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.
SMALL BUSINESS OWNERS
Among the customers that lenders are targeting are small business owners, whose personal income tax returns may not reflect their ability to repay a loan. Many keep income in their business to reduce their personal income tax obligation. Stated income loans are also often geared toward investors, who don't fall under the same rules imposed by the 2010 Dodd-Frank financial reform legislation.
Other lenders lowering their standards to win new business include Wells Fargo & Co, the biggest home lender in the United States, which said earlier this year it is willing to make loans to borrowers with credit scores as low as 600, down from a previous limit of 640.
The Dodd-Frank law said that, for all owner-occupied mortgages made in the United States, lenders must make sure the borrower has the capacity to repay, or face enforcement from the Consumer Financial Protection Bureau as well as consumer claims in court, where lenders could be liable for up to three years of finance charges and fees.
Ability-to-repay rules apply only to mortgages for people who will live in the house. That means there is potential for abuse if borrowers apply for the mortgages saying they'll rent out the property when in fact they intend to live there. Because these kinds of loans are not subject to ability-to-repay rules and require less documentation, borrowers could be talked into taking on mortgages they cannot afford, a lender at a large bank said.
The law, and the CFPB'S rules on the matter, will likely prevent lenders from re-embracing the worst varieties of stated income loans during the bubble years, such as so-called "ninja" loans, a near-acronym for "no income, no job or assets."
While even ninja loans could easily be securitized before the mortgage bubble burst, packaging non-standard home loans into bonds and selling them to investors is much more difficult now. Most stated income loans today are either held in lenders' portfolios or sold to private investors.
(Reporting by Michelle Conlin and Peter Rudegeair. Editing by Dan Wilchins and John Pickering)