurance Corp. following a shutdown of the unit by U.S. regulators.
Federal law prohibits the savings-and-loan subsidiary from filing for bankruptcy protection from creditors like its parent. Federally chartered banks cannot be reorganized and must be liquidated by the FDIC.
Tanta,
Gretchen's two-pager today on CW sob-stories left me with a lot of questions.
Most basic: are those fee numbers reasonable? Does someone add 25% to their loan balance, just by falling behind 3 months? Or is this just sloppy reporting and there was other stuff going on?
Which makes me wonder, could we have some rules for our friends in the MSM:
If you want to write about hard luck mortgage stories the following pieces of information are required before our heart strings will be pulled (more then the usual, it's sad when someone is forced to move... for renters and owners).
Ruling out stated income is stupid, if I have a 60% (of an appraisal) downpayment then the loan is safe, no matter what my income is or how vague it is. If I can't service the loan, sell it and MAKE A PROFIT on your loan!
If you are worried that the local market is in a bubble tell your appraiser to discount the valuation appropriately, that isn't MY problem. All I have to do is come up with 50% or more of what YOU think the value of the house is, and lend me the rest, and I have skin in the game, more skin than you.
Your example, Tanta, avoided specifying what the "healthy downpayment" is. In my view it is the most critical part of the story. More important than FICO or tax returns.
Do so many people borrow 90% or more that high downpayment is ignored?
That CW hatchet job in the NYT has left me with questions too. Like, all of these people appear to have had loans that they could afford before they refinanced into an ARM. Why did they do that? Did they understand the terms before they signed the contract? Do they bear any responsibility to what is happening to them now? Only the lady with the flood insurance problem really had a CW-initiated problem. While it certainly seems that CW is a crappy company to deal with (would YOU want to work there right now anyway?), why is it anyone's right to get a workout and a lower interest rate on a loan? Why should we reward bad credit risks with lower interest rates?
Such efforts may soon become more difficult. At an investor conference on Sept. 18, Angelo R. Mozilo, Countrywides chief executive, said the company would be hiring more staff members to do home-retention and loss-mitigation work. Those employees, however, will be based in India.
These reforms were necessary in terms of making more efficient use of funds," formerly being diverted to useless public works projects, said Kentaro Kogi, banking analyst at Macquarie Securities.
Privatization could also help foreign banks and investment companies scoop up new clients, with the huge savings pool up for grabs at a time when more Japanese turning to stocks and mutual funds.
That means big money for both domestic and foreign banks, as well as insurance companies.
"We can expect the changes to be a plus for stock markets, against the general backdrop of a trend toward more diverse investments," Kogi said.
The entity privatized on Monday will eclipse Citigroup, with assets of $2.22 trillion, as the world's largest commercial bank. Third will be Japan's Mitsubishi UFJ Financial Group, with $1.67 trillion.
So far, they have been granted only a minor role, with Goldman Sachs Asset Management the only foreign firm chosen from a dozen that applied to sell their funds.
hmm i red sometime ago that japan has cca 30 trilion usd in savings and that the postal bank itself has more than 7 trilion in deposits. koizumi was not able to start the priuvatization of postal bank, the clown after him was completely without any charisma, so whether it will work who knows ... but well 7 tril, thats a lot of OPM, and how many derivates one could make of this kind of money hmm
If were at the beginning of the 'end of oil' , then i think it's a shrewd idea to sell a depreciating asset at it's all time high's in earnings potential...
Home builder D.R. Horton has clamped down on public attendance and media coverage of a planned auction today of condominium units at two San Diego developments amid a growing national interest in its marketing strategy.
Charlotte Observer expands its investigation of the foreclosure problem... first it was the FC stats... then the builder (Beazer, now under FBI investigation) ... to the Realtors
Employees received a total of $525,846 in bonuses that were not submitted, reviewed or processed under proper procedures, according to D.C. personnel rules and before the chief financial officer had certified that sufficient surplus funds were available in agency budgets to pay for them.
If the lender is made to feel no pain (and pass along the debt risk to investors, and then society as a whole), there is no incentive for the lender not to repeat this behavior.
The collateral damage to the rest of us from failure to do appropriate mods. CW is a crappy company, and I don't want any of its crap splattering on me, the taxpaying neighbor. Why should my property values sink in my neighborhood because CW ignored its fiduciary duty and created a loan and fee structure that it knew would be untenable for buyers in the name of short-term grubbing of fees? Why should I pay any of the social costs associated with homeowners who will probably have to rent now for the rest of their lives, if we make the rosy assumption that they can even afford rent?
Look at what is happening with credit-card debt and this scenario will be extremely familiar - CW learned how to run this predatory fee scam from citi and wachovia and wells fargo -- get debtors on the hook, and charge them exorbitant fees, because that's how you make your money. So what if the foreclosures pile up and the neighborhoods get dark and scary, and my taxes rise, and my anxiety grows? Tangelo's got his, that's all that matters.
Since when does "stated" mean that you don't verify anything? As you know, there are variations on stated income documentation requirements. The famed Form 4506(-T) or Form 8821 have always been required by some lenders for self-employed borrowers, while other lenders felt it hampered loan production...so guess which lenders the liars went to?
I'll still say that lenders didn't follow their own guidelines for stated income loans and knowingly accepted fraudulent loans in an attempt to gain market share and those big corporate bonuses and stock prices. Gee, maybe the RICO laws should be enforced instead of bailouts proposed for the perp-corporations.
If you want to see real deflation in Japan - privatize their retirement system more than it already is... the thing that keeps the Japanese from spending is fear of the future... they have no SS or anything like it... closest thing is the 'postal system' and it is in disarray.
If I were a Japanese worker and they privatized that sucker - I wouldn't open my wallet until the NEXT century. My motto would be... "I hunker down now but you ain't seen nothing yet."
In fact a short prediction: After they 'privatize' the thing my guess is they 'nationalize' it completely to 'undeflate' the economy (i.e. liquify the place again)... say in five years and one ugly election after privatization. You think yen trade is crazy now, just wait.
I tend to be only self-employed when times are good. Once a recession (or a global financial crash) rears its head I find a full-time job and bank my self-employment income. I've been in this mode since Jan. 2006 and am currently hoping both sources of income survive the recession.
I think most can't pull this off - I can't. I have to be in position at the bottom of the recession to be able to tale advantage of the boom at the top. My 'sell cycles' are just way too long.
So the thing you do during the 'despair phase' of the down cycle is start lining up principles & making contacts with customers... when it POPS your already there and everyone else is trying to catch up.
By the end of the boom - I've been shoved out of they way by 'in-house direct' competition and am waiting for the next round of 'creative destruction' to send them away - it always comes though not on 'my schedule'.
Alo, you're missing the point. It is not written into law anywhere that that lower interest rates and loan modifications are anyone's right. You seem to take the moral high ground here, but that is far from the reality of what if even feasible. Why should the taxpayer bail out the greedy idiots who got cash-out refis that they didn't understand and couldn't afford. What's wrong with renting, anyway? You sound like the Bushies that touted homeownership for everyone. Since when is that an American right? And CW was not necessarily the lender on those loans, they are the SERVICER. Different business.
I'm not suggestion it's a right of all borrowers - and I'm not suggesting every borrower is entitled to a mod or adjustment -- but saying that a failed borrower doesn't fail in a vacuum - their loss affects other people not a party to the bad loan -- that means one way or another, taxpayers will foot their bill. I'd rather make the alleged "professionals" who knew better foot some of the cost of their bad buisness decisions, instead of foisting the results on me.
Requiring full income documentation may go a long way toward making people pay their fair share of taxes. Sounds good to me. I seriously wonder how much tax revenues would increase if people were motivated to bring their income out of the shadows in order to buy a house one day!
