Mortgage applicants who can’t provide tax returns or pay stubs to show their income are getting stated income loans again as companies such as Unity West Lending and Westport Mortgage chase customers they can no longer afford to ignore.
Lenders say these aren’t the same products as the so-called “liar loans” that were pervasive before the housing bust. Instead, the loans are going to borrowers such as small business owners or investors buying properties they intend to rent who can demonstrate an ability to repay, verifiable through bank or brokerage statements. Lenders said they look for enough assets to pay six to 12 months of payments, while also demanding high down payments to reduce the chance of default.
“This is not a return to the wild and wooly days of, if you fogged the mirror, you can have a loan,” said Paul Lebowitz, founder of Westport Mortgage. “They have a smarter edge to them now.”
Some rival lenders said the stated income loans on offer could be abused if borrowers fudge bank statements or don’t have enough money to repay the loan. None of the three biggest banks offer them. Sam Gilford, a spokesman for the Consumer Financial Protection Bureau, said the agency is concerned, though he wouldn’t say whether it is investigating them.
The CFPB’s rules don’t give specific minimums for assets required to demonstrate an ability to repay a mortgage, but critics said a year’s worth of payments for a three-decade loan may not be enough.
“It’s easier to falsify bank statements than income tax returns,” said Julia Gordon, director of housing finance and policy at the Center for American progress.
To avoid the housing-bust taint, the new stated income loans are being called such things as “alternative documentation loans,” “portfolio programs,” “alternative-income verification loans” and “asset-based loans.”
Borrowers usually have to have credit scores of about 700, though some lenders, like San Jose, California.-based Western Bancorp, will accept credit scores as low as 620. Credit scores range from 300 to 850, with 640 seen as the line between prime and subprime. Borrowers typically pay one-half to three-quarters of a percentage point above conventional mortgage rates.
Jae Chang, president of Los Angeles-based National Mortgage Service, started offering stated-income loans five months ago. “We are targeting those borrowers who have excellent credit, and a lot of liquid reserves, but who are having difficulties proving their income,” he said. National Mortgage Service is doing $15 million worth of stated-income loans a month.
Compared to the roughly $1 trillion of U.S. home loans anticipated this year, the stated income mortgage volume at National Mortgage Service is tiny. There is no available data about how widespread stated income mortgages are, and experts said that any growth in these products is off a small base.
But the shrinking mortgage market is prompting some lenders to expand their potential pool of customers. The MBA’s forecasts for this year’s mortgage lending volumes are down 30 percent from 2013 levels. Volumes started falling last year as rising rates cut into demand.
Read more at Reuters