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Thread: Agency Sounds Warning On Stated-Income And Interest-Only Mortgages

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    Default Agency Sounds Warning On Stated-Income And Interest-Only Mortgages

    'Agency Sounds Warning On Stated-Income And Interest-Only Mortgages
    by Kenneth R. Harney

    An important mortgage market player has sounded an alarm about limited-doc and interest-only features in a growing percentage of home loans, especially those made to purchasers with subprime credit.

    In an advisory issued last week, Wall Street's Dominion Bond Rating Service, which assigns risk ratings to mortgage-backed securities pools, expressed "concern" about lenders' potential "easing of credit standards" to boost origination volumes in the post-refi boom climate of 2005.

    The rating agency cited interest-only and "stated documentation" loans in new subprime mortgage pools as especially worrisome. "Stated" doc mortgages generally do not require homebuyers to provide hard evidence of income and assets to support their applications. Interest-only loans allow home buyers reduced monthly payments -- there is no principal reduction for an agreed-upon initial period -- but then convert to full amortization for the balance of the term.

    Dominion said "mortgages underwritten (with) minimal documentation sometimes account for as much as 50 percent of mortgage pools" in the subprime arena. Yet the no-doc/stated-income concept was originally designed to assist self-employed, business-owning homebuyers with solid credit histories who preferred not to divulge their full financial details. The idea was not designed for buyers with marginal incomes and credit.

    No-doc "has since been expanded to include salaried borrowers who cannot or will not show proof of income," said Dominion in its advisory. Some analysts have called such mortgages "liar loans" because the income or assets claimed by the applicant may be illusory or fraudulent. That potential, in turn, raises the chance of future delinquencies and foreclosures.

    Dominion is hardly alone in its opinions. Last spring, two major mortgage insurance companies blew the whistle on "NINAs" -- no income, no asset verification loans -- and curtailed issuance of new insurance to no-doc borrowers with low downpayments.

    "It may be stating the obvious," said Curt Culver, president and CEO of Mortgage Guaranty Insurance Corp. (MGIC), the largest underwriter in the industry, "but you can't document what you don't have. In many instances (NINAs) are allowing borrowers to do just that. Why wouldn't a borrower choose to fully document their income to assure that they get the lowest possible rate?"(snip) '

    ......... why indeed ?

    full article at

    At any rate, the handwriting is now on the wall that would be no-doc and stated income borrowers are going to be subjected to a significantly higher level of scrutiny before the insurers who underwrite mortgages will agree to provide coverage. Without mortgage insurance, lenders will have to assume a much higher degree of risk themselves - as opposed to the current situation of lenders pocketing the points and interest rate margin while passing on the 'cost risk' of belly-up borrowers on to the insurers. This in turn will lead to many more no-doc and stated income borrowers being turned down, and higher interest rates for those few no-doc and stated income borrowers who can still get approvals.

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    Default Re: Agency Sounds Warning On Stated-Income And Interest-Only Mortgages

    Thank you for posting this!
    "She has written so well, and marvellously well, that I was completely ashamed of myself as a writer...But this girl, who is to my knowledge very unpleasant and we might even say a high-grade bitch, can write rings around all of us who consider ourselves as writers"

    Ernest Hemingway on writer, aviation pioneer and horse trainer Beryl Markham


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    Default Re: Agency Sounds Warning On Stated-Income And Interest-Only Mortgages

    I figured that it might be of particular interest to dancers. Basically, it's just the 'private sector' starting to take advantage of the same income side and expenditure side financial records that the IRS and state tax people have been tapping into.

    Bottom line is that, increasingly, private sector financial circles are looking to "official" incomes only and treating under the table cash as if it doesn't exist. Eventually this will relegate those who try to 'fly below the radar' in regard to reporting their incomes to keeping cash in their mattress, spending their cash $1000 or less at a time, and unable to buy anything which requires a gov't registration (so far house, car, boat) or financing.

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    Default Re: Agency Sounds Warning On Stated-Income And Interest-Only Mortgages

    Well, the mortgage insurance is a joke, anyways. A total waste of money...on the borrower's part, anyways.

    Can't come up with more money down? Do a split mortgage and pay the smaller one off faster using the money that you would normally have to pay to the MI. (80/20, 80/15, 80/10) You'll avoid the MI.

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    Default Re: Agency Sounds Warning On Stated-Income And Interest-Only Mortgages

    Well, the mortgage insurance is a joke, anyways. A total waste of money...on the borrower's part, anyways.
    Well it's arguable that mortgage insurance is of great interest to the lenders, otherwise it wouldn't exist in the first place. I have a suspicion that the approval criteria for such financing techniques as split mortgages are going to tighten as well, particularly if "hard documentation" of income is sparse or non-existant.

    Bottom line here is that lending institutions ... even 'creative' ones ... are seriously beginning to look at risk factors now that confidence in an ever rising real estate bubble is quickly being lost. As posted elsewhere, in a raging bubble environment lenders really didn't care if a borrower went belly-up or not because they were virtually assured the ability to foreclose and sell the property at a price which was higher than the amount they were owed by the borrower. However in many real estate markets this is clearly no longer the case, and lenders are facing the distinct possibility that they won't be able to get all of their money back from foreclosure and sale if a borrower goes belly-up on them in the future. This fact, along with tighter scrutiny by insurers before agreeing to write loan insurance, is directly resulting in a demand by lenders for more solid proof of a would-be borrower's actual ability to pay before granting approval for loans.

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