Stated Income Mortgages Quietly Return to RMBS

Mortgage Foreclosure

Stated income loans all but disappeared after the housing crisis, but they, along with other forms of subprime lending, have quietly returned, albeit often under new terminology.

Some stated income loans have recently appeared in one of the few nonprime residential mortgage-backed securitizations to be rated since the 2007 housing meltdown and subsequent financial crisis.

Stated income loans — labeled “liar loans” during the crisis — have a host of new names now: portfolio programs, alternative documentation loans, alternative income verification loans and asset-based loans.

Lenders say they’ve got newer, tougher underwriting standards in place that allow them to carefully qualify the risks of these loans to make smart lending decisions that won’t lead to the high defaults experienced during the housing crisis. Consumer advocates still contend, however, that fraud remains a concern with reduced lender documentation requirements.

Federal regulations put in place following the housing crash effectively outlawed liar loans. Under federal ability-to-repay requirements (ATR) passed in the wake of the crisis, lenders must take specific steps to ensure homebuyers can afford a mortgage. If they don’t, homeowners can sue and potentially win damages that can dwarf the value of the homes.

Documenting the return of stated income lending

About four years ago, Citadel Servicing Corp. said it became the first company since 2008 to expand the credit box with standard and alternative income documentation products to borrowers, funding loans as high as $3 million and offering a second-lien program. Citadel said it carefully manages the higher risk loans, noting it never calls them subprime. It allows self-employed borrowers to document their income via two years worth of bank statements rather than using tax returns or 1099s.

Other specialty mortgage firms who focus on nonprime lending have also entered the market since then.

More recently, the COLT 2016-2 Mortgage Loan Trust bond offering rated by Fitch for Caliber Home Loans contained 65 loans that Fitch treated as stated income loans. The loans were purchased from Sterling Bank and Trust, a partner in the bond offering. Employment and assets on the Sterling loans were verified but borrowers only provided a 30-day bank statement for income verification — inconsistent with Appendix Q documentation standards.

Fitch said these loans would have a rate of default probability that is 1.4 times that of a more fully documented loan. The loans were assumed to have a higher rate of ATR claims upon default, and Fitch raised the loss severity accordingly.

The loans came through Sterling’s Advantage Home Ownership Program, whose niche is Asian borrowers, mainly in and around San Francisco, who don’t fit the typical debt attributes and documentation profiles of prime jumbo borrowers but who have very strong credit attributes.[1] Sterling provided a delinquency history that showed no delinquencies in the Advantage program since October 2011.

Fitch said the 15% of the loans in the pool originated by Sterling were actually stronger than those originated by Caliber despite projected loss penalties for weaker income documentation. That’s because the Sterling loans had robust attributes in other areas, including stronger credit scores, higher loan-to-values and no previous credit events.

It noted that borrowers with attributes similar to those in Sterling’s Advantage program have historically performed similar to prime full-doc loans.

Caliber Home Loans originated 85% of the loans in COLT 2016-2. In September, New York’s financial regulator asked Caliber about its origination of mortgages to borrowers with checkered credit histories as well as its handling of delinquent borrowers, an indication that the regulator is ramping up an early stage investigation of the lender. Caliber has declined comment on New York’s request for documents.

Conclusions

New opportunities for consumers, lenders and investors have arisen in the nonprime residential mortgage sector, but whether the market can successfully jumpstart a nonprime RMBS market remains to be seen.

[1] Fitch Ratings, COLT 2016-2 Mortgage Loan Trust Presale Report

This article was written exclusively for GoRion.

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This article has been exclusively written for GoRion by...

Kerry Curry

Kerry Curry

Kerry Curry is a freelance writer based in Dallas and former executive editor of HousingWire, an influential source of news and information for U.S. mortgage markets. She covers banking, finance, real estate, law and general business news for a variety of media and corporate clients.

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4 comments on “Stated Income Mortgages Quietly Return to RMBS

  1. Frank on

    Kerry, What really needs to be pointed out is that stated income or altertanive income loans did just fine in 1991 until the 2000s. As a mortgage veteran, I remember veyr well the low doc loans back then, called “easy doc”. Borrower had to have a 720 orhigher credit score, 30% down or 30% equity for a refinance and 6 -12 months in liquid reserves. No crisis or concerns back then.
    What happened in the late 90’s was Clinton’s push for everyone to own a home. In the early 2000’s banks lowered their credit criteria, Bush promoted the $250k/500k capital gains excluson if you owned the home for 2 years as a primary residence and also supply some buyer’s cashed out of the dot-com bust early enough so they had to invest it somewhere which was, “housing”.
    Then underwritng guidelines got even more relaxed with No Job, No Income, No Asset loans, and even negative amortization loans.

    So, the real problem is sub-prime low doc loans and highly leveraged. People will not just walk away as much from a home they put 30% of their money into.

    What concerns me now? I see 85% financing using alternative income loans and 95% financing up to $1,500,000. Albeit the borrower needs to have 12 – 18 months of payment in reservesand a 740 or 760 credit score, it is still wrong. Chase and few others offer just 10% down up to $2,5 million. I think people will awalk away from a 5 or 10% down when or if their values fall.

    Reply
    • Art Bail on

      I agree. The early 30% down ( Barclay) stated loans were strong performers. On Jumbos it often eliminated the need for Business managers to send over reams of Returns and other financial statements specifically Balance sheets. I believe these loans should be restricted to the non-conforming Jumbo market.

      Reply
  2. WF on

    So are all these articles about Caliber and GoRion part of GoRion’s SEO strategy? Weren’t you guys trying to create some kind of underwriting risk engine for Non QM loans. Has that failed and you’re just a blog now or is this part of SEO for you guys?

    Reply
    • GoRion on

      Thank you for your interest, WF.

      The system we developed allows originators to get into the market, and ensures investors that all their loans are originated properly.
       
      The way we do it is actually quite simple. The system manages legal risk which is insured by a Lloyd’s policy covering up to $100,000 against legal claims, and offers third-party verification that every borrower on the platform can repay their loans.
       
      Contact us to schedule a time to hop on a quick call : http://www.gorion.com/contact-us/ so we can tell you more about it.
      You may also find more information about our solution on our about us page : http://www.gorion.com/about-us/.

      Reply

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