Unbelievably, the No-Doc Loans Movement Gains Steam 16 comments
-
Font Size:
-
Print
- TweetThis
Like cockroaches, the idea that somehow, some way, people who can’t document their income should 
nevertheless be given mortgages just can’t be eradicated. The movement to resurrect this monster is gaining steam.
From Clusterstock:
Realtor.org: No-doc loans are particularly hard to get, locking out people whose incomes are derived from investments or who are able to tax-shelter significant dollars.
The California Mortgage Bankers Association spokesman Dustin Hobbs says the industry understands that banning most alternative financing isn’t the long-term answer.
“It’s a reaction to the current environment,” he says. “There’s such a lack of appetite for risk right now in general that any product viewed as having any sort of risk at all has a tough hill to climb.”
Chris George, president of CMG Mortgage, predicts that no-docs and other nontraditional loans will be back within the next six months as lenders gain confidence. “As with injuries, as with your credit, as with the economy, time heals all wounds,” he says.
Parse what you read here. The rationale offered for no-doc loans is that people who make money from investments or who are able to shelter their income from taxes need these loans. The implication is that these people can’t prove their income. Well that’s true if they don’t file income tax returns.
The simple fact is that an income tax return will show both your pre-tax income and your income tax liability. If you have significant income from investments it goes right on the front page and then gets explained in Schedule D, I believe. Those who have significant income also list their gross income and then via a number of different schedules utilize various parts of the code to reduce their tax liability. It’s a relatively simple procedure for either type of borrower to ascertain the actual after-tax cash flow that the borrower has available to service his proposed mortgage obligation.
The common complaint of the no-doc borrower has always been that his Schedule C doesn’t really reflect his true cash income. You see, because he’s able to itemize expenses he is able to inflate them to an extent that his income tax liability is much less and one should not really underwrite the loan based on the income that the business shows on the Schedule C — wink, wink.
What this guy is telling you is that he cheats the government and you should therefore assume that he’s playing square with you. Well, we know how that worked out.
I certainly hope mortgage broker Chris George is wrong about these products making a comeback in six months. If he’s not, let me make a suggestion. Every no-doc loan should be subject to rigorous audit and if any irregularities are found, both Mr. George and his client should face criminal fraud prosecution.
Lord, can we please learn something from all of this!
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 16 comments:
Sir, you ask too much.
(That was meant to be a sarcastic joke by the way)
I can't fathom how No-Doc loans can even still be legal anymore.
> money from investments or who are able to shelter their income
> from taxes need these loans.
So...before, we misused these loans to let poor people buy houses.
Now they want to misuse them to help rich people and tax evaders?
How is this an improvement?
Seriously, we MUST cut through the double-speak here.
The ONLY reason somebody could not document their income is because doing so would expose them as EITHER: a) criminals or b) liars.
There's a reason they call these things "liar loans".
Anything legitimate--ANYTHING--can be "documented". If you're income has an "unusual" source then say what that source is. It's really quite simple. There's usually a place in any loan application for "other income" and plenty of room to explain. Legitimate income can be proven (bank balances, signed letters from customers/employers, etc.).
Don't let the NAR tell you any different. There are no "technical reasons" for liar loans. This is a transparent attempt by the NAR to allow their member's incomes to be supplemented by illegally obtain cash or pure fraud (i.e. no income at all).
Since the NAR and the banks KNOW that ALL loan losses will be paid for by the American tax payer, they have NO INCENTIVE to avoid losses. ANY business is good business in this new world we're in.
OP
It is that a combination of investment & self-employed income is seen by the lender as being extremely unstable whether it is or isn't. A salary is seen as very stable, even though an employee can easily be fired in this environment. I do think that this country is rapidly becoming more hostile to those with the audacity to set out on their own.
If no-doc loans make a comeback it will only prove once again that moral hazard is real. Its not just some conservative spin to try to stop compassionate democrats from helping people out. If it happens again I fear that liberals calling for more regulation may be right. Heck their might be calls for the government to nationalize all banks and run the banking system. They would be half right in calling for that. If the private banking system is going to systemically ignore risk and place the error for not doing so on the shoulders of the tax payers why shouldn't the government run the banking system? For starters govt run banking would be much worse because politics would decide who gets the bail out loans....I mean loans. Govt would decide which business suceed and fail. However our current fascist banking system is not much better I'll beit still better than pure socialism.
We need to go back to brutal free market capitolism. If your bank loses your money its gone forever. With current technology people could do two things. Demand more conservative banks by voting with their cash. And the second thing they could do is easily diversify their cash deposits among 10 of 20 different banks. Internet companies could be started that would help individuals manage the accounts with combined statements. These companies would have nothing to do with the actual banks themselves just a filing cabinet of sorts.