Thanks for the link to the Charlotte story about Realtor involvement in the foreclosures taking place in that town. What story! I have a feeling that this is not the only town where this happened.
People who can't verify their STATED INCOME are not making what they say they are making.
Any self-respecting, self-employed person knows EXACTLY how much they make and knows EXACTLY how to document their income.
People who can't document their income are either doing so to not report their income or are just flat out lying about how much they make. In either case, they don't deserve to get a loan and don't deserve to buy a home.
But there's the problem with tax cheats: they can't qualify on their tax returns. So, fine. Buy a house for cash.
Bingo. And of course somebody who lies to the IRS, with all the threats that they can make upon one's fortune and liberty, is likely to lie to somebody without as much coercive power. Banking exists to serve the general economy and the general public. It exists to grease the wheels of business and commerce. It does not exist to please anal retentive underwriters trying to justify their miserable existence by playing Sherlock Homes and solving the crime of applying for a home loan.
I thought that "anal retentive underwriters," were hired on behalf of those WITH money to make sure that they didn't actually LOSE money. It's the golden rule, those that have the gold, make the rules. Instead, as some level, the mortgage business has become about getting money by selling bonds that have an outer layer that appears to be of "truthy", bank sacntioned goodness but are constructed upon a core of fraud.
For us "hard money lenders", happy days are here again.
For years, we have shook our heads at the crappy loans that the institiutional lenders have been making. Loans we would not touch with a ten foot pole. Unfortunately for us, a lot of our bread and butter loans got sucked up as well.
Now that the box checkers are back in command, as they were in the 80s, we will be seeing loans that require taughtful underwriting, which includes actually getting to know the borrower and his/her individual situation.
Example in process: A permanently disabled single lady with one child is buying a home with two rentals for $460,000. She's putting $310,000 down. She has a $1mm settlement trust fund from an auto accident. Banks won't touch her because her credit went in the tank following the accident. Private money to the rescue (8.25% for five years and 2 points). By the way, we have never called a loan at maturity.
Most of our loans are less than 50% LTV. I mainly check tax returns, just to make sure that the borrower is filing, and paying at least part of his share the burdon. We service a rural area where many borrowers work for cash, in legal enterprises.
With a small stable of private lenders (trust depts and foundations), we are married to our loans. A friend at Well Fargo tell me that their loan officers can lose their jobs if the loans they originated develope a below par history. That they way is should be. But I guess, thousands have already lost their jobs.
Have you read up on the Great Depression of the 30's?. How about the International Lending Boom of the 70's which culminated in the International Debt Crisis of 1982? How about the Fed under Paul Volcker and their actions to control inflation of the early 80's as written by William Greider in his book "Secrets of the Temple". Are you aware of and do you understand boom and bust cycles in markets? I assert that you do not.
You are knowledgeable but you lack understanding of the economy as a whole. I stand by my statement that you are a former underwriter (perhaps promoted to a VP) who carries an underwriter's bias to the extreme and a chip on her shoulder as I've seen underwriters take abuse that would cause any reasonable person to go insane. I was an underwriter once but figured that it was a dead end job that people do not appreciate. So I became an originator and I am much happier. Even in a down market, I am much happier. I am beginning to thrive as much of my competition is dropping like flies.
I even saved most of the money I made because I foresaw this crash approaching. I read history and books on economics. I actually own a book called "The History of Interest Rates". I have actually read it.
I have always hated sub-prime product and I was disgusted by the greed and stupidity that dominated this business in this decade. I can, and often have told people NO.
Stated income loans have their place, but not over 80% LTV. They usually charge a premium rate for the added risk of not being able to document the stated income. Like fire, they must be contained and regulated so that the house is warm but not on fire.
The hype and sensationalism going on around the mortgage meltdown has a dark side... Profit via demogoguery. Is that word applicable here? I think it may be.
"That is, they're taking risky loans, but instead of doing so with eyes open and docs on the table, they're putting their customers at risk of prosecution while producing aggregate data that appears to show that there is minimal risk in what they're doing. This practice is not only unsafe and unsound, it's contemptible."
If this is ture and proven in a given case it is at the least bad faith and perhaps could be used to void the obligations of the barower-- but I am not sure you can just assert that it is so across the board as a matter of law of fact.
I am no expert,but one thing I do know is that when banks loose money it tends to be other peoples money. So bad acting, bad faith and the like need to be exposed,but it does not help prevent the issue if it is exposed after the fact.
So prehaps the new regulator environment wiil need to impose personal criminal and civil liability on those who look the other way, as well as those who commit the underlying act of commision of omision.
4shzl, when you lie on a mortgage app you commit a federal crime and you take a huge personal risk. What if something had happened? What if your plan didn't work out?
AS I recall he did not lie he just added in his rental income as income-- as it meet the definition of taxable income it would not be a lie unless he claimed it was from another source-- we do not know if the app was that detailed.
Now if the bank excluded rental income from there calculatinons thats there right but if he gave them that info as well I am not sure it would be a lie- the bank needs to do its job as well. Now if this innoccent error could be shown to be a attempt to decieve then there might be an issue
INcome X ( all sources)
income from rental of morgaged property y
no lie here the bank needs to to its thing its no my job to fingure out what there standards are( or should be)
Jeez, she's on her soapbox about stated income loans and yet there's a big fat Ditech ad at the top of the page. Anyone see the discrepancy here? She preaching yet has no problem accepting ad revenue from a scum-sucking bottom-feeder company like Ditech. Nothing like having it both way, eh?
Great insight, Tanta... I love your blog and you rock!!!!
Scary things going on with banks:
Economic Disconnect: The Disconnect WILL be Televised!
Tanta: Are you saying that all "stated" is bad and that there are no legitimate reasons for stated income loans? Like when the borrowers are self-employed with many different entities on their 1040's? I was taught, 17 years ago, that stated was for documentation-heavy files of qualified borrowers, not to boost income or make-up assets. - The big problem was that "stated income" loans became liar loans, as lenders encouraged fraud. Maybe not in so many words, but they sure didn't penalize anyone when fraud was detected, esp if the originator produced volume - More than one wholesale AE from big Name lenders would tell me to make up reserves or income, because,"we don't verify that." - It was like being in a game with two sets of rules, and I played by the ole rules.
I hope they do go back and prosecute the many loans based on fraud, but it'll be some 22 yr old LO that ends up holding the bag, not a branch manager of a big lender or a regional VP of a bank. - The guidelines for underwriting stated income loans was there, it was just that no one enforced it...not when production bonuses hung in the balance.
That's the problem with letting C students manage risks of any kind: financial, engineering, medical, environmental, you name it. All they can manage to do is work through a checklist. Every item construed as being on the checklist is evil incarnate, with punishments, hearings, nasty letters, etc. Everything else is just ignored.
Naturally this drives away the A students that you'd prefer ran the show, while letting scoundrels make the liveliest sort of mischief.
I was taught, 17 years ago, that stated was for documentation-heavy files of qualified borrowers, not to boost income or make-up assets.
Er... If the file is documentation-heavy, wouldn't it not be the "stated income" loan we all know and love? Or is the file full of information about the borrower other then their income?
I was taught, 17 years ago, that stated was for documentation-heavy files of qualified borrowers
OK, let's call it straight, because it's confusing the civilians.
If you have a big thick file full of tax returns and P&Ls and auditor's letters and a very complicated picture on income, and you really think this is a good loan but you're having a hard time getting exact documentation of cash flow, and you arrive at a number that seems to make sense, is consistent with the verified information, and lets you calculate DTIs that you can then measure, you are not "stating income," you are "being a mortgage underwriter."
Calling that "stated income" is stupid. It's not. It's "calculated income," and my way of calculating income--stand back, everyone--might not be some simple-minded reading of a box on a 1099. That's what I get paid the big bucks for.
