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No income, no loan modification
October 14th, 2009, 7:08 am · 43 Comments · posted by Mathew Padilla
Here’s a quote from John Courson, president of the Mortgage Bankers Association:
“You can’t modify someone if they don’t have income or a job. We have to be realistic going forward. If we are going to play a numbers game, we are going to see a smaller percentage of borrowers in default able to be modified. It’s an unfortunate and difficult fact we are going to have to face.”
The quote comes from the Denver Business Journal, and I first saw it on economics blog Calculated Risk, which points out maybe the industry should not have made NINJA loans — or loans to folks who did not verify income, job or assets.
Anyway, Courson says the complexity of the paperwork required to modify a loan, rising unemployment and depressed home prices all mean many folks will lose their homes in coming months.
The MBA wants to create a think tank of folks working on the dud-loan problem. But Courson may also be preparing the public for more foreclosures.
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Essentially, Obama’s mods are no income, no documentation during the trial phase. They don’t require documentation until right before the mod is finalized, so the borrower could be in the program for 3-5 months before they have to prove anything. That’s why even though 500,000 trial plans have been started, don’t expect that many mods to close. The fallout rate will be very high for banks that qualified borrowers on stated income. BofA has gotten a lot of heat for not getting more borrowers on trial plans, but they were being smart by requiring full income documentation before a borrower could start a plan with them.
Well said, another race to the bottom due to government pressure. The banks who tried to do things the right way by gathering documentation upfront were shamed into fast tracking the applications, resulting in wasted time and effort.
The plan will not work if the govt/banks pick winners and losers.
Right on Liar Loan.
I can tell you Chase/Wamu get income docs up front.
No they don’t tracker. Not for Obama mods. You ate wrong.
Um….I know this for an ironclad fact.
In a year of obvious statements with regard to mortgages… this may take the cake. Obviously 0 income makes your DTI a divide by 0 error, and therefore you wouldn’t qualify (or likely be able to pay) for any loan at all, modified or not.
Things like this will happen when you use actual underwriting guidelines. How long until we start seeing stated income modifications?
This story is pathetic….sorry. There is a vast difference between having no income and not verifying income. It’s as if the author thinks all people who have reduced doc loans do not have jobs. Can the issue be more muddied than it has been here today? The overwhelming majority of reduced doc loans are performing.
I can’t believe anyone is still defending stated income loans. They invite fraud and are a key reason why we are in this mess. I hope one day we have a complete prohibition on stated income loans.
Matt, you read far more into my post than what is there. I commented on the lack of cohesiveness in this story. You attempted to combine vastly different issues. And since you want to go there: stated income loans - with proper guidelines (low-ish LTV) are completely legitimate. You can get hard money on anything at 65% LTV. It’s all about the proper management - and pricing - of risk.
But too few used “proper management” during the boom. It will happen again.
Yes they did, and that is why they need to hold on to an interest.
I can’t believe anyone is still defending stated income loans.
Matt-
As a self employed business owner, I can assure you there is a valid need for stated income loans. People like me are doing everything we possible can to reduce our tax liability … this is generally accomplished by expanding our business expenses, and therefore reducing our income.
If you go back a few years, there was a huge tax deduction for purchasing an SUV with a GVW exceeding 5k lbs. You could literally buy an $85k Range Rover and reduce your taxable income by that very amount. There’s all kinds of tricks in the tax code that allow business owners to reduce their income significantly.
The problem with stated income was when they started allowing fire fighters , cops, teachers, etc, to bid up real estate, saying they made $200k, with a 670 fico, with a $20,000 down payment.
Being self employed/a small business owner is no justification for stated income loans. Such borrowers should provide their tax returns, and explain their situation.
Color me surprised, I agree with Lee on something! For years (and at all times for certain lenders), you DID have to be self-employed to do these loans. The other somewhat valid usage is your W2 person who has a side gig, but for straight-up W2 income, it does not make sense. There is risk in all lending. Assessing it and pricing it is the key. And no, this mess is not about stated income, except to the extent it helped propelled values beyond sustainable numbers. This mess is about valuations……and little more.
