Unconventional Mortgages Make a Comeback

I'm pretty sure I made the argument in a past thread about this that I felt this is one of the reasons why we were on the cusp of a bear market.

In terms of being "good for the market":
Short term yes, long term no.

That's what I was going to say. Good if not an excuse to lie about one's income. And good that it recognizes the new economy. But I am not sure about these "asset-depletion or asset-dissipation" loans in which there is no actual income generated. That may be a recipe for disaster.

These loans do increase overall market liquidity which most people seem to think is a good thing for pricing. But I think they may be inflationary if not worse.

I think the questions need to be asked:
Why did these loans disappear?/ Was it more than an irrational backlash against the last fiscal crisis?
And
Why are they reappearing now? / Is this an irrational grasp to bolster a faltering market?

Here is another question:
Who here would lend $610,000 of their own money to a nursing student with part time employment and needs roommates and AirBnb income to maintain their current residence?

"Why did these loans disappear?" I think it was because they could no longer be mass produced and packaged together as securities. Maybe bank regs changed also I don't know.

"Why are they reappearing now?" See the above. Someone has figured out that they can make a mortgage broker and a securities firm a ton of money. Wow. Using mortgage broker and securities firm in the same sentence takes me back. Scary combo.

Not sure its fair to call these new products a "loosening" of underwriting standards, though it is a creative way to establish good credit worthiness.

These non QM loans have been available for sometime. I'd say probably about three years, maybe longer. Finally the WSJ got wind of this. Also these bank statement loans are only for self employed borrowers.

There was a time when self employed people were able to get no income verification loans. This goes back to about 1983. These loans were not responsible for the financial crisis; it was the subprime loans. The fact is If I were a lender I would feel more comfortable giving a self employed borrower a loan, no income verification than doing a Fannie Mae loan to someone with verified income via a w-2 pay stub, 5% down, that has been working for two years. Likewise with a 3% down FHA loan.

But isn't that a bit of a straw man argument? Hasn't down payment size always trumped any other underwriting criteria?
No matter how credit worthy the borrower putting down only 3% to 5% they are under water the second the closing is over.

A a commercial mortgage underwriter for many years, I can say that real equity or so-called "skin in the game" always out-trumped perceived equity based on value/price vs. mortgage. But that never seemed true in the resi mortgage market at least as far as I knew. If it was securitizable, it was always a good loan.

WSJ has a critical missing element. What was the LTV of the loan to nursing student and interest rate relative to others?

Sorry, it actually has that. 66 percent LTV and 6 percent rate.

I think this article is very misleading since it is implying that a w-2 worker without a pay stub can get this loan.

I think this article is very misleading; for one, it is implying that a w-2 worker without a pay stub can get this loan.

Sorry for the duplicate post

As far as the nurse is concerned, I hate to say it but there are just some people who should rent not buy or continue to save their money until they can more safely afford to buy a home. The idea of home ownership as part of the American dream has in many ways become fraud. Didn't we learn that in the last recession? Although her LTV is not high if the payments are tight she is at great risk of loosing her home and whatever equity she built up in it if her life changes which happens for a variety of unexpected reasons - layoff, marriage, pregnancy, recession, whatever. Our modern economy is not strong enough to protect people who take on too much risk. What would a professional financial adviser tell her?

She inherited a portion of the home and bought out her relatives. Selling and paying huge transaction cost would have been a bad financial decision. If she had to sell due to not being able to make payments, she is no worse off than selling in the first place. She will make good money as a nurse and by subletting. Kudos to her. This is the way to build wealth rather than take inheritance and spend it on fancy vacations and rentals.

300, she is worse off if she loses any equity she built up in the home.

And her interest payments might as well have been flushed down the toilet.

If she sells before taking a mortage, she will pay 6-7 percent transaction cost and capital gains. If she sells if she has trouble paying, she will pay the same 6-7 percent cost. You have to remember that hers is not a new purchase but a house a part of which she owned due to inheritance.

How much extra did she pay in mortgage recording tax under this scenario?

I never understood people who think borrowing money does not make their investments riskier. A lot riskier if leverage is high and borrower is counting on a number of good things happening to them in the future.

She could be making a great investment decision. Time will tell. But it looks like she is taking on a lot of risk, looking completely at the upside and ignoring the downside and the possibilities that her situation and her expectations could change for the worse.

She is not alone however. Studies show most people are overly optimistic about their abilities to make good investment decisions even when they have some experience and some expertise.

Housing consumers need objective advice from professional with a fiduciary responsibility to their clients, which we know they won't get from a licensed mortgage broker unless its required by law.

My impression is that most people think a mortgage broker's job is to "get them a mortgage no matter what."

Right. These people don't think they need advice, only someone to execute their business plans. God help them.

Do you think lender is not complying with “ability to repay” requirement for mortgages?

https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/ability-repay-and-qualified-mortgage-standards-under-truth-lending-act-regulation-z/

I think no real estate professional who earn commissions is putting the interests of the consumer first and that no law can prevent what happens behind closed doors. We need better consumer protection laws and better consumer education.

