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The "Stated Income" Phenomenon

With the influx of home purchases in the late 90's and into the New Century, a phenomenon hit us all. Homes were increasing in value and the banks needed to figure out a way to keep business flowing. Otherwise, it would come close to a schreeching hault, due to the afordability factor. Yup, the ability to afford your car payments,credit cards,personal bank loans and ofcourse...Your Mortgage! In reality, all outgoing payments should be around 38 cents going out in debt for every dollar coming in through income.

Since clients "true incomes" didn't fit the model for meeting the calculated risks of offering a home loan, many just pretended. In the beginning, it was anyone's guess. Then, underwriters started buckling up and using websites like Salary.com to check a "stated income" to make sure it was in line with what the average person in that capacity would make.

Now, the rest will be unfolded and history for all to see. Fingerpointing? Check out Kristal Kraft's great blog on her area!

I think it is important to note that not all lenders are the same. Personally, I have always cared if my clients can make the payments on their homes, period. Also, I have been blatantly honest with all clients seeking a home loan, telling them if I did or didn't think that purchasing a home was in their best interests with their past,current and guestimated future financial situation. With the inclusion of “stated income loans” in the mortgage industry, many lenders will overstate a clients income substantially higher than their actual income. Why? For the sake of bringing business through the door. Is it right? No. Is it a monster that the industry and consumers have created? Yes. Just the thought of people getting into homes that they couldn't afford from the get go seems unfair. The deception came on both sides. Borrowers that understood their actions and took the risk. While others simply went with the flow and never sought to truly know if they could afford the home. Many well respected people in the real estate field will agree with me that the madness must stop. Yes, real estate is a great investment over the long haul. People will always need homes. Aside from the value of the U.S. Dollar, Real Estate is the backbone of our economy, period. It is the largest financial decision that many Americans will decide on. Having a mortgage professional that takes the time to go through your personal situation and tells you “how it is” is important! You may or may not agree with my decision, but atleast you'll appreciate it in the years to come!

Scott Gormley
Broker/Owner
Oak Valley Mortgage
2006 Chico Assoc. of Realtors Affiliate Chairman
Direct: 530.592.8362
Fax: 530.267.5555
Website: http://www.CALoan.com

Blog: http://activerain.com/blogs/lendingmagician

"You find the perfect home, we'll find the perfect loan!"

Posted by Scott Gormley on 11/02/2006 10:33 AM

Comments (21)

stated, income, loans, phenonomen, home, mortgage, broker, lender, real, estate, affordability, factor, application

21 Comments on The "Stated Income" Phenomenon

NOV

2006

I understand the concerns of the stated mortgage, but what would be an alternative?

After all, the stated program is ideal for cash income borrowers and self employed, but a salaried W2 employee on a stated program is potentailly dangerous.

Change will only come from investors. If there is no money to be made from buying mortgage notes of stated borrowers the the programs will dry up.

I recently posted this answer in one of the mortgage forums. Should we do away with Stated Income loans? posted by Ricardo Bueno.

-I just recently read that the IRS will allow lenders faster access to tax returns to check for fraud on stated income loans.

"Effective Monday, Oct. 2, 2006 the 4506-T form can be used to get electronic transcript data in one to two days. Although the law requires the 4506 forms to be signed and data and completely filled out to limit the tax years that the lender can get access to, many loan officers and lenders require the borrower to leave it all blank, especially the date. This is because the 4506 is a limited power to obtain returns and is only good for 60 days from the date on the form"

More and more lenders will require this form in order to check early and quite possible before the loan funds this form in order to reduce the probabilty of a buyback.

There are some lenders that have stated income loans that do no require this form. Such lenders are already calcualting the risk thus borrowers that do not want to sign form 4606T are still able to still purchase a home.

But I do agree with you Scott, mortgage consultants should always evaluate their clients personal financial goals and make sure that their purchase is something that is going to help them obtain wealth through ownership.

Scott you are the man, THe stated income process has been blatantly abused. This is evidenced by the number of foreclosures present. Like you said sometimes people can not afford a house payment. Often clients have a taste that exceeds their budget. Its our job as mortgage professionals to make sure the transaction fits their needs in the long run.

As a lender I appreciate brokers like you! If you haven't had a chance to read

I said Can not Should, May not Must! Buying Into Trouble 101

please do. You'll appreciate the dark humor.

Good post, yours. The general public needs to know. By the way - we've always asked for 4506T's and checked Salary.com and used the good ol' "smell" test. Essentially we look at the outstanding debt, the seasoning thereof and mostly the use. If someone submits a file where a client stated $100k income and they have 3 credit cards with a $1000 limit and all of them are near the limit .... I'm not buying that income statement and will ask for further QC review. Many lenders are not portfolio lenders or direct lenders and are operating as pass-thru or corespondent lenders and don't care as long as the lender they are selling to buys the loan.

While I agree that the stated income process has been abused, there are many people who without it, would never have a home. And the people I'm talking about DO make there payments every month on time!

Scott - I for one totally appreciate the ethics of your approach to business, and the genuine concern you voice for your clients. Hopefully your example will rub off on those who would normally take the low road.

How timely. From NAMB I just received this poll question via email: After explaining the interest rate risks and other features of a negative amortizing loan product, such as a sharp increase in payments at the first adjustment period, what percentage of the time do your customers follow your advice? I think they are reading my AR blog!

Scott.... good insight. But people will do what people want to do. And stated loans are used for many reasons. Something that is positive that wasn't mentioned. I could have a W-2'd job and work for someone on the side, on the weekends. They are bringing in income still.

Here is another thing.... we talk about stated vs full doc. But just because you have income to prove, doesn't mean that 2 months from now, you will be able to pay...even though it was verified and met all guidelines. It's called.... unemployment.... getting fired.... job lay offs.

