'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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