We are talking here about "stated income" meaning I, underwriter, never see those tax returns and other piles o' docs, because the borrower just "states" a GMI number on the application.
So the whole "heavy file" thing, once again, is a red herring.
Why do examiners and auditors pass over the "Type 1" loans with such... trust ? There mere fact that those loans are there should invite inspection (and close inspection). If I were an auditor, I'd look at those even more than the Type 2 loans (assuming I had a choice of course).
Why shouldn't drug dealers be able to get a mortgage, c'mon!
The first time I read about "stated income" loans I didn't believe the story.
I couldn't imagine that any institution would lend hundreds of thousands of dollars without requiring proof of income. The last time I got a mortgage it was 1998. It was my third mortgage, and I had to prove my income. I expected it, and it was no problem for me.
If someone borrows money on a "stated income" basis and then defaults on the loan, the lender (and holder of the bond backed by the loan) deserves whatever the hell happens. It boggles my mind to hear that such a stupid, reckless invitation to fraud is even legal, let alone practiced by banks.
I gather/guess from the context that drdebt9 meant to say what would otherwise be documentation-heavy files.
One interesting phenomenon were experience with regards to stated income and the like, is that many states are passing draconian-style legislation. Pro-consumer statutes to be sure, although one tiny little problem
National Banks are pre-empted.
Tanta carries an underwriters bias to the extreme and seems to have been the victim of over-zealous QC write ups and general paranoia that are big corporate staples. Stated income loans do have a place in the world. Many times if you take a self employed borrower and give their tax returns to 3 different underwriters, you will get 3 different income figures. The point is this: When to pass go and collect $200 and keep the pieces moving around the board. Stated income loans have been abused, without a doubt. The single biggest risk factor is LTV. If the LTV is reasonable and the self employed borrower has plenty of seasoned cash reserves and excellent credit and is a move up buyer, why ask any more questions? Stated income for wage earners was clearly insane.
Banking exists to serve the general economy and the general public. It exists to grease the wheels of business and commerce. It does not exist to please anal retentive underwriters trying to justify their miserable existence by playing Sherlock Homes and solving the crime of applying for a home loan. Over-zealous regulators who have been discovered to have been sleeping on the job have let the cows out of the barn... Now they come running to secure the barn door and lock out the cows in the process. The cows will then starve in the cold and more of the herd will be lost due to sheer stupidity of regulators and underwriters who are paid by the hour. Whether they make a mistake or not, they are still paid for their "work".
Sales managers were in the drivers seat until recently. That was a mistake. It is just as big of a mistake to put underwriters in the drivers seat without some sort of counter-balance or a compression in credit will exacerbate the economic situation.
Why do examiners and auditors pass over the "Type 1" loans with such... trust ? There mere fact that those loans are there should invite inspection (and close inspection).
OK, so, say you look at them. What do you see? A GMI number on the application. What part of the underwriting analysis are you reviewing here, the ability to divide debt by income and get a ratio? There's nothing to review when there's nothing verified.
It's just too circular to make any sense. If you assumed that stated income is a risk on any loan, regardless of other loan characteristics, then you just wouldn't do it.
In other words, the Number 1 loan is not an exception. It meets the lender's published guidelines for "stated income loans." No examiner who signed off on the freakin' credit policy that was approved by the board of directors can wade through loans and fault them for following that policy. So when I talk about "stated income loans," I mean in fact that the policy is to accept statements of income by the borrower and never see docs. There is no way to subject those to meaningful review. Meanwhile, however, they're prettying up the DTI averages.
Tanta carries an underwriters bias to the extreme and seems to have been the victim of over-zealous QC write ups and general paranoia that are big corporate staples.
Excuse me? I've never been the "victim" of the QC department. I'm the one over there demanding that the QC people do their damned jobs, even if that pisses off the underwriters.
Your rant makes no sense unless we assume that there was, once upon a time, before the stated income craze, a situation in which self-employed borrowers just didn't get mortage loans, or didn't get enough loans.
Care to cough up any evidence for that?
If there is no real problem to be "solved" with stated income, then we see what the agenda is here: to in fact "grease wheels." Well, no, that's not what safety and soundness regulations are for, to make sure that every nitwit entrepreneur gets a mortgage from a bank.
You know you're in the presence of ideological nonsense when we start complaining that underwriters are paid salaries, and actually get paid for denying loans as well as for approving them. Gasp! Risk managers get paid too, even though they occasionally have to say no to a deal. You think their salary should be docked when they do that?
It isn't a game of monopoly, everbody just acted for years like it was. It's a bit late in the day to be talking about keepin' the game going when we're reaping the results of not taking risk management seriously.
Meanwhile, however, they're prettying up the DTI averages.
Which is where the problem lies (I think). There is only one DTI average... and everyone seems to be assuming its a golden number. The DTI off those Type 1 loans is mucking up the 'trustfulness' of the DTI averages (even tho no one sees that until its too late). If the Type 1 loans were required to contribute to the average calculation as 100% DTI, I bet lots of those would get written as Type 2 instead.
Its like some guys are robbing the bank and they walk past the guard carrying these big heavy sacks. The guard's cover is "they didn't show me a note that said they were robbing the bank, so I let them pass".
Banking exists to serve the general economy and the general public.
I just can't get past that sentence - the same as politicians carry out public service ( usually very proudly too ), right ?
Why don't you start with - "Banking exists to make money..."
Jeez...
-K
Many times if you take a self employed borrower and give their tax returns to 3 different underwriters, you will get 3 different income figures.
Line 22 on the 1040 is total income, and line 37 is adjusted gross income. I'm not seeing the problem.
I swear to God, officer. She stated that she was eighteen! I mean... look at those assets.
"Line 22 on the 1040 is total income, and line 37 is adjusted gross income. I'm not seeing the problem."
Not to defend our sales manager friend, but there are/may be one-time expenses, depreciation, depletion..
On another note, I wonder why the loan mods are less common than we would like? Is it perhaps because the greeter at Walmart doesn't want to fess up that he doesn't really make $10k/mo.
These Tanta position threads are my favorite!
Let the fireworks continue!
daveNYC, it is actually a little bit more complicated than that. And you will get different underwriters giving you different numbers.
My all time favorite true story in this regard involved a loan to a borrower whose occupation was self-employed charter fishing boat captain. We had tax returns for the last two years, showing just enough income to cover loan payments, assuming a big down payment. We required that big down payment in the commitment letter, and as usual included the condition that the loan couldn't close until the borrower provided additional documentation of the source of funds for the down payment.
So the guy comes in to close, and the closer asks for the verification of the funds, and he hands over a bill of sale showing that he had sold a non-cash asset, and was using the proceeds for the home purchase. The closer wasn't sure it was OK, so she faxed it to the underwriter to approve.
The underwriter about died, because the asset that was sold to make the down payment was. . . a fishing boat.
Now, wouldn't you go back and make some changes to the income picture of a charter fishing boat company that just sold its boat?
You get that kind of stuff with self-employed borrowers. You have to watch out for it, and yes, underwriters do calculate income they think makes sense, whether it shows up that way on the tax returns or not. The whining you're hearing from Charles is a loan officer who hates this, because his deals don't get done.
i remember walking into work for the first time, not knowing anything in particular about mortgages, and picking up my brand new shiny copy of HMBS to start learning. i got to the section on 'alternative mortgage products' and learned that there are such things as 'stated income' loans, and even no doc loans, and i was like, 'you can do that? oh well, it's in the book, i guess they know what they're doing...
The underwriter about died, because the asset that was sold to make the down payment was. . . a fishing boat.
Maybe that was just the backup boat.
