'Liar Loans' Scheduled for Extinction

Liar Loans To Be Prohibited

No income verification and stated income mortgage loans have been available to borrowers for many years. As originally conceived, a no income verification loan was a sound product, offering highly qualified borrowers the ability to purchase or refinance a home quickly with minimal documentation. Stated income mortgages are still being offered today to highly qualified borrowers by lenders such as Emigrant Mortgage.

What was once a legitimate mortgage product, however, morphed into the worst type of irresponsible lending during the national housing/mortgage frenzy of the past decade. “Liar loans” became a product of destruction that allowed millions of totally unqualified people to borrow money who had little or no ability to service the loan.

Due to the mortgage industry’s excesses and irresponsible behavior, the “liar loans” are scheduled for legislative extinction on October 1, 2009. The new regulations will apply to a newly defined category “of higher-priced mortgages” and the following restrictions will apply:

Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.

Require creditors to verify the income and assets they rely upon to determine repayment ability.

The rule’s definition of “higher-priced mortgage loans” will capture virtually all loans in the subprime market, but generally exclude loans in the prime market. To provide an index, the Federal Reserve Board will publish the “average prime offer rate,” based on a survey currently published by Freddie Mac. A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5 percentage points or more above this index…

The new rules take effect on October 1, 2009.

No Income Loans To Become Niche Product

The new rules severely limit the interest rate that can be charged on a stated income prime loan to only 1.5% above the average rate on a prime mortgage. Given the higher lending risk involved in approving a mortgage without income verification, I would expect that after October 1st, stated income loans will become a niche product, offered by only a few lenders to highly qualified borrowers.

The new rules will make it much more difficult to borrow for those who cannot verify income. Considering the financial havoc that can result from liar loans, the mortgage industry should welcome the new restrictions which impose proper responsibilities on both lender and borrower.

Comments

[Angry Banker:]

These rules should have always been in effect for all banks. In my shop, they always were.

Jul 30 07:37 AM

[nova:]

"No income verification and stated income mortgage loans have been available to borrowers for many years. As originally conceived, a no income verification loan was a sound product, offering highly qualified borrowers the ability to purchase or refinance a home"

This sentence makes no sense: how in world someone can determine "highly qualified borrowers" with no income verification. The answer is simple: it was fraud from the start but it took sometime for "liars" to take full advantage of it.

Jul 30 10:00 AM

[Trane250:]

This new rule will affect independent contractors and business people who stick the cash that they earn in their pockets and don't report it to the IRS. What a shame.

Jul 30 11:52 AM

[Chorniki:]

"Liars' Loans" are not due for extinction because the loans never existed. Many of the major banks simply manufactured the loan
packages as "AAA" loans to sell to the investment banks in 100
million packages to be sliced and diced and repackaged for sale
globally as real AAA paper. GS was one of the biggest players in
this scam. Just ask "Hunkering Hank" for the details.
For documentary evidence the authorities need only provide
assurances to the ambulatory notaries that notarized the packages
immunity from prosecution and perhaps some substantial reward
for their efforts. These notaries can also supply information on the
number of ethical Americans who refused to participate in the fraud
and turned down these fraudulent loans by refusing to have their
signatures notarized

Jul 30 12:12 PM