must read for 'Independent Contractors' seeking mortgages or re-fi's ...
The Hartford Courant reports: "
Lenders Will Be Spotting Income Fibs Much Faster
Starting Monday, it's going to get much riskier to fib about your income when you apply for a home mortgage. That's because the Internal Revenue Service is overhauling a key income verification tool used by lenders - making it faster and easier to pull up electronically the confidential income tax information of borrowers.
...
Many lenders in recent years have offered "stated income" and other limited documentation mortgages aimed especially at self-employed applicants. Dubbed "liar loans" by industry critics, stated-income mortgage programs allow applicants to bypass standard underwriting requirements for W-2s or copies of personal and corporate income tax records.
Instead, applicants simply assure the loan officer or broker that, yes indeed, we earn enough to qualify for the mortgage, and the transaction proceeds to closing. Often lenders will ask borrowers to fill out what is known as an IRS Form 4506-T along with their other mortgage documents.
That form authorizes the lender or the investor providing the money for the mortgage to obtain transcripts from the IRS summarizing income and tax data for as many as four years. The form must be signed by the borrower and can be used only during the 60-day period after the date of signing.
Until now, the process of faxing in 4506-T requests to the IRS and obtaining transcripts has been paper-driven and non-electronic - making income verifications slow and difficult to fit into lenders' highly automated loan underwriting systems. Most lenders have used 4506-T forms as a way to perform quality-control checks on pools of closed mortgages.
But now, with the IRS promising to provide electronic transcript tax data within one to two business days in an electronic format, more lenders are likely to run income checks before closing - even on loans to applicants who are not self-employed or using stated-income programs."
Re: must read for 'Independent Contractors' seeking mortgages or re-fi's ...
So nice the IRS is doing it's best to automate for the protection of the wealthy class.
...
Did I say that out loud?
Re: must read for 'Independent Contractors' seeking mortgages or re-fi's ...
very few lenders actually require a 4506
Re: must read for 'Independent Contractors' seeking mortgages or re-fi's ...
^^^ few lenders HAD required a 4506-T in the past, for the exact reason stated in the news report ... that the old paper based IRS reported income verification system took weeks to provide useful information back to the lender, which made it impractical for lenders to consider actually using it as criteria for loan approvals. However, with a dramatic rise in recent loan default rates, and with increasing gov't regulatory pressure now being exerted on lenders to tighten their creditworthiness criteria, the sudden availability of a 24 - 48 hour turnaround for an IRS reported income verification is almost certainly going to make a 4506-T IRS reported income verification check part of the standard procedure for mortgage loan approvals by 'mainstream' lenders.
I'll agree with you that the subprime lenders probably won't get involved with 4506-T IRS reported income verification checks ... if for no other reason than the probability that some 50% of subprime loan applicants couldn't be approved based on their past 3-4 years of tax history !
As Deo implies, the new availability of 24 - 48 hour turnarounds from the IRS is likely to reinforce the further evolution of a "two class" financial system ... where loan applicants with a fully documented tax and financial history will be able to get mortgages / re-fi's at 'reasonable' interest rates under 'reasonable' terms from 'mainstream' lenders, but where loan applicants who don't / can't have a fully documented tax and financial history are likely to be forced to deal with 'subprime' lenders, and forced to pay exorbitant interest rates under less favorable terms, if they want to be approved for future loans.
Depending on how deep the coming FNM / FRE default debacle winds up being, it is also fairly easy to extrapolate that FNM / FRE could mandate a 4506-T based IRS reported income check as a condition of acceptance for the resale of future mortgage loans. Given that the vast majority of subprime mortgage lenders have no intention of holding newly written mortgages to maturity, any such change in the resale criteria might filter down to changes in subprime lending criteria and/or interest rates as well. After all, some recent statistics are showing that something like one in five recently written subprime mortgages is already in default / foreclosure. If those sort of losses had to be absorbed by the subprime lenders themselves rather than reselling the 'risk' to FNM / FRE or other mortgage bond repackagers, the subprime lenders would potentially have to charge 10%+ interest on subprime mortgage loans in order for the profits from four 'good' loans to cover the losses from the fifth 'bad' loan.
