There is one surefire way to reinvigorate the housing industry and it's such a simple solution that regulators should be embarrassed they have to be reading about it here: Re-institute the liar loan.
In polite circles, these loans were called stated income loans or "no doc" -- short for "no documentation" loans. They allowed borrowers to say that their income was whatever the bank wanted to hear it was and then, with a wink and a nod, get their money to buy a house. Everybody was happy and no, this alone did not lead to the housing collapse -- although it may lead to its recovery.
First, in their defense: It was those adjustable rate loans with crazy low initial interest rates that jumped into the stratosphere at about the time you lost your job that led to the housing collapse. It was also the fact that some homeowners kept borrowing against the paper equity in their homes under the false assumption that the home's value would continue to appreciate. It didn't.
But liar loans? Puh-lease. They may have hurt those who lied to the extent that their noses grew, but that wasn't most people. Most people inflated their income 15% to 19%, says the research. And that was basically the populace disagreeing with the government about how much of our earnings we should spend on our housing. The regulators thought 25% was enough. I, for one, didn't.
Where I live was always more important to me than what I drove or what I wore. Where I live trumped where I vacationed, where I dined out, how I spent my disposable income. If I wanted to spend a greater percentage of my income on my housing, what's it to you Mr. Big Bank? Shouldn't banks be more concerned about whether I can pay them on time? And I always have.
The liar loan -- the ability to get a bank to loan you money to buy a house that you know you can afford -- is especially important today, when so many people are self-employed. This is a gig economy; we don't have corporate jobs, we work for ourselves. Many people are doing fine financially, but just can't document it. Lenders require you show them a pay stub or, for the self-employed, two years worth of income tax statements showing your earnings. Well, if you don't have a corporate job you don't have a pay stub, and if you haven't been self-employed for two years, what are you supposed to do? It doesn't mean you can't afford a house; it means you can't prove to a lender that you can -- and there is a world of difference in those two events.
In some cases, the gig-employed are trapped in higher interest rate loans and unable to refinance to lower payments because they can't show two years of tax statements -- even though they haven't missed a mortgage payment at the higher rate. Does that make any sense?
It doesn't to Robert Satnick, former head of the California Mortgage Bankers Association. Most of the loans being written now are for refinances, and there is a whole market of people with good credit and earning money who can't qualify because of the regulations now in place.
The good news is, at least according to Forbes, liar loans are making a comeback. Quietly, of course, but lenders are starting to write them again.
In 2006 and 2007, no-doc and low-doc loans were about 40% of newly-issued mortgages, according to FirstAmerican CoreLogic. Low-doc loans were about 8% of newly-originated loans as of February, the group reported.
Forbes said that Wall Street Funding of America, a Santa Ana, Calif.--based lender, recently offered a low-doc package to self-employed borrowers seeking no more than 60% of the value of the home and with six months of mortgage payments in reserve. The interest rate was 1.5 to 2 percentage points higher than a conventional loan, less for those with excellent credit.
But big meanie government has already cast its evil eye in this direction. The financial reform package passed by the House and under review by the Senate requires lenders who give mortgages to folks without full documentation to post a reserve equal to 5% of the loan's value before they are securitized. That's going to make it harder to get these loans, which certainly runs counter to the purported intent of trying to stimulate the housing market.
Without loans, who will be buying houses? I say, a little lie can sometimes save an economy.
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