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Posted by on Jun 15, 2012 in Mortgage News, Mortgage Qualifying, Thinking of Buying? | 10 comments | Print Print

Stated-Income Loans!

From HW:

Preparing for the return of the jumbo lending market and the days when Fannie Mae and Freddie Mac are no longer mortgage finance behemoths, Rancho Financial is bringing to market loans often blamed for the destruction of the nation’s housing economy.

A division of Calabasas, Calif.-based Skyline Financial, Rancho only six weeks ago began originating stated-income loans — when a borrower’s personal income is not verified.  Rancho is currently processing about 100 applications with an average request of $500,000. The company is receiving 10 calls a day for a stated income program that has a $1.5 million loan limit and requires loans above $1 million to have a second appraisal.

Borrowers’ bank statements are examined, but not their tax returns or pay stubs. And unlike earlier versions of stated-income mortgages to high-risk borrowers, the Rancho product is only for the affluent homeowner.

“In the late 1990s and 2000s, no one was regulating anything and you had these loans that were made and sold on Wall Street, and they became known as ‘liar loans,’” says Rancho mortgage banker Craig Brock.”We’re staying clear of that. If someone has several hundred thousand in assets, chances are they do have the money. We’re trying to target smart people who have financial advisers, who have certified public accountants.”

But the concern that this product will again be abused permeates the mortgage-lending arena. “Yes, they can be abused, but that doesn’t mean the potential for abuse mean they should be taken out of the market place for everyone. That doesn’t seem to be an appropriate response,” says Rich Andreano, a partner at the Washington, D.C., law firm Ballard Spahr.

Most of the loans, Brock says, will go to individuals with a loan-to-value ration of 65% to 70% who put down 30% and a credit score of at least 740. A borrower must have a 2-year history of self-employment, a 12-month reserve and a CPA letter or business license.

“If we’ve got all those things, then the chances are pretty darn high that they have the ability to repay,” Brock says. “They won’t walk away from a 30% down payment.”

The generation of this program is unique considering the tremendous amount of uncertainty surrounding the finalization of the Dodd-Frank Act, which is making financial institutions hesitant to inject capital into the jumbo mortgage lending space.

“There’s no financing,” Christopher Whalen, a senior managing director at Tangent Capital Partners, said in early April. “In the New York area there is no financing available above $1 million dollars.”

But Brock views the program as a catalyst to drive the jumbo market and reinvigorate the secondary mortgage-finance market.

“We’re like a lot of companies nationwide. The reason why we’re bringing programs like this out is because we’re preparing for the day that Fannie Mae and Freddie Mac don’t exist,” Brock says.

“We have a hell of a conundrum right now because not only are we having to prepare now for Fannie and Freddie to not exist, but we’re having to create a whole new conduit for these jumbo loans. It’s a heck of a grind,” says Brock, who cites plunging property values and the Dodd Frank Act as challenges to the resurgence of the non-agency market.

Rancho won’t hold the stated income loans on its books. Instead, it sells them to a single portfolio investor (a confidentiality agreement prevents Brock from identifying the investor) who apparently is more comfortable buying these types of loans than the rest of the market.

“They found an investor. Well, they’re lucky,” says Andreano, remarking on the loan program. “For the right investor there is a marketplace for it. If you find the lender to do this correctly, these are good products to have. They won’t be large in number, it’s just they won’t be standard. The typical investor’s only going want the mainstream vanilla-type loans.”

And Fannie Mae and Freddie Mac aren’t taking them. A spokesperson at Freddie said products with alternative stated income provisions were eliminated from the agency’s guide years ago.

“There’s only one source (taking the loans). Until (PIMCO founder) Bill Gross, until Goldman Sachs start purchasing these loans again, it’s going to be slim pickings. Until they start buying these things, we won’t see any huge volume,” says Brock, who projects originating $50 to $75 million in stated income loans in the programs first 12 months.

“We’re hopeful that the market’s turning,” he adds. “A lot of us are showing confidence. We could be out there grabbing the so-called low-hanging fruit, but we’re trying to show some foresight for when the market comes back and people are involved in buying higher-prices homes.”

10 Comments

  1. I’m sure it’s not a coincidence that they are based in Calabasas, same as Countrywide.

    These are the old-fashioned stated-income loans though, with bigger down payments and qualifying based on bank statements.

  2. The question is: who is buying the paper and what are they doing with it?

  3. It has to be former C-wide execs running the shop, and they are probably selling to one of their old cronies on Wall Street who was infatuated with the yields.

    Did they mention the interest rate that they are charging?

  4. LTV of 65-70%. I’m assuming no seconds are allowed, right?

  5. It is about time. As far as pre-bubble loans are concerned the bigger problem was the zero down, rather than the stated income that ended up causing alot of the problems–I read the default stats and fully doc’d zero downs were around the same default rate as stated income zero downs.

  6. My wife and I are both self-employed and it has been a MAJOR hassle to refi our house. I went through three lenders who strung me along for some time before declining our loan. We submitted 2 years of personal and business tax returns and all three came up with different debt-to-income ratios. We finally found a bank in Florida who got it done. There is definitely a need for this product.

  7. Bill, lenders used to do these loans because they had underwriters who knew what they were doing. They became redundant during the boom years and a “Senior Underwriter” today might have the skills of one coming off their probationary period in 2001. I had to explain to a senior underwriter that the terms of a counteroffer superseded the original contract terms. This was the most senior underwriter at that lender…and it happened during the closing. USAA savings bank, not a joy to work with.

  8. Down payment should be the single biggest factor in any credit model.

    I’d loan money stated-income with 30% down, but I’d never make the 3% down subprime loans that FHA is writing on behalf of the taxpayer.

  9. The problem was never with any particular type of loan, but with the ability of lenders to hide the true level of risk of the loans they were writing by bundling them into securities with better quality loans, lying to investors about the overall risk and getting ratings agencies to swear to the lies. As long as regulators don’t look the other way again, the inability to resell junk loans will act as the same disincentive to make a lot of them that it used to in the days before the housing bubble.

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