I believe the consumer protection laws were tightened significantly post 2009. You can not take is too far and turn US into a communist country where every thing has a govt rule which applies to only common people. Free society and capitalism requires people to be responsible for their own decisions. Govt tries to control the extremes only.

300_mercer - consumer finance protection bureau, laws and enforcement have been gutted in the past two years. Agree that individual responsibility is key to a vibrant and healthy country, but the sad fact is that 2008 showed us the downside of free market approach . Too many consumers do not have either the skillset or perhaps don’t have the time to properly inform themselves and the moral hazards have proven too great for financial institution to resist throughout history. Re whether underwriters are doing their jobs and properly determining ability to repay, I would say we need to be careful about pendulum swinging back to pre-2008. There is so much distraction that many are not even aware of what is going on re consumer finance protection laws and banking regulations that came into place in 2009.

While CFPB teeth has been rolled back in general, I am not sure how much impact it has had on “ability to repay” determination for mortgages. My general take based only on anecdotal evidence and some publications is that the industry is still following this rule due to potential for hefty fines. Someone familiar will mortgages nation-wide may have a better view of what is happening in reality.

https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf

Another good reference data. Compare current index level to say 2004. We all know 2007 was crazy.

https://www.mba.org/news-research-and-resources/research-and-economics/single-family-research/mortgage-credit-availability-index

https://www.hsh.com/finance/mortgage/subprime-lending.html

Btw, currently the real issue is in student loans to students of low ranked colleges, where the education simply does not have enough return and the cost has continued to go up significantly every year.

The biggest problem with student debt isn't even tuition. It's third rate schools with 4 star hotel dorms (kitchens with granite counters, spas, lattes, etc) where the students go to party instead of learn by borrowing 6 figures.
https://brobible.com/college/article/college-students-at-texas-tech-dumb/

However even in "good" schools costs are rising because rather than spending on acedemics, administration budgets are ballooning.

All true and no one is doing anything about it. That is where the future trouble is my opinion rather than the mortgage market (I believe the rates will be significantly lower than the historical averages in the future).

I sold my little cottage in Florida last year and saw that mortgage brokers and agents were up to their old tricks. I had to walk them through how the structure they were proposing violated FHA regs. They had the buyer walking away from the closing with cash by rolling closing costs into the loan and then categorizing some non-closing costs as closing costs to use full $3000 allowed. The result was that buyer would have walked away from the closing with both the house and fresh cash in her pocket without having put in 3% of her own money. Their response when I told them this was not okay: “But everyone is doing it!!” The kicker was when the agent offered to throw in $1000 of her own money to get the deal done. It’s happening . . . again.

But yes, student loans are worse. It should be criminal to let an 18-year old mortgage away their future for a degree in vapid partying at Nowhere U. The mantra of those I know who embrace Social Darwinism is “Who are you to get between my prey and me?” Good times.

FHA by definition of 3 percent down is unsafe and is a risky subsidy. Add abuses on top of that. In the example you describe, I do think FHA buyer is also to blame in addition to the mortgage broker. At least the agent offered to cut commission.

Agent was having me (seller) pay full commission and then giving buyer $1000 in cash at closing towards cash buyer was supposed to be bringing to closing. Prohibited by FHA regs. Buyer had no clue what was going on.

That type of abuse unfortunately can not be stopped as small amount of free money (less than typical transaction costs which are less than the required down payment) makes a big difference to money buyer is supposed to have. The solution is to increase downpayment requirement for FHA loans. FHA loans to ME are govt approved and led predatory lending in form of hefty insurance premiums.

Agreed.

I remember after the crash when reforms we're being proposed and Barney Frank asked something like "But what about people who haven't been able to save the 20% for a down payment?" and all I could think was "They shouldn't be buying Real Estate."

multicityresident,
Re:"“Who are you to get between my prey and me?”
When billions of dollars of taxpayers money is going to get used to fill the crater, you're not just taking from your mark, but my pocket as well.

30yrs - I could not agree more on both your last two comments. Not everybody should be encouraged to “own” because we all pay in the end with the unscrupulous walking/running away with the life savings and/or future creditworthiness of the uniformed as well as the taxes of those who feel a responsibility to something greater than themselves.

"Opinion: Jumbo mortgages are haunting the housing market, and things could get really scary"
https://www.marketwatch.com/story/this-ghost-of-the-housing-bubble-still-haunts-the-home-mortgage-market-2020-01-15

I just don't get it. Didn't we already do this?

"Cash-out refis are gaining popularity again — and are still dangerous. According to Freddie Mac's refinance report, the percentage of refinance originations in dollars that were cash-outs soared to 23% by the end of 2018 from 3% at the close of 2012. The report notes that 82% of all refinances in the final quarter of 2018 were cash-outs refis. This chart based on Freddie Mac data shows the surge in cash-out refis over the past five years."
https://www.marketwatch.com/story/this-home-mortgage-disaster-is-ready-to-punish-housing-markets-2019-11-19

With crooks keep injecting trillion dollars of money into the system, this kind of practice must exist.