The old First-Franklin way of qualifying – and a better gauge of actual income and expenses. From HW:
http://www.housingwire.com/articles/36188-is-subprime-lending-ready-for-a-comeback?
An excerpt:
In fact, CSC does not use the term subprime. According to Will Fisher, SVP of sales and marketing, at CSC “Subprime is offensive.” CSC has coined a more apt descriptive word for of this part of the mortgage world, “non-prime.”
“People have been hesitant to make this kind of loan since 2008 and even wondered how we could even fund them,” said Fisher. “Even now people ask how we are making these loans. The truth is, subprime is not a four-letter word. And non-prime is an even better description of what is occurring since 2011-12 in this loan type.”
CSC created a loan program four years ago that allows self-employed borrowers to document their income using bank statements instead of tax returns like 1040s or 1099s. The company requires two years of bank statements to validate cash flow and thus extrapolate income. This gives the company critical insight into a borrower’s ability-to-repay (ATR).
“We believe that 24 months of continuous bank statements are a very reliable look into what a person actually lives on per month when compared to tax returns or even a W-2s,” Fisher said. “Because these borrowers are self-employed, they want the benefits that come with the legal ability to write off expenses. That can make the use of tax returns as conventionally underwritten a poor barometer of ability to repay, but we’re able to document income in a different way. And we stay in the spirit of ATR and QM loans by requiring a two-year history.”
CSC offers up to 90% LTV for self-employed borrowers with a 700 credit score and up to 80% LTV for a credit score of 600 or higher (the typical threshold for subprime is 620). This program has huge potential for growth since many of the 14.6 million people who are self-employed may not qualify for a traditional QM loan, even with a high credit score and adequate income.
http://www.housingwire.com/articles/36188-is-subprime-lending-ready-for-a-comeback?
LOL! What could go wrong!?
Reminds me of the “PoppyLoan” being offered by San Francisco Federal Credit Union. https://www.sanfranciscofcu.com/poppyloan-information
Since CoreLogic considers San Francisco undervalued, buyers need this kind of lending leverage!
Random link.
http://youtu.be/aoeUxzUR4ec
If they stick with the min of 2 years of all bank statements that will be ok, since you do then have a good idea of what a persons cash flow looks like. (Cash flow is of course the key not taxable earnings) But you have to stay with the 2 year min and not get loose about it as they did in the past.
As a particular example assume someone is a small time rental housing person. for each house you own you can take depreciation of 3.63% of the value of the improvements in depreciation. (Note no depreciation on the land values). That could reduce 1040 income a good bit but still not affect the cash flow situation. So in one sense this kind of lending is another distortion due to our tax system,
Calculated Risk just did a post on this as well – there’s nothing particularly wrong with sub prime if you are talking bad credit history but collateral and capacity to pay. The “what could go wrong” is taking borrowers without capacity and without collateral but with A+ credit. So, in this case we are clearly establishing capacity – bank statements for two years showing real cash flow (that the IRS might not get a cut of). And collateral means “no fake appraisals.” Which I also think we have covered. So, I don’t exactly see “what is going to go wrong here” – the borrowers are proving they have the capacity to pay and appraisals are not 100% made up.
As far as PoppyLoan, it’s all about capacity to repay – borrowing 100% with a decent appraisal and a job that can pay? Might work out fine. Borrowing 3mn with perfect credit but a job gardening? Big problems.
I finally found the classic Jamie Dimon quote:
http://www.calculatedriskblog.com/2012/04/jamie-dimons-brain-freeze-and-comments.html
We need to write a letter to the next generation that says, “Never forget: 80% loan to value and verify appropriate income.”
I think this program at least verifies appropriate income – something completely missing from alt-a loans from 2008.