San Diego lender allows 50% debt ratio on stated income loans

[powayseller]

I’d like to draw attention to the most risky part of this housing bubble: risky lending.

I love reading the posts at housingbubblecasualty.com. The author, who goes by SoCalMtgGuy, worked for a major San Diego lender. He saw the writing on the wall and got out of the biz earlier this year. If you have the time, go and read his blog to get the insider’s view of lenders. It is nothing short of amazing.

This week, SoCalMtgGuy wrote:
“With the ‘relaxed’ lending standards, the lenders I worked for would take a ‘full doc’ debt ratio of 55%…and a stated income debt ratio of 45-50% depending on the loan. ….you only need to gross about $42,600 per year to ‘afford’ a 400k loan.”

The last time I bought a home, I only qualified for 3.5 x income. Those were the old days I guess.

[powayseller]

From a lender, wiseguy:
We are starting to see plenty of people who’s ARMs are adjusting from a couple of years ago and cannot refi because of HELOCS and seconds that they took out. When there was huge appreciation it didn’t matter. Now appreciation has slowed and they are in a bad position.

SoCalMtgGuy writes:
“My biggest office that had over 100 loan officers just closed their doors last month. Most of these econoMISSEDs are tied to the industry, so they don’t have the integrity to tell the truth. Either that, or they are so far removed from the ‘ground level’ of what is really going on in most broker shops to see HOW people working fast food can buy 400k starter homes. Stated income loans have been abused to such an extent that the repurcussions will be felt for years.

If the banks had to hold these loans then this NEVER would have happened to this extent. When I was doing loans, our company would take a loan to the investor to see if they would buy the loan BEFORE we would approve it. This wasn’t done on all loans, just the ‘ugly’ ones. If the investor said OK, then the loan was made. Sometimes they would ask for other conditions, other times they flat turned it down.

I have had communication with several bond traders. What they told me is that there is so much money sloshing around out there, that people/funds/companies need a place to park it. They know there will be defaults, but the rate of return on the MBS is still way better than they can get in other places of the world.

I say yes…right now. but what happens if/when the massive defaults hit??? Same thing with the junk bonds is going to happen here.

Junk bonds became ‘hot’ items. Then the ‘junk’ that was backing the bond deteriorated to such a point that the whole thing crumbled. Same thing with mortgages. The quality of the borrower and loan deteriorated as the markets got ‘hotter’…and again, there will be hell to pay.

Just like people that were buying ‘bonds’ on crazy amusement parks in the middle of the desert…there are people buying mortgages on people who have little to no chance of ever being able to afford their mortgage when the paymnet adjusts.”

[Daniel]

Thanks for posting that, Powayseller. Regarding stated income loans, I have had a nagging question for a long time. So I am asking anybody in the mortgage biz who happens to be reading this blog: given that a recent comparison of (a) IRS returns to (b) stated income on mortgage applications showed large and systematic discrepancies, what percentage of buyers lied on the loan application, and what percentage lied on their tax return?

The quick answer is that everyone lied on their mortgage application, in order to qualify. However, I’m not so sure that this is always the case. There are big tax cheats out there, I’m sure, and “stated income” could be their entry ticket into a house.

So, if there is any mortgage broker reading this, what is your experience? Do you mostly see middle-class folks who whisper to you “I need to go no-doc, I can’t get the loan otherwise”, or do you see shady characters (drug dealers come to mind) who seem to have the dough but no way to prove it?

My guess is that most fall into the first category, but it would be nice to get an expert opinion.

Thanks,
Daniel

[Anonymous]

Hi Daniel,

There are many reasons why people would get a stated income loan such as:

1. They are commissioned and their income varies.

2. They are self-employed or own their own business. Their business expenses/tax deductions significantly reduce their personal net income.

3. They don’t qualify going full doc.

4. When two or more people are buying a home and the primary wage earner has poor credit, the secondary wage earner with the higher credit score goes stated.

5. Retired persons that would qualify is they were taking distibutions from their retirement plans but prefer not to.

6. Those involved in cash businesses.

Although I believe that stated income loans serve a purpose for certain borrowers, I also believe that they have been widely misused over the last few years.

[PerryChase]

I have a feeling that drug dealers would have the cash to buy a house (at least a substantial down).

I’ve talked to mortgage brokers and my feeling is that, the professor wrote in his piece, many homeowners are speculation the their own homes. Say two single sisters live together because the normally can’t afford 2 houses. They decide to “invest” in a house so they go out and buy a new house hoping to flip it. However, the market is stagnating and they can’t get out. They can refi once more at a teaser rate, until 2-3 year s from now, when they’re so much under water that they have to sell.

I’ve heard of mortgage brokers telling clients exactly want they need to make in order to qualify. Just about all buyers were getting the maximun house that they could qualify for. I’m not surprised at the study’s findings.

Also consider all the families who ended up with 2 primary residence homes who would normally qualify just one mortgage. They’re going to be up-the-creek when the investment property doesn’t sell. I believe that this second category is much greater than we realize.

[powayseller]

The website says that the mortgage broker is in cahoots with this. He has 15 attempts at adjusting the income in the computer, and keeps moving it up until the borrower qualifies. With a higher interest rate, and the fact that it takes only 10-15 minutes to gather your paperwork or a letter from your CPA to certifiy your business income, the obvious reason to go no-doc is to cheat.

Borrowers and lenders justified this, thinking that when the intro period expires, they will refinance at another teaser rate, or turn around and sell at a much higher price. With higher interest rates, dropping prices, and high debt loads, that dream has turned to a nightmare.

The lenders are paid commission and sold the loan to the MBS market. They have no skin in the game. Borrowers were living on false hopes of indefinite appreciation.

I wish we had some lenders on this forum. But check out the other site, housingbubblecasualty.com, and you will learn a lot about loose lending standards.

[Daniel]

Yeah, I wish we had more lenders posting here. We have good inside info on the realtor biz, as there are several of them pretty active on this site (thanks, all!), but no so much info on the mortgage biz.

I have been reading the site you suggest, and it’s very interesting. But lately the host has been busy doing other things, and the posts are few and far between.

[Author]

Posts