You bring up some good points. Anyone that has written blogs about fraud, stated loans, predatory lending.... all good

My advice to all buyers: Save up the 25% down payment; don't buy it if you don't need it (too much space); and take pride in home ownership.

Something else to know is that underwriters for many lenders are now beginning to use sites such as salary.com to verify if someone's stated income is even in a believable range for the type of work that they do (i.e. a secretary states an income of $500k/year...come on...that's not coming from her job surely).

I had that in there Allan :)

"Then, underwriters started buckling up and using websites like Salary.com to check a "stated income" to make sure it was in line with what the average person in that capacity would make."

I agree with the last blog.. I work with a mortgage broker that tell it how it is. She will say your personal income doesn't fit your housing needs. Most don't care they just wanted to get into that house.. Its unfortunate and sad in a lot of ways.. But most of the population doesn't want to here NO. Well my neighbor got into a bigger home so we can to. A lot of people in professions that are commission based need a stated income loan. But there are predatory lenders, and a lot of fraud in the world. We should just keep our eyes open for those types of lenders and let the public know about them. I hope the best for everyone. Educate to make the right decisons after that they are big adults and will make up there minds.

Scott,

Whenever I do a stated income loan, I have disclosure that I make them sign. I covers all bases of a stated income loan. It is another way to of CYA. Even though you are doing the right thing, someone could come back and haunt you stating that you misrepresented their income. (Our country is very sue happy when something bad happens - even if it is not your fault).

The form pretty much states that the borrower is aware that this is a stated income loan and that the income they are stating is in fact correct. It puts all the blame on them.

As for someone's comment above (to lazy to scroll back up to see who), stated income loans are not for W2 or fixed income. These programs were designed to help those who cannot show a lot of income because they try to write off as much as possible for tax reasons or do not have a steady or a fluctuating month to month income (those on commissions).

If you would like a copy of the form that I mentioned, please email me and I will forward it along.

Jason

Jason - good move. Getting evidence from the client is awesome. Let me clarify, however, that we (lenders) do offer stated loans for fixed income borrowers and W2'd borrowers. W2'd borrowers who have a side business, play in the investment field (especially if they are paying cash for their investments and carrying the note), professional athletes who are professional but not a big name are all acceptable stated income for "fixed" income people.

What stated income must never be but often will be is a lie to get a property or earn a profit. In fact the FBI classifies this form of fraud no differently than Fraud for Housing or Fraud for Profit through a material misrepresentation of the facts.

Any loan officer who states or coaches the stating of income to provide a lower DTI in an effort to qualify for the loan is guilty of committing mortgage fraud. THIS IS ANOTHER REASON I AM DISMAYED that people who call themselves loan officers don't even think it's important that anyone who takes a mortgage application know the answers to these questions: Ding Dong: Multi-Level Loan Officer Calling

Alternatives to stated income loans are: No Income Qualifiers. the challenge is that the rates and LTV requirements are more onerous. The stated income loan needs to be abolished for no ration or no income qualifier loans.

I hate to say...back in the old days (of 2000)..but stated loans used to be reserved for 80LTV and 680 credit score or better.

"The stated income loan needs to be abolished for no ration or no income qualifier loans."

Abolished or more education of borrowers and required education and licensing of LO's? I often want to throw the baby out with the bathwater, too. Think of it from my perspective ... from the lender's perspective ... NIVA is a good loan but SIVA at least gives me something to come back after the borrower on - it mitigates a modicum of risk. (Personally I'd love to see state loans get back to 680/80 - talk about lowering risk weighted exposure!)

Good point, Brian, as per usual.

Very interesting discussion, Scott!

But whatever has been going on with buyers getting into homes they can't afford through the use of stated income loans, something has to be said about the intermediary between the underwriters and the clients! Most clients wouldn't know about stated income loans if the loan officer didn't inform them about them at some point, and in my experience as a loan officer, it was up to my discretion how to structure the loan and what income to claim. If clients are defaulting on loans, although I don't wish to point any fingers, certainly who ever counseled them on the loan qualifies as a good bet of who set the client up for failure.

I can't see the stated income loan going disappearing however, just as the one month adjustable interest only arms are likely to not disappear.

There are two levels of discretion required to avoid a setup for disaster. First, the loan officer as the expert (as compared to the homeowner/homebuyer) has the responsibility of monitoring to ensure that a loan is not assembled past a certain level of acceptable risk. And second, the loan applicant needs to use wisdom and self-control in honestly assessing what monthly payment they can successfully manage. Greed on both the sides of LOs and loan applicants is what leads to disaster.....

I am doing lots of Short Sales these days. One guy bought two houses (Stated Income 80/20 adjustables) one for 895k and another for 535k. Well, they adjusted and now his payments are about $9000 a month on both. He is an Assistant Manager at Pepboys and makes about 35k a year. Where have all the Underwriters gone? Even with stated income, you should have to take employment into consideration. Anyone could figure an Assistant Manager at a Tire store cannot afford1.5 million in real estate and now the Banks are going to eat 300k. It will make it much harder for other staed borrowers down the road.

Underwriters? Depends on the lender. If they were portfolio loans who knows what happened. With stated income we do take employment into consideration. If there were no mitigating circumstances such as he owned several other income producing properties this would have never made it past our loan officers. But as I have said in too many posts and am more convinced every day most loan officers should NOT be in the business or SHOULD be held to the very strict standards of such organizations as NAMB or MBA or others. The problem goes all the way to some "lenders" but the very bottom of the pile? Uneducated or unscrupulous borrowers. Stated loan requirements are already starting to equalize - they got WAY out of hand for some time.