I think long term this would be a better banking system. Don't get me started on the abolishment of fractional reserve banking. Our current system is basically fruad if you ask me. It only works if banks are extremely conservative since they are in essence leveraging our deposits. Its obvious that bankers can not restrain themselves. Moral hazard will one day lead either to the abolishment of fractional reserve banking or slavery.
I know I sound extreme but that is the calculus as I see it.
Also, why should residential lending be any different than commerical lending? In commercial lending, loans are made all the time to people with bad personal credit, but the projects are sound. The interest rate and loan terms are stuctured according to the risk.
I think we are all over-reacting to the financial mess we're in and forgetting business fundamentals.
The No Doc loans we should all be against are the ones that misrepresented the risk being peddled to the financial markets.
I remember seeing a 0% down, stated income loan for investment properties. Stupid loan, even stupider system for offering it. The product should never have been offered as there is no way to price the risk! But a Lehman Bros company offered it, securitized it and sold it to an entity they suckered in by understating the risk.
On the other hand, I see nothing wrong with a No Doc or Stated Income loan for a primary residence only, that requires 20-25% down, great credit & reserves and is priced to accomodate the higher risk.
On Jul 11 01:33 AM johngonole wrote:
> I'm self employed and the truth is that our income is more unstable.
> Therefore I chose to by a smaller house than I could probably have
> afforded. Likewise banks in all honesty must account for this risk.
>
>
> If no-doc loans make a comeback it will only prove once again that
> moral hazard is real. Its not just some conservative spin to try
> to stop compassionate democrats from helping people out. If it happens
> again I fear that liberals calling for more regulation may be right.
> Heck their might be calls for the government to nationalize all banks
> and run the banking system. They would be half right in calling
> for that. If the private banking system is going to systemically
> ignore risk and place the error for not doing so on the shoulders
> of the tax payers why shouldn't the government run the banking system?
> For starters govt run banking would be much worse because politics
> would decide who gets the bail out loans....I mean loans. Govt would
> decide which business suceed and fail. However our current fascist
> banking system is not much better I'll beit still better than pure
> socialism.
>
> We need to go back to brutal free market capitolism. If your bank
> loses your money its gone forever. With current technology people
> could do two things. Demand more conservative banks by voting with
> their cash. And the second thing they could do is easily diversify
> their cash deposits among 10 of 20 different banks. Internet companies
> could be started that would help individuals manage the accounts
> with combined statements. These companies would have nothing to
> do with the actual banks themselves just a filing cabinet of sorts.
>
>
> I think long term this would be a better banking system. Don't
> get me started on the abolishment of fractional reserve banking.
> Our current system is basically fruad if you ask me. It only works
> if banks are extremely conservative since they are in essence leveraging
> our deposits. Its obvious that bankers can not restrain themselves.
> Moral hazard will one day lead either to the abolishment of fractional
> reserve banking or slavery.
>
> I know I sound extreme but that is the calculus as I see it.
Hey "The best way to rob a bank is to own one"- that is the over riding mantra in today's world.
Before making the loan, the bank should evaluate your ability to repay it. How you are doing your tax planning should have zero relevance.
The problem isn't no-doc loans. The problem is the U.S. government coercing lenders to make mortgage loans to deadbeats.
I expect that when/if the lending community is bullish on housing again, that's when No-Doc loans will return.
Often, police and government types will enact a policy that is intrusive-- even unconstitutional-- and their defense of it is "If you are not doing anything wrong, you have nothing to worry about". That seems to be the jist of what some are arguing here, but maybe I am misreading that sentiment.
When you hand over your tax returns to a bank or mortgage company, you have an expectation that they will take steps to protect your privacy and not freely copy, fax and distribute those documents. But the levels of red tape on a mortgage loan mean that copies and faxes will be made.
After your tax return has left your hands, you really have no control over who sees it, copies it, leaves it lying around for others to view-- It is now under the control of others, who really don't have a vested interest in worrying about that stuff, especially if it means more work for them.
I would prefer not to hand over my tax returns for others to view. I have no guarantees that they will properly secure those documents for the 30 years of the loan life. Or even for 30 days.
I may be in the small minority on this, but I would prefer to pay the higher interest rate with a stronger downpayment, rather than hand over my tax returns to strangers. There is just too much personal information on my returns.
But, a healthy (somewhere between 20-30% seems reasonable, but I am not qualified to determine the % needed for the risk level) downpayment should be required, now that taxpayers are footing the bill for irresponsible lending.
I can tell by reading this article and the comments that the typical village idiot (that thinks they are an expert on everything) believes that no-doc loans were responsible for the problem our country finds itself in. However, it wasn't the loans... It was the greedy imbeciles that were responsible for underwriting the no-doc and low-doc loans. These loans weren't intended to be used by 30% (or more) of borrowers as a way to purchase more house than they could afford. These loans devolved into this type of a “sham” because underwriters allowed borrowers to lie about how much they made or what assets they owned.
