“Liar Loans” – RIP – October 1, 2009

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.

6 Responses to ““Liar Loans” – RIP – October 1, 2009”

  1. Amazing that this even required a rule

  2. I’d be interested in hearing the ratings agencies attempt to defend their ratings of securities based on liar-loan mortgages. Such mortgages offer no reasonable basis for an estimate of future loss rates.

  3. If there are ANY loopholes in anything being sold, touted etc there will be the sly, dishonest coming out of woodwork. Sadly, it’s the whole system of capitalism that thrives on Ponzi, finding loopholes with the right lawyer & feeds the dishonest (thru their lies, their silence/vs telling the true, those friends of Madoff, Greenspan etc that float on piles of money because of an ‘artifical reputation’. Society now must follow behind those in power as detectives as we can not blindly trust anymore for the handfuls+ of deceitful.

  4. I think it is great to show your income, but what about the contractor who works just as hard as the next guy. For example, I was laid off in may as an employee of Comcast for 17 years, but found a new and better job in the same field starting in October as a contractor. I am now screwed from a loan even though my gross income will rise this and next year. Go figure. Any solutions.

  5. You would be able to state all of your legal income, of course, even income earned as an independent contractor, earned in other countries, from dividends, etc. As an example, most of the richest people in the world make relatively little or no salary, but would still be able to qualify for a loan.

    On aside, if you still want a liar’s loan, you’ll have to go the extra step and print up fake income documentation for yourself using your home computer. Maybe your mortgage broker can do this for you?

  6. Self-employed. Lived outside the country for 5 years. Came back couple months ago. Naturally, did not file income tax for the last four years. Therefore, even if I have an excellent credit score (almost 800!) cannot get loans/mortgage because do not have proof of income for the last couple years. Income from other countries doesn’t count!!! … talking about being screwed…..

Leave a Reply