This type of legislation is exactly what the industry needs. For the most part, "Stated Income Loans" are often fraudulent (in my opinion). Here in Utah, if the income is overstated and the loan goes into default, the loan officer and PLM are as responsible as the borrower for committing loan fraud if the loan officer has seen any type of income documentation. It is commonplace for the loan officer to review income documents and determine that the borrower will not qualify. The loan officer will then just “state” the income to fit the loan. This is “LOAN FRAUD” and unfortunately many loan officers have been taught this way (or learned it on their own) and don't even realize they are breaking federal laws. I would rather do away with loan types that perpetuate loan fraud, they just don’t make any sense to me. Let’s look at some examples:
Real Estate agents and Loan Originators in Utah average about $35,000/year in commissions. Most of them claim they make 3 times that amount. The clerk at a store can’t really afford a $100,000 home but claims he make enough to purchase a $250,000 home. And now for some actual cases that I know about … A house cleaner states her income at $12,600/month and a Valet claims he makes $10,000, how do I get one of these jobs???
I believe the answer to the problem is "No Ratio" type loans. The borrower is not asked to disclose income information and therefore does not commit loan fraud. The onus is put upon the investor to implement guidelines to determine if the borrower has the ability to repay the loan. The underwriters can then determine by set criteria if the borrower appears to have the ability to repay the loan.
For instance: A borrower has previously had a $300,000 mortgage that performed well. It is not uncommon for that same borrower to be able to handle a $350,000 mortgage. On the other hand, that same borrower would most likely not be able to handle a $650,000 mortgage.
There are other aspects about a borrower that demonstrate the ability to repay a loan. A first time home buyer with good credit and considerable assets shows the ability to save. This goes hand in hand with the ability to repay a mortgage and this FTHB should be considered for a conservative sized loan. On the other hand, a first time home buyer with minimal assets and $100,000 in credit card and student loan debt with a marginal credit score is probably not the best borrower but in the past, if he states his income high enough, he can qualify for a rather large mortgage. These backwards type lending practices are what have caused the industry to lose BILLIONS of dollars.
There are literally hundreds of aspects and criteria to the borrower’s loan profile. From the recent events in the mortgage market, investors should have enough information to determine what type of borrowers can repay a mortgage and those that can’t. They could use this data to create an advanced algorithm and implement some strict and efficient criteria to determine who can borrow and how much they can borrow. It isn’t the LTV that needs to be restricted, it is the quality of the borrower that needs restrictions. There are MANY 100% LTV and CLTV “Stated Income” loans out there that are performing perfectly but it's not the DTI that makes these loans perform, it's the borrowers themselves. Investors need to look at these compared to the ones in default and determine what the differences are. Then they can implement guidelines that follow their findings.
It is not the income, DTI, LTV or even the size of the loan, it is the quality and experience of the borrower that ultimately determines the performance of the loan. In most cases, stating income to lower someone’s DTI so they can “qualify for the loan” is like putting a band-aid on a cut that really requires 12 stitches, sooner or later it’s bound to get infected.
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