I get your point, and to some extent his. Funny how your example to support his point that determining income is difficult, is a good argument for more documentation, not less. Probably not what Mr. Murata has in mind.
Actually, it was his only boat. When challenged to explain how the business was going to operate without the boat, he explained that he was going to lease a boat for a while until he could buy a new Bigger and Better Boat, to make mo' better money.
So the underwriter says fine, get me the cost of a lease on another boat, and when those expenses got added back in, the deal went to hell.
As we knew it would. I had my doubts--I got called into this because the borrower was "connected" and a food-fight was going on over it--that the bill of sale wasn't just a fraud, and that the boat was going to be "bought back" after the loan closed, with money the government and I weren't supposed to know about. But there's the problem with tax cheats: they can't qualify on their tax returns. So, fine. Buy a house for cash.
"Your rant makes no sense unless we assume that there was, once upon a time, before the stated income craze, a situation in which self-employed borrowers just didn't get mortage loans, or didn't get enough loans.
Care to cough up any evidence for that?"
How about myself? I spent about 3 years renovating a very run down large property in London with the occasional help of one person. I began with a large cash reserve but no income. Every now and then i needed more cash to continue.
Prior to the mid 1980's it was impossible to finance this kind of thing unless you got a secured overdraft which meant you needed an established income flow in and out of the bank. Then came the American banks and it became very easy to get mortgages with or without income if you had the low LTV.
When i bought my first house in 1983 the agent really could not believe that a house in that condition could be bought using a mortgage. At that time lenders wanted gaurantees that even in the event of an economic disaster a property could be quickly sold. This house had no modern wash facilities other than the sink in the kitchen. It was though obviously worth the money i was prepared to pay for it but the tick box at the traditional lender required a bathroom.
Times have changed.
If joe public can get a mortgage with no money down then the stated guy should also be getting a better deal.
I am not saying any of this makes any sense now.
But i think it did use to.
shorter Charles: The income of some self- employed people is just too complicated for underwriters to calculate acuratey; so the lender should just take the borrower's word for it.
Tanta,
In your opinion and/or experience, and assuming a "normal" RE market, at what LTV does a total no-qualify make sense?
a food-fight was going on over it
it wasn't shrimp, was it?
at what LTV does a total no-qualify make sense?
I don't do "no qualify."
Hard money lenders do that. That is not a business I'm in.
Part of the definition of "residential mortgage loan" is "financial deal in which profit comes from repayment of debt."
You can't walk up to me and say, I'm putting down 50% (or more) in cash (but I won't tell you where I got it) and I won't tell you if I can make the payments. You want that kind of deal, go to a hard money lender or Vinny. Maybe you should see a commercial lender if you've got one of those really sophisticated stories that some dumb underwriter like me can't follow. All I know is, the interest rates on residential home mortgages are too low for those kinds of deals.
Which is why all the gamesters want them, but that doesn't mean we need to give it to them.
it wasn't shrimp, was it?
I work on Main Street, my friend, not Wall Street. We never throw around the shrimp (when we have shrimp).
It was probably celery stuffed with pimiento dip. Or donuts.
oh, i thought the borrower might have been captain dan or something.
Nah, it was more like Gilligan's Island . . .
We have a major credit crisis that's proving that.
You mean that problem with those subprime people I keep hearing about on tv?
Nah, it was more like Gilligan's Island . . .
did you get yourself a hat like the skipper's yet?
tanta "It's calculated income". Exactly. Calculated backwards from [purchase price minus 5% (or less) downpayment in monthly payment] plus 70% so there's plenty of cushion.
Charles Murata Tanta carries an underwriters bias to the extreme and seems to have been the victim of over-zealous QC write ups and general paranoia that are big corporate staples.
Awww, this is a ludicrous comment - the entire comment, although I'm not going to embarrass you by reposting it. She's not paranoid, she's the adult explaining why you don't drink and underwrite to a room of hormonal teenaged LO's who believe they are immortal.
There's no way to grease the wheels of commerce by writing bad loans, buddy. In fact, writing bad loans in large numbers is a way to lock up the wheels of commerce.
Returning to Underwriting 101 for
The Minimally Banking Competent, methods of calculating actual cashflow available to service the debt in such situations will vary to suit with the other factors in the analysis. The idea that anyone - borrower included - is well served by not doing the analysis is idiotic.
Everything that everyone always writes about such situations is a red herring, IMO. If one institution is using a tighter analysis than another, it may be because it is a bit overextended. OK, then go to another institution; depending on their individual situations institutions may have different risk tolerances.
In such situations the underwriter will look at the debt that the borrower has been servicing as well as income, for example. The underwriter will take anything into account that does show that the borrower can make the payments, including, but not limited to, the fact that ordinary living expenses may be much lower than the norm because in this case the person's home is also their office and their primary transportation is largely charged off as a business expense, etc.
I am so sick of this type of twisted logic. Just because previous loans on the books with 45% DTIs and documented offsetting factors are performing well does not mean that you can assume 45% DTIs are not a risk factor and therefore you can write all you want of these loans without verifying offsetting factors. Instead, if you try it you will discover that you have remarkably disappointing losses a few years down the road.
Until the adults get back in control of the industry, I suppose we will have to listen to such nonsense. In the meantime, I note with deep satisfaction that my banks who were sticking to the old, antiquated, paranoid underwriting ways are now picking up business again and suddenly expanding; that even in Florida, which is well and truly into a recession, they have the money to lend, and that, for some odd reason, their brilliantly innovative competitors do not.
I'm sure it has nothing to do with imploding loan cargoes that those brave exploratory ships the NINA, the SISA and the SIVA brought back from the newly discovered Land of LaLa Lending. Maybe cosmic rays or Martian invasions account for the difference? Only Fitch, Moody's and S&P can tell us for sure.
Over-zealous regulators who have been discovered to have been sleeping on the job have let the cows out of the barn... Now they come running to secure the barn door and lock out the cows in the process.
I don't see this as whining, I see it as a statement of fact. We're in the process of witnessing an over-reaction by both lenders and regulators that will make things worse not better.
Your rant makes no sense unless we assume that there was, once upon a time, before the stated income craze, a situation in which self-employed borrowers just didn't get mortgage loans, or didn't get enough loans.
Care to cough up any evidence for that?
There have always been and will always be good loans that don't meet underwriters' criteria. Case in point: when I bought the house where I now live twenty years ago, I inflated my income to qualify for the mortgage. The reason I did so was because I was told that the rent I intended to collect from roommates would not be taken into consideration because the property was an SFR. So I lied about my other sources of income, collected rent from my roommates, and paid off the note in full ten years later.
There will always be a significant number of potential borrowers who fail the various "metrics" of over-automated underwriters. Locking them out of the market will only worsen what is already destined to be a truly nasty economic downturn. I vote with Charles on this one.
These people will never be prosecuted.
(i) Months and years after the fact, it becomes a hard and expensive case to make.
(ii) There is only pressure to prosecute if defaults hit a very high level (but then there will be far too many to handle).
(iii) If defaults do go through the roof then lots of actual fraud will surface, with the same people involved in scores or hundreds of defaulted mortgages. Those are the only ones who will face prosecution (other than the odd accident).
As a former mortgage fraud investigator in previous cycles, I can say you are just wrong about this.
"Banking exists to serve the general economy and the general public. It exists to grease the wheels of business and commerce. It does not exist to please anal retentive underwriters trying to justify their miserable existence by playing Sherlock Homes and solving the crime of applying for a home loan."
This must be baffle them with BS week. I laugh at that, this dude funny maybe he one of those A students.