Well, there is one more thing it is about: short term loans with too much payment shock allowed.
Why should you be able to tell Uncle Sam you had little or no “profit”, then get a loan saying I bank $10g’s a month?
You can have it both ways. Report your true monthly net to the IRS, or don’t get the loan. Simple!
You know what, Lee, small business owners are known to manipulate their income. We never know for sure how much you really make. Don’t use that as excuse or reason for stated income. How much income/profit are you reporting to the IRS, that should be the income used to qualify your for a loan.
Matt, I agree with 100% on this.
If they have the income why do they use a no doc loan? You know they say the prisons are filled with innocent men.
Because it’s easy…..and free a lot of the time.
Tanta, may she rest in peace, said it best on Calculated Risk (if you read all the way to the end you see why self-employed getting stated income are setting themselves up for criminal prosecution):
http://www.calculatedriskblog.com/2007/09/whats-really-wrong-with-stated-income.html
Apologists for stated income always bring us back to this so-called “classic” loan involving a self-employed borrower who “needs” a stated income loan because income is hard to verify or, you know, the tax returns don’t “show the whole picture.” This is never, really, actually, an argument about why stating rather than verifying income is necessary, although it pretends to be. It’s really about why people with volatile income or a preference for not paying taxes on their income should get the “benefit” of financing on the same terms as wage-slaves and people who don’t cheat on their taxes. That argument will end just before the sun freezes, so I’m not at all interested in participating in it.
My big problem with stated income lending has never really been about the wisdom or importance or lack thereof of making mortgage loans to the self-employed. My problem has to do with elemental safety and soundness of lenders, in a way that may not be obvious, so I’m going to hammer it for a bit.
Let us take the “classic” stated income hypothetical loan: the borrower is self-employed, has been for years and years, is buying a house, and has some trouble verifying income. Imagine that everything else about the loan is just groovy: high FICO, big down payment, lots of cash reserves after closing, scout badges out the wazoo. I’m not “stacking the deck” here. This looks like a super loan in all respects, except that question about whether there is sufficient current income to service the borrower’s debts, or reason to believe that current income will last long enough to get past payment three or so.
We can make this loan in one of two ways:
1. We go “stated income.” The borrower provides no tax returns, and just happens to state income sufficient to produce a debt-to-income ratio of 36%, which just so happens to be the maximum traditional cut-off for “acceptable risk.”
2. We go “full doc,” and the underwriter does a complete income analysis. In writing, on the sacred 1008 (the Underwriting Transmittal in the file), the underwriter fully discusses the business and its cash flow, noting that a 24-month averaging of income is producing a DTI of 68%. However, the underwriter believes that cash flow trend is positive, that there are documented reasons to believe it will continue, that the borrower has sufficient personal cash assets not needed for the business to supplement income for debt service, and hence this high DTI is justified. The 1008 of course is countersigned by a senior credit officer, because it is an exception to normal lending rules–the DTI is too high–and also because we are doing our required Fair Lending monitoring, making sure that the exceptions we make are made fairly, not just to rich white folks or folks in certain zip codes, but to anyone who qualifies for them.
Either way, it’s the same loan, but Number 1 was more “efficient.” Same risk, right?
Wrong. The default risk of the individual loan is only one risk. There’s another huge looming risk created in Number 1 that we keep ignoring.
What happens if the loan performs just fine for a while? Well, if it’s held by a financial institution, that institution will be subject to periodic safety and soundness and regulatory compliance examinations. One major point of those exams is to make sure the institution is holding sufficient reserves and capital against its loan portfolio. Among other things, an examiner might look at some reports of loan activity. And on reports, Number 1 looks like a low-risk loan with a 36% DTI. Number 2 catches someone’s attention.
