Is it 2005 all over again?
During the 1990s and early-2000s, financial institutions required very little or, even in some cases, no documentation at all for housing mortgages. These were known as stated income loans and were advertised by banks as “low-doc” loans. However, as time went on, they became known as “liar loans.”
The applicants as well as the mortgage lenders would write anything on the application in order to complete the transaction. This practice quickly ended during the United States housing crash, but it’s making a gradual return.
According to a report from CNBC, one FDIC-insured community lender in New York City, Quontic, is promoting a product as “Lite Doc.” The product only requires verification of employment as well as two months worth of bank statements. This is far less than what most applications need today: two years of 1040 income tax statements, a minimum of four pay stubs, two years of employment W2s, bank statements and credit checks.
“We no longer have to have our borrowers qualify in the traditional sense,” said Quontic CEO Steve Schnall in a statement to the business network. “Because of this new Dodd-Frank requirement, a lot of people who don’t meet the very strict and traditional qualifying guidelines that the ATR requires are simply ineligible for financing. There’s a huge swath of the population that simply can’t get a loan on a primary residence anymore.”
Is the Lite Doc product any different from “no doc” during the housing bubble? A couple of things: the program is only for owner-occupied properties, which means investors can’t use the product. Also, borrowers must have a minimum FICO score of 700 and need to show they have at least 12 months worth of principal, interest, taxes and insurance in the bank at closing.
He added that a lot of the bank’s customers are immigrants who are low-income earners, who go from job to job and who may have 10 family members pooling their money together to make a down payment.
“A lot of these lower-income earners, they jump around from job to job to job and that doesn’t mean that they’re not going to earn consistently, but they might not earn consistently at one particular place of employment,” said Schnall. “Most of these borrowers have immaculate credit, they have substantial equity in the property and significant liquidity as the result of gifts from family members.”
It should be noted, however, that these mortgage loans can be made anywhere in the country. It’s becoming very popular as it has already processed seven loans in Miami and New York, and it’s in the midst of closing more.
Although the Lite Doc product may not be as bad as it was in the 1990s and early-200s, it’s still part of a growing trend that many banks and governments are a part of: going back to the old ways of doing things.
Last month, Wells Fargo introduced the yourFirstMortgage program that offers customers mortgages of up to $417,000 with a down payment as little as three percent. Earlier this year, the Bank of American introduced a similar product that only requires three percent down payment. Mortgage agencies Fannie Mae and Freddie Mac also lowered its down payment requirement to just three percent (SEE: Housing Bubble 2.0: Wells Fargo starts to offer 3% down payment, follows Bank of America).
With real estate values going through the roof, low interest rates and banks and governments rolling back requirements, this is certainly the second edition of the housing bubble.
No news here. If you have to have a 700+ credit score and 12 months of payments in the bank, that could easily equal 10 K to 50 K depending on the market you are buying your house.
Another non-story hyped by Mr. Moran. If this continues I may have to stop reading ECN!