I'm sure it has nothing to do with imploding loan cargoes that those brave exploratory ships the NINA, the SISA and the SIVA brought back from the newly discovered Land of LaLa Lending. Maybe cosmic rays or Martian invasions account for the difference? Only Fitch, Moody's and S&P can tell us for sure.
stands up and claps
We go "full doc," and the underwriter does a complete income analysis. In writing, on the sacred 1008 (the Underwriting Transmittal in the file), the underwriter fully discusses the business and its cash flow, noting that a 24-month averaging of income is producing a DTI of 68%. However, the underwriter believes that cash flow trend is positive, that there are documented reasons to believe it will continue, that the borrower has sufficient personal cash assets not needed for the business to supplement income for debt service, and hence this high DTI is justified. The 1008 of course is countersigned by a senior credit officer, because it is an exception to normal lending rules--the DTI is too high--and also because we are doing our required Fair Lending monitoring, making sure that the exceptions we make are made fairly, not just to rich white folks or folks in certain zip codes, but to anyone who qualifies for them."
This is a fallacy in a never never world so any sense or logic in your whole essay abruptly stops there.
"I don't do "no qualify."
Hard money lenders do that. That is not a business I'm in."
And your speaking for what industry/mortgage segment? "You" are who?
You know, I think I am beginning to get the joke here, very hilarious.
4shzl, when you lie on a mortgage app you commit a federal crime and you take a huge personal risk. What if something had happened? What if your plan didn't work out?
Charles and you are dead wrong because the purpose of pooling (mortgages sold) risk is to produce pools with aggregated risks that will support low interest rates, thus supporting the entire economy.
Look, banks I deal with write loans that are extremely, sublimely subprime on the face of it (based on, say, on FNMA standards), but they do so with very careful underwriting and they manage the risks very carefully, and thus they write with much lower interest rates than one would have to demand to pool these loans. And eventually, virtually all of their loans perform, and the borrowers end up being prime or near prime with genuine equity, and those loans get recycled out to the vast universe of conforming, usually FNMA, with even lower interest rates.
There are very good reasons to slot borrowers into the types of loan programs best suited for them, because frankly, a borrower who does have the income to support their loan should not have to be essentially subsidizing individuals who don't. Nor should that borrower be subjected to the type of oversight and documentation necessary to properly underwrite the type of borrower who is high risk. Trying to aggregate high risk loans with low risk loans is totally unfair to the low risk borrower.
Did I mention that you committed a federal crime?
Locking them out of the market will only worsen what is already destined to be a truly nasty economic downturn. I vote with Charles on this one.
Don't forget the bailouts from the political side that are inevitable. I think the political response will far outweigh the loss of liar lendees.
Did I mention that you committed a federal crime?
Jeez, MOM, I live in a state that is utterly dependent on folks that have committed "federal crimes," just like you do. Picked any citrus, lately, MOM? Would you like to give it a try?
I hate to be the one to break it to you, but the "Leave It To Beaver" world that the banking industry is positioned to serve ain't comin' back. The cash economy is enormous, and will only get larger. Reality is undocumented -- get used to it.
Why not just say no to the self-employed if they cannot clearly document their ability to meet their loan payments? If that means a lot of the self-employed cant get buy a house, then so what? Go to do something else. I cannot understand this American obsession with owning residential real estate. Whats the problem with renting? Sometimes renting is much better deal than owning. I could buy for cash, but I dont because residential real estate is currently way over priced
Banking exists to serve the general economy and the general public. It exists to grease the wheels of business and commerce. It does not exist to please anal retentive underwriters trying to justify their miserable existence by playing Sherlock Homes and solving the crime of applying for a home loan.
I used to be a reporter, and this statement reminds me of a couple guys I interviewed a long time ago for a story about commercial real estate. It was during the '80s when the S&Ls were shoveling cash out to anyone and everyone.
One interviewee was the president of a local bank. He wasn't making those loans because he thought the whole thing was a stupid bubble. My God, he told me, they're writing long-term leases for under $10 a square foot. It'll be great for the tenants but I'm sure glad I don't hold the mortgages!
So I go to the developers and one of them pats me on the head and says, young man, the people who write these leases are sophisticated people and they wouldn't write them if they didn't make sense. In other words, take it on faith.
So I quoted both of them and went on to other things. Five or six years later, after I had moved to a different career, I was reading a story about the S&L collapse and the commercial real estate collapse, so I thought I'd check up on these people.
I call back to my old newspaper and ask what's become of these people. Oh, the banker was fine, I was told. Just chugging along. The developer was in jail.
Odd, Producer, Tanta's "never never world" is one that seems very familiar to me. And please note, Tanta's lending world is mostly at the opposite end of the spectrum from mine.
It's not that banks I deal with don't originate conforming, it's just that I have relatively little time allocated to that, because conforming is pretty cook-book. And there's everything right with that. I spend most of my time on the non-conforming side, but everything Tanta has written makes sense to me.
It's past time to move on to a new subject ya'll... PUHLEASHHHHHHH!
AMERICAN hedge funds cleared to bid for Northern Rock...
Hedge funds cleared to bid for the Rock - Telegraph
Well, there are other things as well. Like anon above a few years ago I was rebuilding my old house. Got it very cheap, good location, just needed a lot of work. As I had just retired from my company I had some excess cash plus did some add'l work for another company (under the table so to speak).
Anyway a year later I sold the old house make quite a large sum. So I decided to move to another part of the country and in this case buy another house but with a mortgage. Except I had no verifiable income. I wanted to save most of the profit I made on the prior house sale and reinvest it.
It took a while but I finally found a bank that accepted the fact that if (and when) I started drawing my pension plus applying for social security I would have an acceptable (and verifiable) income sufficient to pay the mortgage. And, of course, they took my investments into account.
BTW, they required every financial disclosure known to man before they went along with the deal. But it worked out OK in the end.
Longon Times online
Shake-up must not bring back overregulation Ameican Account
(Very interesting article from England)
Hedge funds cleared to bid for the Rock - Telegraph
Sorry wrong post. Try this. FFDIC
Hedge funds cleared to bid for the Rock - Telegraph
I appreciate the other concerns that are voiced here, but I really am stuck on the tax evasion issue. If this type of loan is done by or sold to an entity with public insurance (FDIC with its ultimate federal guarantee or the implied Fannie/Freddie guarantee), then the tax PAYERS are being defrauded. Either the IRS is not collecting the taxes due, or the tax PAYERS are being lied to in terms of income that does not exist.
As for the case of 4shzl and the renters, it's no different to me than a student about to graduate college trying to use their projected salary. Why should the bank take that risk unknowingly? If they accept the risk, I assume that they will charge a higher interest rate to make it worth their while. I'm OK with paying more to get better services. Option 2 is to have the borrower wait a little while. If you are willing to live with the inconvenience of renters living in your house, then I think it isn't too much of a stretch to hold on a little longer.
I don't expect much of the fraud will be made right, and I expect a bailout. And I still pay my taxes (every bit that I understand that the government expects). I'm not sure why, but it's probably because I don't want to let my parents down. I guess drinks are on me for those truly enjoying this party.
Too bad no legislator has thought to link bailout to reconciliation of under-reported tax liability from the initial loan documents. If the Wal-Mart greeter wants to stay in his $550K home with a government bailout, then I expect them to cough up the under-paid taxes. If that doesn't work, we can take the home to make up the difference and sell it to settle the tax liability. Given that choice, I think the lenders would work harder to modify loan terms for the accomplices in the initial fraud, and absolutely stop origination of stated income garbage for future fraud. Win-win. Probably cause a depression though. Then again, we would create plenty of government jobs trying to track down the unpaid taxes.
Bloomberg.com
Libor Costs Soar as Banks Seek Funds Over Quarter End
Libor Costs Soar as Banks Seek Funds Over Quarter-End (Update3) - Bloomberg.com
"Too bad no legislator has thought to link bailout to reconciliation of under-reported tax liability from the initial loan documents."