But, you say, wouldn’t an examiner’s attention be caught by the fact that Number 1’s “doc type code” is stated, making it the kind of apparent higher risk worth a look at the loan file? Well, not if we started this whole thing by having assumed that there’s no additional risk in stated income if other loan characteristics are good enough. The whole circular argument–stated is OK for OK loans–means that this will be considered one of those “not high risk” stated income loans, because all the other data points (FICO, DTI, LTV, etc.) look good.
The odds, therefore, that Number 2 would get further review are high, because it stands out as an exception loan with a high DTI. The odds that Number 1 would get further review are no better or worse than random.
And for any other purpose, such as counterparty due diligence, investor approval, um, servicer ratings, etc., that relies on aggregated data, Number 1 isn’t going to make the institution’s average DTI look worse, while Number 2 will. It matters if you write enough of those loans.
And what does the institution risk by having an auditor or examiner take a look at the file for Number 2? Why, the risk is that the auditor or examiner will not agree with that analysis, or will find the documentation unconvincing, or will be troubled by an apparent over-willingness to make exceptions or something. This is how the game is played: the loan shows up on some examination problem report, management is forced to respond with a memo defending its underwriting practices, and possibly even more loans get reviewed as the examiners seek potential evidence that whatever they don’t like about that file is part of a pattern. Any stray skeletons you might have in your loan file closet (and everyone has a few loans they rather wish they hadn’t made, or had handled better when they made them) get dragged out onto the conference room table.
Number 1, in other words, doesn’t attract scrutiny. And what happens if it actually goes bad?
Well, with Number 1, it’s “clearly” the borrower’s fault. He or she lied, and we can pursue a deficiency judgment or other measures with a clear conscience, because we were defrauded here. We can show the examiners and auditors how it’s just not our fault. The big bonus, if it’s a brokered or correspondent loan, is that we can put it back to someone else, even if we actually made the underwriting determination. No rep and warranty relief from fraud, you know.
With Number 2? There is no way the lender can say it did not know the loan carried higher risk. Of course, higher-risk loans do fail from time to time, and no one has to engage in excessive brow-beating over it, if you believed that what you did when you originally made the loan was legit. If you’re thinking better of it now, at least with Number 2 you have an opportunity to see where your underwriting practice or assumptions about small business analysis went wrong.
For anyone using loan servicing databases to research risk factors, of course, Number 1 might cause the conclusion to be drawn that stated income is a risk independent of other loan features. Number 2 might cause the conclusion to be drawn that 68% DTIs just don’t work out well on the whole. You could, of course, go back and update the system with Number 1, after it fails and your QC people get around to finding the true income numbers, so that the database will show the true ratio of 68%, but that gets you to the catching-examiner-attention problem above.
And what about Fair Lending compliance? Insofar as a lot of stated income lending is just a way around having to make a formal exception to your lending policies, it’s a good way of hiding certain patterns in terms of who you let get away with what. We do ourselves no good by thinking that the current environment–in which any marginal risk can get a stated loan–is the permanent environment. Structural ways to avoid showing your exception patterns invite abuse.
I have said before that stated income is a way of letting borrowers be underwriters, instead of making lenders be underwriters. When I say make lenders be lenders, I don’t mean let’s not regulate them. I have no problem with regulatory examinations; far from it. I am someone whose signature (usually, in fact, as that second sign-off) has appeared on exactly these kinds of loans, and whose butt has been on the line for them. We all face having loans we approved go bad; the world works that way. What the stated income lenders are doing is getting themselves off the hook by encouraging borrowers to make misrepresentations. That is, they’re taking risky loans, but instead of doing so with eyes open and docs on the table, they’re putting their customers at risk of prosecution while producing aggregate data that appears to show that there is minimal risk in what they’re doing. This practice is not only unsafe and unsound, it’s contemptible.
