Danger of Stated income loans, 75% of borrowers face payment shock at least 50%

[powayseller]

“In 2006 97.5% of borrowers are likely to face a payment shock of at least 25% and 75% of borrowers could face a shock of 50% or more. These changes neglect additional shocks that would result from the repayment of principal because of current interest only payments!” – MBARL

Facts listed on MBARL website:

“Residential housing, 16% of GDP, is the largest sector of the economy.

A small sample of 100 stated income loans, found that over half lied about their income, overstating it by > 50%.

Last year, over 70% of Bay area loans were interest only or Option ARMs. Could it be similar in San Diego?

70% of Option ARM borrowers make only the minimum payment.

Half of ARMs made last year were NOT full documentation.

ARMs now dominate the subprime lending market. 37% of subprime ARMs made by non-agency MBS are stated income.

The President of MBARL warns about the dangers of stated income loans on his website. His main points are:

Stated income loans are associated with fraud, and started to become popular in 2002.

Banks originate these loans because they are profitable and then sell them to reduce their risk.

Fraud is encouraged by the banks.

Stated income loans help no one.

Stated income loans cost consumers hundreds of dollars a year because of higher interest rates.

Exotic loans originated with stated income are now causing foreclosures or forcing homeowners to refinance into negatively amortized loans.

Stated income loans are why home prices have skyrocketed. They have caused a large demand in the US housing supply.

Banks have sold their loans and have already made their profit. Investors will soon realize stated income loans are too risky and stop purchasing them.

Almost anyone can get a stated income loan for $950,000.

Stated income loans allow tax cheats to purchase homes easier.

Stated income loans are not always faster than fully documented loans.

Appraised values are often inflated. Underwriters are basing their decision on inflated home values, inflated incomes and inflated assets. The only “real” number is the FICO (credit) score. This is why underwriters have become focused on FICO scores.”

Schahrzad Berkland

[powayseller]

The letter in its entirety, from the MBARL website.

Another snippet:
“Some banks doing business nationwide are reporting that close to 80% of loans originated are stated income loans.”

We already know that most stated income loans are “stated” because the borrower is lying about his income. Can you imagine what will happen now that 80% of loans originated are made to borrowers who are not able to make their payments?

“Between 40-50% of all outstanding loans in the United States are owned by the federal government.”

“Consumers have access to loans where a home can be purchased with 0% of a down payment, stated income AND stated assets. This same loan will allow a very low credit score of 620 (680 is average). Lastly this loan program will allow someone to borrow up to $950,000 dollars.”

Without the exotic lending, my predictions for a housing price bust would be 25-30%. But this lending stuff is downright scary.

Now, why do people state their income? Why would anyone put themselves into a situation of a higher mortgage than they could afford?

Let’s get our answer from the pro, SoCalMtgGuy at housingbubblecasualty.com

“Making a low teaser payment for 2, 3 or 5 years only works when prices go up. Many people are going to have that sick feeling in the pit of their stomachs when their teaser ARM adjusts and their property is worth 100k less than they ‘paid’ for it….and there is nothing that the great econoMISSED Leslie Appleton-Young can say to take that feeling away. The thinking was, “Why should I get a fixed rate loan when I can just ’state’ my income, not put any money down, and make 6-figures in appreciation a year?” (SoCalMtgGuy)

Schahrzad Berkland

[PerryChase]

Yeah, the exotic loans are one big factor that’ll cause the crash we’re expecting.

[PD]

During a conversation recently with my mother, she told me that she wished she had caught the RE bubble/appreciation wave sooner than she did because then she could get a HELOC and use it to buy stuff. GASP! No doubt this is exactly what all of her friends have done. Forget about retirement, let’s party like it is 1999!!

[Bugs]

My wife’s best friend is a consumer loan officer at one of the credit unions. She sees it all. According to her (and I’ve heard this from other bankers) there are lots of seniors who might appear to have money but actually have massive debt. They’re not hoping to have enough money to last – they’re hoping to have enough credit to last.

[PerryChase]

Bugs, my cousin who’s a banker also tells me the same thing. Many seniors have already given away wealth to their children to help them buy houses and cars. Could it be that retiring boomers who downsize will create a glut of big houses?

[Author]

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