Some be the C students and some are in on the same scam.
4shzl: Jeez, MOM, I live in a state that is utterly dependent on folks that have committed "federal crimes," just like you do. Picked any citrus, lately, MOM? Would you like to give it a try?
Well, dang, since my Congress Critters haven't responded sanely to my letters about just this subject, I guess I'll run off and borrow a million dollars on a fraudulent loan app. How does one injustice redress the other? The world of LaLa immigration law produces just as much economic harm as LaLa Lending, because both cause us not to recognize true costs. (Note the careful, clever reference to Tanta's point about inadequate reserves.) In fact, if more people thought like Tanta we would not have such a situation.
Regardless, I'm in peril of liking you because you do realize the injustice of declaring people illegal who are needed economically and thus blinked at by the law, so that we can more effectively exploit them. The profits are just as illusive and short-term as those deriving from securitized stated loans.
The reason I pointed out that you committed a federal crime and that many people will in fact get bitten by such a step is because hundreds of people read this blog and the comments, and I don't want them thinking that this is a good thing to do. It isn't.
PS: It freezes here in GA, so no I haven't picked citrus. But I sure as heck did pick my own blueberries this year! It is hard, hot work but I bet I can beat you at it. You seem to be assuming that both Tanta and I are t----t-ssed bitches who don't care about reality, but actually both Tanta and I get our noses rubbed in economic and social reality all the time. The outcome is that we sometimes get accused of having pinko politics, and sometimes get accused of being regressive capitalist running dogs, when in fact we are only pragmatists who like to see things work out well for people.
LIBOR at six. FFDIC, I just don't think our regulators can get staffed up nearly quickly enough.
Why shouldn't drug dealers be able to get a mortgage, c'mon!
Amgen and countrywide, the perfect community partners
The regulators can hardly claim to be shocked about the blossoming of these byzantine arrangements. The Bank of England pointed out in its twice-yearly financial stability review in April, that for banks in general, 'there has been a gradual shift towards an "originate and distribute" business model'. In other words, instead of taking money in from depositors, and then lending it out again (how dull), they have become mere conduits, gathering in willing customers and selling their loans to investors keen to take a slice of the profits.
By hiving off parcels of loans into separate legal entities, often registered offshore, banks are able to get a better credit rating, and hence borrow at a lower interest rate. Financial institutions which buy the loans are first in the queue in the event of a financial crisis, ahead of depositors. Many banks have also developed a lucrative sideline in setting up, and effectively underwriting, special purpose vehicles containing other people's assets, as well as their own. They take a fee for creating the vehicles, in return for agreeing to accept the risk if everything goes sour.
As the credit crunch hit last month, HBOS - the giant UK bank formed by the merger of Halifax and Bank of Scotland - was forced to announce that it would lend money to a so-called 'conduit fund' called Grampian, 'to repay maturing debt as market pricing was unacceptable'. This was code for a bailout: no other institution would lend the facility money.
No mention of Grampian is made in HBOS's 2006 annual report - an indication that the facility was held off-balance sheet. But investigations show that Grampian is a £28bn financing facility, which appears to have been arranged with the help of leading Channel Islands law firm Ogier, which refers to the arrangement on its website.
This complex financial merry-go-round has made a lot of people rich. Lawyers are happy, because they get paid for drawing up the complex contracts that create the vehicles; accountants are happy, because they get paid for auditing them; traders are happy, because they have lots of funky new products to sell - and consumers are happy, because they can carry on borrowing.
Banks hooked on a numbers game that didn't add up |
Business |
The Observer
seasoned cash reserves
wtf is that? a perma cd?
Blah, blah, blah. . .
This is crazy. The only reason stated income exists is because it is other peoples money. If I worked my ass off for several hundred thousand dollars I sure as hell wouldn't lend it out on someone's statement of income. I have no doubt if the depositors sat in on the actual meetings where these loans took place they would jerk their money out. Insane!
"If I worked my ass off for several hundred thousand dollars I sure as hell wouldn't lend it out on someone's statement of income."
That's why they get paid the big bucks because it's OPM.
There's no way to grease the wheels of commerce by writing bad loans, buddy. In fact, writing bad loans in large numbers is a way to lock up the wheels of commerce. - MOM
As a self-employed guy I've taken out a few loans over the years and we go Full Doc down at the local Boondocks County Nat'l Bank... We'd bring it all in and let the LO sort it out & they tell me how much I can borrow...
Then I take about half that much or less as my criteria of what I can afford is far less than what BCNB thinks I can afford.
I can't imagine doing the opposite - its terrible business strategy... not for the bank but for MY business.
All I can say is most of those so called independents who are filing 'stated' so they can get a bigger mortgage must have recently come from the corporate world where salaries are 'guaranteed'... at least until they aren't.
I tend to think you aren't really self-employed' until you've survived at least one fugly recession... do that and you're for real.
I've been through a couple and also some ugly regional events (like the farm crisis which for me was worse that any recession I've been involved with).
One thing for sure - you learn to hunker down and 'owning' a large home with a big mortgage makes that a very difficult prospect.
Reality is undocumented -- get used to it.
where do the two meet? at signing?
jeez, maybe if i just show up at the signing, no nothing, not even a photo, i can get the corner lot in brentwood.
Thank you MOM
I have worked as a loan broker for nearly 3 years,and I see no need for stated income loans.It's good paper or bad paper,if the borrower has unusual characteristics,and I have a newbie underwriter,I talk to the senior underwriter if there is a problem,or find a different lender.I have lost deals because the Borrower wanted to lie about occupancy or income.I always remind them that Mortgage Fraud is a Federal Felony,punishable by 10 years in the pen,which would probably mean 4 years served.visit one sometime.for a 1 hour tour.then tell me the risk is worth the potential reward.and as MOM and Tanta have mentioned our whole society will be paying for this systemic fraud for a long time.BTW after you get a reputation for being a straight shooter,the underwriters are a lot more likely to work with you...and tanta only about 85% of hard Money loans are predatory.
If that doesn't work, we can take the home to make up the difference and sell it to settle the tax liability
Let's not go down this road...
as the govvy is 9T in the hole, 10t by this time next year...
Off topic
Goldman Sachs tiptoeing into the bear camp
Goldman Sachs tiptoeing into the bear camp - Telegraph
I'm sure it has nothing to do with imploding loan cargoes that those brave exploratory ships the NINA, the SISA and the SIVA brought back from the newly discovered Land of LaLa Lending.
MOM 10:53, you oughta get a colorful metaphor award for that one, no kidding. I bow in great respect.
There have always been and will always be good loans that don't meet underwriters' criteria.
Well, duh. Let me hasten to admit, as someone who has written credit policy for many years, that not even I am capable of writing a set of guidelines that captures every conceivable good loan out there. But capturing every single good loan out there without ever having to process an exception is not the goal of writing credit policy. If it were, all credit policies would be very short: "Any good loan can be done if it's a good loan. The end." Once you try to start specifying what is a good loan . . . you're into a basic problem. We tip our hats to this problem by calling these things "guidelines" instead of "laws of nature." Forgive me for being so snotty, but this objection is older than the hills and incredibly child-like.
Case in point: when I bought the house where I now live twenty years ago, I inflated my income to qualify for the mortgage. The reason I did so was because I was told that the rent I intended to collect from roommates would not be taken into consideration because the property was an SFR. So I lied about my other sources of income, collected rent from my roommates, and paid off the note in full ten years later.
So what is this an argument in aid of? Allowing stated income, or asking banks to be willing to consider rental income on an SFR? I see a great deal more wisdom in the latter than in the former.
As it happens, there are now--if there were not twenty years ago--plenty of first-time homebuyer loan programs that allow things like "boarder income" (call it "roommate income" if you want).