We use the term “bagholder” all the time, and it seems to me we’ve forgotten where that metaphor comes from. It didn’t used to be considered acceptable to find some naive rube you could manipulate into holding the bag when the cops showed up, while the seasoned robbers scarpered. I’m really amazed by all these self-employed folks who keep popping up in our comments to defend stated income lending. It is a way for you to get a loan on terms that mean you potentially face prosecution if something goes wrong. Your enthusiasm for taking this risk is making a lot of marginal lenders happy, because you’re helping them hide the true risk in their loan portfolios from auditors, examiners, and counterparties. You aren’t getting those stated income loans because lenders like to do business with entrepreneurs, “the backbone of America.” You’re not getting an “exception” from a lender who puts it in writing and takes the responsibility for its own decision. You’re getting stated income loans because you’re willing to be the bagholder.
And no, this doesn’t particularly do much for my assessment of your business acumen. Frankly, I’d rather see your tax returns and your P&L and hear your story about how investments in the business you have made, with the intent to grow it wisely, have limited your income or made it highly variable, than to see you volunteer to risk prosecution for fraud because, you know, you really need to buy a house. Do you do business with people like that all the time? Are you typically attracted to deals that are claimed to be perfectly legitimate, except that it’s important not to fully disclose certain facts to certain parties? Does that maybe explain some of your accounts receivable problems and your pathetic cash flow? It certainly seems to be explaining some lenders’ cash-flow problems at the moment.
This isn’t just an issue for regulated depositories. All those claims by securities issuers and raters about how we had no idea that gambling was going on in this joint are directly comparable. The tough news for the self-employed “respectable” borrower is that I don’t care if you’re individually willing to play bagholder: you can’t afford to underwrite that collective risk. We have a major credit crisis that’s proving that.
How is this not solved by lending at acceptable LTV levels? How would this not be solved by flagging loan #1 appropriately? The answer is it can be solved - easily, in fact. Many types of lending, from autos to credit cards do not go into a person’s income documentation, and especially not tax returns. Have you ever seen a 300 page tax return? They are not pretty. Where are the underwriters/CPAs with the skills to assess difficult returns? How long would such an analysis take? This is not practical and that is why we have moved away from it. Virtually all risk is quantifiable and manageable.
Tanta answered by one of my questions:
“But, you say, wouldn’t an examiner’s attention be caught by the fact that Number 1’s “doc type code” is stated, making it the kind of apparent higher risk worth a look at the loan file? Well, not if we started this whole thing by having assumed that there’s no additional risk in stated income if other loan characteristics are good enough.”
That is a major flaw. There is no doubt that there is more risk with stated…..until you cross a very sound LTV threshold. At the end of the day, there is risk in every loan. Everyone can have a change in circumstances.
I agree with you on one point - I would outlaw no, or low, money down mortgages before I outlawed stated income. Having at least 10%, if not 20%, equity in the game should be required of the borrower.
It should also be required of the lender. Originate and sell, which is still the predominant model today, is a disaster.
There are three Cs to sound lending: collateral, capacity and creditworthiness.
A low LTV is only good for collateral.
Stated income by its very nature corrupts the other two.
Stated income does not corrupt credit either. At best, it’s capacity and that is assessed by looking at the big picture. Things like assets consistent with your stated income are big clues.
Matt, I strongly disagree with you that low LTV does not cure all ills. It, by definition is self-insurance, credit enhancement. There is no problem that addtional credit enhancement cannot solve.
I agree with Tracker on this. I’ve studied this in the past, and an additional 10% down payment is enough credit enhancement to put stated income on the same playing field with full doc.
So if you have a 20% down full doc, a 30% down stated would perform comparably. It would also provide a strong incentive for a borrower to fully document income in order to avoid the stricter down payment requirement.
see my reply below to Liar Loan’s other comment.
And just to put the nail in stated income’s coffin, here’s a clip from an earlier post by Tanta:
http://www.calculatedriskblog.com/2007/08/just-say-no-to-stated-income.html
This is a mortgage loan. It is the largest debt most people ever contemplate. It has, as we have seen lately, not just profound personal repercussions, but social and political and macro-economic ones, as well. It should be time-consuming, and it should be more expensive, in terms of transaction costs, than getting a $200 Barnes and Noble Master Card at the counter so you can get 10% off your copy of Elvis, Jesus, and Coca-Cola. It does not have to be draconian, just sensible.
