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. 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.
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.
 Fitch Ratings, COLT 2016-2 Mortgage Loan Trust Presale Report
This article was written exclusively for GoRion.