Of course, then we get bitching from the WASP contingent that this allows those infamous loans to brown people who allow their brown buddies to "over-occupy" SFDs. As far as I can tell, that complaint has squat to do with documentation, and everything to do with people who don't want bikes on balconies, laundry in the backyard, or too many Mexicans in one house.
In any case, I still don't get your point.
Everybody who is trotting out the "people don't get prosecuted for stated income fraud" should bear a couple of things in mind:
How often is insider trading prosecuted? Are we all happy with the idea that Reg FD is not perfect, and so we all as individuals can just decide that our specific situation is "different," and trade however we want? I ask, again: do you like to do business with people who act the way you do?
I tend to think you aren't really self-employed' until you've survived at least one fugly recession... do that and you're for real.
I tend to be only self-employed when times are good. Once a recession (or a global financial crash) rears its head I find a full-time job and bank my self-employment income. I've been in this mode since Jan. 2006 and am currently hoping both sources of income survive the recession.
BTW, in 2002 I got a conventional fixed mortgage during one of my self-employment-only periods. That was a rectal exam to remember.
NetBank Files for Bankruptcy After Regulators Take Over Unit
NetBank Files for Bankruptcy After Regulators Take Over Unit - Bloomberg.com
The parent of NetBank, a pioneer in Internet banking, filed for bankruptcy protection after the savings-and-loan became the first in three years to fail.
The filing in U.S. Bankruptcy Court by NetBank Inc. in Jacksonville, Florida listed assets of $87.2 million and debt totaling $42.4 million.
The bankrupt holding company plans to sell real estate it owns in Columbia, South Carolina and its captive reinsurance subsidiary M.G. Reinsurance Inc. The Chapter 11 filing occurred after a sale of the savings-and-loan fell through and it was taken over by the Federal Deposit Insurance Corp. following a shutdown of the unit by U.S. regulators.
Federal law prohibits the savings-and-loan subsidiary from filing for bankruptcy protection from creditors like its parent. Federally chartered banks cannot be reorganized and must be liquidated by the FDIC.
Tanta,
Gretchen's two-pager today on CW sob-stories left me with a lot of questions.
Most basic: are those fee numbers reasonable? Does someone add 25% to their loan balance, just by falling behind 3 months? Or is this just sloppy reporting and there was other stuff going on?
Which makes me wonder, could we have some rules for our friends in the MSM:
If you want to write about hard luck mortgage stories the following pieces of information are required before our heart strings will be pulled (more then the usual, it's sad when someone is forced to move... for renters and owners).
ok tanta, i'm convinced!
even tho i have sucessfully used stated income loans in the past for my self and later even recast my loan -
i'm a believer
Ruling out stated income is stupid, if I have a 60% (of an appraisal) downpayment then the loan is safe, no matter what my income is or how vague it is. If I can't service the loan, sell it and MAKE A PROFIT on your loan!
If you are worried that the local market is in a bubble tell your appraiser to discount the valuation appropriately, that isn't MY problem. All I have to do is come up with 50% or more of what YOU think the value of the house is, and lend me the rest, and I have skin in the game, more skin than you.
Your example, Tanta, avoided specifying what the "healthy downpayment" is. In my view it is the most critical part of the story. More important than FICO or tax returns.
Do so many people borrow 90% or more that high downpayment is ignored?
That CW hatchet job in the NYT has left me with questions too. Like, all of these people appear to have had loans that they could afford before they refinanced into an ARM. Why did they do that? Did they understand the terms before they signed the contract? Do they bear any responsibility to what is happening to them now? Only the lady with the flood insurance problem really had a CW-initiated problem. While it certainly seems that CW is a crappy company to deal with (would YOU want to work there right now anyway?), why is it anyone's right to get a workout and a lower interest rate on a loan? Why should we reward bad credit risks with lower interest rates?
i love the ending to the GM article:
Such efforts may soon become more difficult. At an investor conference on Sept. 18, Angelo R. Mozilo, Countrywides chief executive, said the company would be hiring more staff members to do home-retention and loss-mitigation work. Those employees, however, will be based in India.
Japan Set to Privatize Postal System
These reforms were necessary in terms of making more efficient use of funds," formerly being diverted to useless public works projects, said Kentaro Kogi, banking analyst at Macquarie Securities.
Privatization could also help foreign banks and investment companies scoop up new clients, with the huge savings pool up for grabs at a time when more Japanese turning to stocks and mutual funds.
That means big money for both domestic and foreign banks, as well as insurance companies.
"We can expect the changes to be a plus for stock markets, against the general backdrop of a trend toward more diverse investments," Kogi said.
The entity privatized on Monday will eclipse Citigroup, with assets of $2.22 trillion, as the world's largest commercial bank. Third will be Japan's Mitsubishi UFJ Financial Group, with $1.67 trillion.
So far, they have been granted only a minor role, with Goldman Sachs Asset Management the only foreign firm chosen from a dozen that applied to sell their funds.
Breitbart.com
More OPM WaaaHoooooooo
hmm i red sometime ago that japan has cca 30 trilion usd in savings and that the postal bank itself has more than 7 trilion in deposits. koizumi was not able to start the priuvatization of postal bank, the clown after him was completely without any charisma, so whether it will work who knows ... but well 7 tril, thats a lot of OPM, and how many derivates one could make of this kind of money hmm
"how many derivates one could make of this kind of money hmm"
How many bubbles more like it revro a lot of bankers will need drooling buckets.
Don't laugh so fast at the Japanese.
The Governor wants to privatize the PA turnpike.
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If were at the beginning of the 'end of oil' , then i think it's a shrewd idea to sell a depreciating asset at it's all time high's in earnings potential...
Seems D.R. Horton got a little shy about it's condo auction...anyone have any info on that? (hat tip to the Housing Bubble Blog)
Builder's condominium auction under wraps
By Emmet Pierce
STAFF WRITER
September 29, 2007
Home builder D.R. Horton has clamped down on public attendance and media coverage of a planned auction today of condominium units at two San Diego developments amid a growing national interest in its marketing strategy.
[snip]
Charlotte Observer expands its investigation of the foreclosure problem... first it was the FC stats... then the builder (Beazer, now under FBI investigation) ... to the Realtors
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Oops that was HouseBubble.com not the other one for the hat tip!
"Don't laugh so fast at the Japanese."
Who's laughing the rot alway starts at the top.
D.C. officials got improper bonuses
Employees received a total of $525,846 in bonuses that were not submitted, reviewed or processed under proper procedures, according to D.C. personnel rules and before the chief financial officer had certified that sufficient surplus funds were available in agency budgets to pay for them.
D.C. officials got improper bonuses - Washington Times
Sandy, because
Look at what is happening with credit-card debt and this scenario will be extremely familiar - CW learned how to run this predatory fee scam from citi and wachovia and wells fargo -- get debtors on the hook, and charge them exorbitant fees, because that's how you make your money. So what if the foreclosures pile up and the neighborhoods get dark and scary, and my taxes rise, and my anxiety grows? Tangelo's got his, that's all that matters.
Since when does "stated" mean that you don't verify anything? As you know, there are variations on stated income documentation requirements. The famed Form 4506(-T) or Form 8821 have always been required by some lenders for self-employed borrowers, while other lenders felt it hampered loan production...so guess which lenders the liars went to?
I'll still say that lenders didn't follow their own guidelines for stated income loans and knowingly accepted fraudulent loans in an attempt to gain market share and those big corporate bonuses and stock prices. Gee, maybe the RICO laws should be enforced instead of bailouts proposed for the perp-corporations.
If you want to see real deflation in Japan - privatize their retirement system more than it already is... the thing that keeps the Japanese from spending is fear of the future... they have no SS or anything like it... closest thing is the 'postal system' and it is in disarray.