Re: must read for 'Independent Contractors' seeking mortgages or re-fi's ...
also, this tidbit about changes in regulations covering creditworthiness of would-be borrowers just came out as well - with the timing of new tighter creditworthiness standards and the timing of 'near real time' IRS verifications of reported income being extremely coincidental !
(snip)"Despite rumors that the new lending guidelines would be benign, the Comptroller of the Currency, the Federal Reserve and other regulators has elected to keep intact a proposal that says banks must qualify borrowers for popular payment-option and interest-only loans at a "fully-indexed" rate -- the highest rate that they could incur over the life of the loan. The new guidance also says lenders should assume a payment-option borrower will let the balance of the loan grow for the maximum period. Being a natural skeptic, I always suspect some small print loophole, but on the surface this will have the effect of largely shutting down the toxic mortgage market, and removes a large component of speculative demand for housing.
As many aggressive state Attorney Generals are often less corrupt than the hacks appointed by this administration at the Federal level, the new combination is a real red flag to even non-regulated toxic mortgage enablers [i.e. subprime and specialty mortgage lenders who cater to poor credit risk / low down payment / marginal would-be borrowers with products such as interest only loans, option ARMs, sweetheart introductory interest rate loans etc. - sic]. Give these AGs a bone, and they will build political careers out of it. On top of it, the LA Times wrote a piece today that gives some inkling of the fraud workload in Bubbleland California. A Google search on "lending fraud", now shows 9.1 million links. Have at it, take a gander, a couple dozen "sold" me. The short version from the Times, and steps now taken to halt it:
One lender recently compared 100 stated-income loans with the borrowers' tax returns and found that only 10 of the borrowers were telling the truth about their wages, according to Mortgage Asset Research Institute, a division of data firm ChoicePoint Inc. Sixty of the borrowers had exaggerated their incomes by more than 50%, according to the institute, which didn't identify the lender.
In fact, it appears many toxic enablers have at long last, already backed down their activity, and are slashing jobs as well. "(snip) from
The reason I posted this thread is that I felt these changes could be of significant impact to 'independent contractor' dancers who will be seeking new mortgage financing or the refinancing of existing mortgages in the near future. Unless the 'independent contractor' already has a 3-4 year track record of having filed realistic tax returns which can and likely will be used to verify income by potential mortgage lenders, the future chances of loan approval are likely to be very poor - at least where 'mainstream' lenders are concerned. When the new tighter regulations come into play for subprime and specialty lenders who offered 'trick' products such as interest only loans, option ARM's, sweetheart introductory interest rate loans etc. it's also highly probable that these sorts of products will cease to exist - or at the very least require serious income verification.
For many 'independent contractor' dancers, this may essentially leave only one future avenue open ... a subprime mortgage loan at a high interest rate that their reported income more or less allows them to qualify for. However, on say a $200,000 loan, this could mean a difference in monthly payments of say $925/mo on the first two years of a sweetheart / ARM loan (which will likely no longer be available) versus $1200/mo on a 6% 'mainstream' loan (which she likely won't have sufficient proof of income to qualify for) versus $1750+/mo on a 10%+ subprime loan. The same is also likely to be true for re-fi financing.
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Re: must read for 'Independent Contractors' seeking mortgages or re-fi's ...
BY even allowing stated income or no doc loans, lenders are condinig lying about income. period. it depends on who the end investor of a lender is, but it is not just sub-prime lenders who do not require a 4506. Alt-A lenders do too, some big name banks. As long as they aren't selling to fannie or freddi, they will continue to offer these loans sans 4506.
Re: must read for 'Independent Contractors' seeking mortgages or re-fi's ...
Quote:
Originally Posted by VenusGoddess
BY even allowing stated income or no doc loans, lenders are condinig lying about income. period. it depends on who the end investor of a lender is, but it is not just sub-prime lenders who do not require a 4506. Alt-A lenders do too, some big name banks. As long as they aren't selling to fannie or freddi, they will continue to offer these loans sans 4506.
Agreed. The term "due diligence" exists for a reason!
Re: must read for 'Independent Contractors' seeking mortgages or re-fi's ...
Quote:
but it is not just sub-prime lenders who do not require a 4506. Alt-A lenders do too, some big name banks. As long as they aren't selling to fannie or freddi, they will continue to offer these loans sans 4506.