Stated income is never sensible. Guidelines that take into account differences in qualifying income or ratios for young people, first-time homebuyers, people with sporadic income, people with lots of cash assets, etc., have always existed and will (if we get through the crunch that stated caused, that is) continue to exist. But those guidelines put the onus on the lender to make an occasionally difficult decision and justify it to the investors, the insurers, the regulators, and the public.
This “stated” thing just pushes the “responsibility” for foolishness back onto the borrower, who cannot pay the cost of his foolishness. That is the situation we are now in. You all can get as morally-disapproving of these borrowers as you like. These borrowers cannot pay the cost of their mistakes. That was the whole problem. It is still the whole problem.
Now we’re all paying for it one way or another. And someone calling himself an expert on the mortgage business wants to continue to allow borrowers to underwite their own loans, and lenders to continue to pretend we don’t know what this is all about.
The only sane policy is to require verification of any income used in qualifying. That does not mean that Congress writes the rules that define “qualifying” in all cases. Let lenders be “lenders.” But let’s quit letting borrowers be “lenders except for the fact that it isn’t their money.”
That is one person’s opinion. There is no issue - none - that additional down, i.e., self-insurance cannot solve. Tanta was not a god.
Agreed. Requiring 20% down payments across the board, like the not-so-old days 10 years ago, would have prevented the entire crisis.
Underwriting is not an exact science. That’s why down payments have always been the surest way to limit lender risk. Anything beyond 80% LTV used to require costly MI payments to cover the additional risk. Getting away from that standard is what invited excess risk taking and carefree borrower behavior. Even unsophisticated borrowers understand that a nothing down loan represents very little risk to themselves if they can’t afford the payments.
Sad to see anyone else defending stated income.
1. How long will the bigger down payments last when the next boom arrives? Have we learned nothing?
2. Common scenario: someone sells house A to buy house B. The sale of house A provided enough for a big down payment on house B. But house B is worth a lot more than house A. So the buyer is now making payments on a much bigger loan. With stated income the buyer could qualify for the bigger loan and ride the road to riches. Sadly, when the housing market turns buyer is suddenly under water on house B and gives it back to the bank.
Matt,
I think you’re focusing on a symptom of the financial crisis, and not the true illness– overleverage. You could choose to focus on any number of products besides stated income… how about interest only? or negative amortization products?… but banning individual products will not prevent another financial crisis. Each of these products represents a risk that should be counterbalanced with a corresponding credit enhancement.
You can combine maybe two of the following risk characteristics: bad credit, nothing down, interest only, negative am, etc. … and still manage the risk. The problem is when you combine 3 or 4 of those risk characteristics that you have a loan with a high probability of failure. This was the underwriting problem from 2004-2006. There was too much risk layering, but somehow people thought that the risk could be sliced and minimized through securitization.
There are very few stated income loans since 2004 that didn’t have some crazy mix of risk layering involved. So you really can’t isolate this one product and say that it caused all the damage.
Liar Loan,
Stated income facilitates excessive leverage. It allowed both sides of a transaction to get a destructive loan finished. It’s like radiation and cancer. Yes cancer is the illness but radiation can cause cancer if one is exposed often enough.
Besides, it also invites fraud, and puts the underwriting burden on the borrower when lenders should underwrite loans.
We couldn’t disagree more on this issue.
You acknowledge that this is one person’s opinion, yet you continue to make issue of it and criticize. What is your problem? Don’t like it when people disagree with you? Get off your high horse
Nice to see someone advocating personal responsibility - a rare thing in CA.
And really, how hard is it to provide a copy of a tax return…. Answer: not at all.
I agree with Matt. Stated income has enticed and allowed a lot decent, good people to make lousy financial decisions with their houses.
Ummm, just to make sure your readers are clear.
