Is 2014 the year stated income and other exotic mortgages will return to the market? Do stated income loans exist in the current mortgage market? If so, why are they being allowed back? Who should consider using them? What precautions should be taken when considering a more lenient property loan?
The majority of the news headlines over the last year have continued to warn that stated income loans have gone for good, and borrowers should expect larger and larger down payments, with even tougher underwriting requirements. It’s easy to understand the motivations for this. While there has been much debate over what new mortgage rules will actually play out like, writing sensational headlines and motivating would-be borrowers to move fast has big benefits for media corporations and real estate professionals.
Prospective home buyers and homeowners hoping to refinance have had these assumptions confirmed when they have attempted to apply for home loans. Others might have found it a lot easier than they originally expected. With cash purchases pushing almost 50% of U.S. home sales, some are confident in an equity rich market, while others, like one University of Maryland professor, call the trend a sign of a flaw due to tight credit.
A May 21st, 2014 Bloomberg News report also shows that regulators and enforcers are finally catching up to the fact that much of the recent crises stemmed from issues at the top of the food chain, not particular loan products which have been blamed in the past. One official said examination of mortgage bonds showed “improper actions,” “with almost every” deal. In other words, it wasn’t necessarily issues at loan origination that were the problem, but in the fraud and manipulation on the back end at the bank. Acting Inspector General of the FHFA, Michael Stephens, describes current investigations at this level the “fifth inning.” His office indicted 82 people in the last 6 months alone, with many more to come.
Of course, there were no doubt some borrowers handed stated income loans or exotic mortgages which shouldn’t have been, and many that didn’t really understand what they were getting into. Others were coerced into abusing them. However, many of these types of home loan products still have a valuable, and essential role in the housing and mortgage markets. With the economy still flat, the government really needs the housing and mortgage industries to take off and prop up, and propel everything else. Options are running out, and forcing a loosening of mortgage credit may be one of the few tools they have left.
Bankers and fund managers are going to have to make more of these loans, as well as accommodate borrowers with lower credit scores if they want to keep up earnings for their organizations and remain competitive.
Many individuals need these loans too. Others will refuse to borrow unless they have options like stated income, or stated assets. Plenty of self-employed and affluent real estate investors and home buyers lack the documentation to prove all of their income, or don’t wish to undue the many thousands they’ve spent on asset protection.
Stated income loans are coming back to the mainstream. To some extent, they have been available throughout the crisis via more obscure lenders and firms like Alternative Mortgage in Boca Raton. Now, going beyond the revival of true hard money lending, mainstream mortgage lenders are offering stated income, foreign national and other loans for bulk rental portfolios like Rental Home Financing in Indiana. Some brave asset management firms in Florida are even publicizing these loans for individuals and residential uses, especially at the higher end of the market.
Right now, LTVs may remain limited, but will expand on confidence in values and proof in performance. When legal and possible, use them. However, make sure to use them right. Know the boundaries and anticipate the ramifications of future regulatory changes. These are not ‘liars loans,’ but provide a valuable service to those light on paperwork, or who simply don’t want the hassle.