What about the new regulations from the Comptroller of Currency and Federal Reserve ? From a CBA position paper released soon after the new regs were first published ...
"Proposed Guidance- Interagency Guidance on Nontraditional Mortgage
Products, 70 Fed. Reg. 77249 (December 29, 2005)
(snip)"About the scope of covered institutions, the Guidance states: “When finalized, the Guidance would apply to all banks and their subsidiaries, bank holding companies and their nonbank subsidiaries, savings associations and their subsidiaries, savings and loan holding companies and their subsidiaries, and credit unions.” While the regulatory agencies’ authority certainly extends to financial institutions that they regulate, the language quoted would appear to extend the authority to the nonfinancial institution subsidiaries of holding companies.
We believe this is broader than the scope of coverage that has been claimed for similar guidance in the past, and at least calls for the agencies to refer to the authority upon which they are basing their claim. The Guidance incorporates by reference other FFIEC guidance (for example, the Guidance says that “the institution’s underwriting standards should comply with the agencies’ real estate lending standards and appraisal regulations and associated guidelines.” Text at fn. 4. See also footnotes 6, 8, 9, and 11). This effectively extends bank supervision and regulation to companies that are not FDIC-insured."(snip)
"Loan Terms and Underwriting Standards
The Guidance states: “For all nontraditional mortgage loan products, the analysis of borrowers’ repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. In addition, for products that permit negative amortization, the repayment analysis should include the initial loan amount plus any balance increase that may accrue from the negative amortization provision.”
This raises numerous questions and would appear to challenge many underwriting practices that are in use today, and that in some cases have been in use for a long time. In general, we believe it is excessive to require that every loan be underwritten based on the worst-case assumption. Performance will vary depending on factors and conditions, and underwriting should be permitted to take these into consideration.
“Fully indexed rate” is defined in the Guidance to be the index rate prevailing at loan origination plus the margin that will apply after the expiration of an introductory interest rate. Presumably, the purpose, with which we concur, is to prevent underwriting based on “teaser rates.” However, the language is broad enough to encompass a typical 3/1 or 5/1 ARM. We would urge you to clarify that this is not the intent. It is also not clear what effect discount points might be, where they lower the initial rate.
The underwriting of a payment option ARM is not clear from this description. Assuming a loan with three options, only one of which includes minimum payments that result in negative amortization, must the loan be amortized on a “worst case” scenario? That would call for the evaluation to assume minimum payments for the full permissible term, followed by amortization at the fully indexed rate of the balance plus accrued negative amortization. The impact of this would be to turn a competitive product that is attractive for many because of its flexibility and the ability to shift payment amounts as needed, into a product that would be beyond the reach of many consumers."(snip).
obviously, the CBA saw the potential results of these new regulations, and was attempting to argue the position that these new regulations would now be binding on non-bank subsidiaries (that typically underwrote nontraditional loans) but should not be, that these new regulations toward creditworthiness standards were 'excessive', and that these new regulations would effectively tighten creditworthiness standards such that many non-traditional loan products would become 'beyond the reach of many consumers'. Nonetheless, the regs are what they are, and this week's news release confirming that the C of C and Fed are not going to soften them up as the CBA had expected means that the implementation of these new regs is now simply a matter of time.
With the regs thus finalized, I doubt that the Alt-A lenders and big name banks will be able to avoid compliance with these new regs for long - which will essentially force them to start utilizing quick turnaround 4506-T IRS reported income verifications, as well as forcing them to turn away loan applicants with marginal financial histories, in order to fulfill their 'due diligence' and regulatory compliance requirements - regardless of however lenient the stated lending standard requirements of their secondary mortgage market buyers / investors might be.
When that happens, people with 'unproveable incomes' i.e. independent contractors, with marginal financial histories and less than 3-4 years worth of realistic IRS reported incomes will likely have little choice but to go to the subprime lenders and pony up 'high risk' interest rate payments. Therefore if there are any 'independent contractors' out there that are contemplating mortgages or re-fi's, you may want to 'get a move on' before these new regs come into effect officially and significantly reduce your chances of loan approval through a 'mainstream' mortgage lender.
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