Wamu/Chase does require ncome documentation for a loan modification to be considered, ask all the people who sent it over and over again and then denied due to lack of income.
BofA does as well, not as in depth but it is required, generally speaking the homeowner must prove they have an excess 10% each month to qualify.
Unfortunatly, the lenders introduced a bad product at the wrong time and the homeowner is the one loosing.
Maybe I am a bit to simplictic but after negotiating contracts between manufacturers and retailers for ever. If a retailer buys a product from the mfg. they normally negotiate some type of buy back program or mark down money if the product does not sell. Believe me if a retailer needs to reduce pricing the first person they go back to is the Mfg.
The two work TOGETHER to come to a solution, because no one wins with excess inventory, etc. They are partners!
If lenders looked at housing the same way, many homes would be saved. Lenders can write off the loss of short sale but not the loss of modification thus unwilling to reduce principle. With the homeowner lack of income vs. the high value, the numbers just will not work.
However, if they took a clue form the above mfg/retail scenerio and took some responsibility for this mess then many homes would be saved. Let’s not forget this is peoples homes we are talking about!
Its Possible, Comparing the scenarios of a mfg. granting some type of buy back program or mark down money if the product does not sell is like comparing apples to oranges.
Why should the bank take a hit because a borrower could not meet their end of the signed agreement?
So we are talking about peoples homes? And? Other then cost how different is a home from a car. If you dont pay it gets repossessed. People place to much value in material things. I know I sound cold but losing a home is an awful thing to go thru but its not the end of the world it doesnt mean these people will be on the street, they can rent.
Lets not forget that some of these borrowers are at fault as well. I am not talking about those that are in trouble due to job losses (these are the ones that should get the help if it is possible) I am talking about those that abused their home as a personal ATM. Those that bought more house then they could afford. Those that didn’t bother to read the loan docs they were signing.
Those that claimed “I didn’t understand the meaning of what I was signing” or “Well he was such a nice guy I just trusted him”
And of course you got to love those stated income loans.
People need to get a clue before they buy a home, there is no equity guarantee. There is no stupidity protection clause in the loan docs. Take the time needed to make the right loan.
Bad things happen; sometimes they are well deserved (see Karma) most of the time it isn’t.
I do agree that banks should be helping those that deserve and can be helped but with the abundance of stupidity and overstock of laziness most of those that are seeking help don’t have a chance because they don’t want to do the work needed to receive the help the can get or they wont face the fact that they are so deep underground that there is no way the bank can help them.
Sorry but some people just need to realize when its time to let go. Life is short and a person’s life shouldn’t be about stress. They should take the credit hit so they start rebuilding their lives.
Well, it is sort of the typical can’t have your cake and eat it too, isn’t it?
I mean if someone plays a lot of games with their tax liabilities, and doesn’t show income they made, because they went out SPECIFICALLY to reduce taxes by buying some atrocious thing that in terms of their business, wasn’t really needed, or justified, good for them, however, what you aren’t paying tax on you can’t later try to finagle actually WAS income. Pick your poison. You either acknowledge your income and then can at least prove you had some– OR you find ways to shelter it, but then you’ve hidden it too well to help you if you’d subsequently WANT to show it. Can’t have it both ways.
I’m with Tracker — only ore so. Uaually brrowers get a loan with too high an LTV. Anyones’ circumstances can chnage. The low LTV protects both lender and borrower. Have you seen the following:
————————————————————————–
The most important article you can read this weekend is economist Stan Leibowitz’s analysis of loan level data on 30 million mortgages. His conclusion is straight-forward: the most important driver of foreclosures is homeowner equity. This means that the loans most likely to default are high loan to value, low-down payment loans.
–
Equally arresting is the list of things we’ve come to associate with the boom that make very little difference on foreclosures. Subprime lending–nope. Teaser rates–not the problem. Liar loans–just move along. Predatory loans–sorry, kids.
–
It’s the low down payments
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http://www.businessinsider.com/zero-money-down-not-subprime-led-to-foreclosure-crisis-2009-7