If I were a Japanese worker and they privatized that sucker - I wouldn't open my wallet until the NEXT century. My motto would be... "I hunker down now but you ain't seen nothing yet."
In fact a short prediction: After they 'privatize' the thing my guess is they 'nationalize' it completely to 'undeflate' the economy (i.e. liquify the place again)... say in five years and one ugly election after privatization. You think yen trade is crazy now, just wait.
I tend to be only self-employed when times are good. Once a recession (or a global financial crash) rears its head I find a full-time job and bank my self-employment income. I've been in this mode since Jan. 2006 and am currently hoping both sources of income survive the recession.
I think most can't pull this off - I can't. I have to be in position at the bottom of the recession to be able to tale advantage of the boom at the top. My 'sell cycles' are just way too long.
So the thing you do during the 'despair phase' of the down cycle is start lining up principles & making contacts with customers... when it POPS your already there and everyone else is trying to catch up.
By the end of the boom - I've been shoved out of they way by 'in-house direct' competition and am waiting for the next round of 'creative destruction' to send them away - it always comes though not on 'my schedule'.
Lotsa ways to skin a cat though.
Alo, you're missing the point. It is not written into law anywhere that that lower interest rates and loan modifications are anyone's right. You seem to take the moral high ground here, but that is far from the reality of what if even feasible. Why should the taxpayer bail out the greedy idiots who got cash-out refis that they didn't understand and couldn't afford. What's wrong with renting, anyway? You sound like the Bushies that touted homeownership for everyone. Since when is that an American right? And CW was not necessarily the lender on those loans, they are the SERVICER. Different business.
I'm not suggestion it's a right of all borrowers - and I'm not suggesting every borrower is entitled to a mod or adjustment -- but saying that a failed borrower doesn't fail in a vacuum - their loss affects other people not a party to the bad loan -- that means one way or another, taxpayers will foot their bill. I'd rather make the alleged "professionals" who knew better foot some of the cost of their bad buisness decisions, instead of foisting the results on me.
Requiring full income documentation may go a long way toward making people pay their fair share of taxes. Sounds good to me. I seriously wonder how much tax revenues would increase if people were motivated to bring their income out of the shadows in order to buy a house one day!
Mozo Maz,
Thanks for the link to the Charlotte story about Realtor involvement in the foreclosures taking place in that town. What story! I have a feeling that this is not the only town where this happened.
People who can't verify their STATED INCOME are not making what they say they are making.
Any self-respecting, self-employed person knows EXACTLY how much they make and knows EXACTLY how to document their income.
People who can't document their income are either doing so to not report their income or are just flat out lying about how much they make. In either case, they don't deserve to get a loan and don't deserve to buy a home.
But there's the problem with tax cheats: they can't qualify on their tax returns. So, fine. Buy a house for cash.
Bingo. And of course somebody who lies to the IRS, with all the threats that they can make upon one's fortune and liberty, is likely to lie to somebody without as much coercive power.
Banking exists to serve the general economy and the general public. It exists to grease the wheels of business and commerce. It does not exist to please anal retentive underwriters trying to justify their miserable existence by playing Sherlock Homes and solving the crime of applying for a home loan.
I thought that "anal retentive underwriters," were hired on behalf of those WITH money to make sure that they didn't actually LOSE money. It's the golden rule, those that have the gold, make the rules. Instead, as some level, the mortgage business has become about getting money by selling bonds that have an outer layer that appears to be of "truthy", bank sacntioned goodness but are constructed upon a core of fraud.
For us "hard money lenders", happy days are here again.
For years, we have shook our heads at the crappy loans that the institiutional lenders have been making. Loans we would not touch with a ten foot pole. Unfortunately for us, a lot of our bread and butter loans got sucked up as well.
Now that the box checkers are back in command, as they were in the 80s, we will be seeing loans that require taughtful underwriting, which includes actually getting to know the borrower and his/her individual situation.
Example in process: A permanently disabled single lady with one child is buying a home with two rentals for $460,000. She's putting $310,000 down. She has a $1mm settlement trust fund from an auto accident. Banks won't touch her because her credit went in the tank following the accident. Private money to the rescue (8.25% for five years and 2 points). By the way, we have never called a loan at maturity.
Most of our loans are less than 50% LTV. I mainly check tax returns, just to make sure that the borrower is filing, and paying at least part of his share the burdon. We service a rural area where many borrowers work for cash, in legal enterprises.
With a small stable of private lenders (trust depts and foundations), we are married to our loans. A friend at Well Fargo tell me that their loan officers can lose their jobs if the loans they originated develope a below par history. That they way is should be. But I guess, thousands have already lost their jobs.
Lee in Santa Rosa
Dear Tanta,
Have you read up on the Great Depression of the 30's?. How about the International Lending Boom of the 70's which culminated in the International Debt Crisis of 1982? How about the Fed under Paul Volcker and their actions to control inflation of the early 80's as written by William Greider in his book "Secrets of the Temple". Are you aware of and do you understand boom and bust cycles in markets? I assert that you do not.
You are knowledgeable but you lack understanding of the economy as a whole. I stand by my statement that you are a former underwriter (perhaps promoted to a VP) who carries an underwriter's bias to the extreme and a chip on her shoulder as I've seen underwriters take abuse that would cause any reasonable person to go insane. I was an underwriter once but figured that it was a dead end job that people do not appreciate. So I became an originator and I am much happier. Even in a down market, I am much happier. I am beginning to thrive as much of my competition is dropping like flies.
I even saved most of the money I made because I foresaw this crash approaching. I read history and books on economics. I actually own a book called "The History of Interest Rates". I have actually read it.
I have always hated sub-prime product and I was disgusted by the greed and stupidity that dominated this business in this decade. I can, and often have told people NO.
Stated income loans have their place, but not over 80% LTV. They usually charge a premium rate for the added risk of not being able to document the stated income. Like fire, they must be contained and regulated so that the house is warm but not on fire.
The hype and sensationalism going on around the mortgage meltdown has a dark side... Profit via demogoguery. Is that word applicable here? I think it may be.
I still like your website though....
"That is, they're taking risky loans, but instead of doing so with eyes open and docs on the table, they're putting their customers at risk of prosecution while producing aggregate data that appears to show that there is minimal risk in what they're doing. This practice is not only unsafe and unsound, it's contemptible."
If this is ture and proven in a given case it is at the least bad faith and perhaps could be used to void the obligations of the barower-- but I am not sure you can just assert that it is so across the board as a matter of law of fact.
I am no expert,but one thing I do know is that when banks loose money it tends to be other peoples money. So bad acting, bad faith and the like need to be exposed,but it does not help prevent the issue if it is exposed after the fact.
So prehaps the new regulator environment wiil need to impose personal criminal and civil liability on those who look the other way, as well as those who commit the underlying act of commision of omision.
4shzl, when you lie on a mortgage app you commit a federal crime and you take a huge personal risk. What if something had happened? What if your plan didn't work out?
AS I recall he did not lie he just added in his rental income as income-- as it meet the definition of taxable income it would not be a lie unless he claimed it was from another source-- we do not know if the app was that detailed.
Now if the bank excluded rental income from there calculatinons thats there right but if he gave them that info as well I am not sure it would be a lie- the bank needs to do its job as well. Now if this innoccent error could be shown to be a attempt to decieve then there might be an issue
INcome X ( all sources)
income from rental of morgaged property y
no lie here the bank needs to to its thing its no my job to fingure out what there standards are( or should be)
Jeez, she's on her soapbox about stated income loans and yet there's a big fat Ditech ad at the top of the page. Anyone see the discrepancy here? She preaching yet has no problem accepting ad revenue from a scum-sucking bottom-feeder company like Ditech. Nothing like having it both way, eh?