These loans were intended to be used by borrowers with extremely high credit ratings in financial situations that might make their ratios appear out of whack when applying standard underwriting criteria. However, someone (like a truly qualified banker or underwriter) could look at the applicant's finances and see that the person WAS truly qualified and would have no trouble making their loan payments. I will give you a PERFECT example of a situation where a no-doc or low-doc loan would be the suitable choice for a mortgage application.
EXAMPLE: Stephan Schweiger is 45 years old and is a small business owner that would like to purchase a new house for his family. He has an Experian FICO score of 810, and has large personal liquid cash reserves plus an IRA with over $300,000 in it. His business is an S-Corp that has been growing at a healthy rate for several years. Because the business is growing, Stephan doesn’t want to spend his cash reserves buying a new house, because his business-plan budgets how those reserves might be required to be poured into the business over the next three years to market and fund the businesses growth that he is projecting/experiencing. Several years ago, the business purchased a large building and expensive equipment for inventory storage and production. The building and equipment are being depreciated, and that large depreciation expense (which is really just a paper loss) reduces the amount of profit that is declared on the tax return, but the equity in the building is increasing Stephan’s net worth. Stephan’s business has just installed new office furniture, a new computer network and phone system for his front office, and those cost around $230,000. Those assets could be depreciated over several years, but Stephan has elected to take a Section 179 depreciation on that equipment, and since taxable income for the year was $280,000, Stephan‘s Section 179 deduction will reduce his income by $230,000 making it look like his business only had a taxable income of $50,000. Because Stephan took the expense of purchasing and installing this equipment for the current tax year, he will not be able to take any additional depreciation expense for this equipment. This means his income is reduced this year, but will be higher for the next several. If Stephan is trying to borrow money, his profit & loss statement look like he only made $50,000 which would limit him to a mortgage around $225,000. However, his “actual” income (if you add back the Section 179 election and the depreciation on his building and equipment) would qualify him for 5 times that loan amount or around $1,250,000. Stephan is a much better candidate for a mortgage than some clown that “clocks-in” to a job and has been employed steadily for many years, but could be fired tomorrow because of the horrible economy. Why is Stephan a better candidate? Because he has proven that he can make things happen, and is adaptable. AND he has a lot of money saved up (unlike the typical 9 to 5 monkey).
In closing, again I state JUST BECAUSE YOUR INCOME ISN’T “SHOWN” ON YOUR TAX RETURN DOESN’T MEAN YOU ARE CHEATING ON YOUR TAXES. BUT IT STILL DOESN'T MEAN THAT I WANT MY TAX RETURNS FLOATING AROUND WHO KNOWS WHERE!
This article and the comments that people have posted only prove what has taken this country down. Americans education and experience have gone from being self-sufficient and self-reliant to looking for someone to take care of them and to blame for their problems. If you think the government will take care of you, GET A CLUE. YOU are the only one that you can count on to look after you. The only thing the government cares about is controlling you and how they can stay in power. If they are controlling you, then you can't look out for yourself.
People that obviously don’t have ANY understanding of owning or running a business need to get an education or a little business experience and stop writing articles that perpetuate stupid theories about how everyone that got a no-doc loan or low-doc loan was cheating on their taxes.
Remember, people like Stephan are the wheels that keep the US economy moving, because they hire/pay employees, buy materials for production, pay taxes, and buy expensive things (like Mercedes, mansions, furniture, appliances, vacation homes, expensive electronics, etc.) that provide jobs to Mercedes manufacturing employees in Alabama, Mercedes salespeople, real estate agents, construction workers like framers, plumbers, electricians, interior designers, and ON and ON and ON.
Stephan is a perfect example of what makes America GREAT. He is living the American dream, and is helping other people live the American dream.
Don’t throw out the baby with the bathwater. Many people shouldn’t have been given no-doc or low-doc loans. But the people that SHOULD be receiving them can’t get them anymore because of articles like this with their typical knee-jerk reaction are promoting junk economics to the masses which continues to drag the US economy down further and further. Get an education before you write garbage for other people to read… If you want the US economy to get back on track, offer TAX CUTS and other ways to get the money back into the hands of small business owners, so they can use that money to employ more people, purchase more equipment and materials and spend that money on things that will give other people jobs and get the economy going again…
The government doesn’t know how to make money… They only print it. Every cent that the US government spends was taken from someone that would have done a better job using that money to create jobs…
May America return to its roots –GOD BLESS AMERICA!
Are you self employed? Do you have any RECENT personal experience as a self employed applicant for a mortgage. I can tell that you have NOT because of your statement that any income can be documented. That used to be true, but now the underwriting criteria have been so standardized that if you don't fit the "mold" of a convential applicant that will borrow money under a loan that can be sold to Fannie or Freddie, you don't have a chance of getting a loan. When you send in copies of the first 2 pages of your tax returns from the last 2 years if the income isn't there..... YOU AREN'T GETTING THE LOAN!