BIG mortgages...little documentation
I sold a condo and bought a house in June 2005. I sold in Arlington and bought out in the burbs of MD. When I went to buy the house we brought a lot of what I call "fake money" to the table as a downpayment. Ended up with over 50% downpayment. (I expect to lose most of this "equity" in the next few years, but we didn't want to rent and we ended up in a nice house with a PITI of 14% between both our salaries so we don't mind too much is we got robbed on the purchase because the condo market was even more extreme.) While speaking to a mortgage broker friend at the time he said with our credit scores and no documentation of income he could have given us a MILLION DOLLAR loan to buy a million dollar home. He was completely serious. My wife, who says the best things sometimes and this was one of those times, quietly said, "That's scary." There was then about a minute of silence before the broker said, "That is scary." And he didn't mention any mortgage financing to us again and we went to a big bank and got a 5 5/8% 30 fixed conforming (anybody remember that word?) no points mortgage.
This brings us to my question: Is it still that scary? I have heard that the industry is starting to crack down and require more documentation of income, etc. Is this really starting to happen or could my wife and I still walk into a mortgage broker's office and get a million dollar loan?
I know my companies products, as well the products of my main competitors...but I don't know every loan program out there for the hundreds of different lenders. So here is the reply from a reader who happens to be a mortgage broker:
Looking at a nearby product matrix for a mortgage company we sell to, I can obtain a borrower up to $999,999 (but not a million!) under the No Doc program. And if I wanted to spend the minute to look it up, I'm sure there is a lender who will give you $1,000,000+ going the No Doc route. If you look at a 1003 using No Doc, you will notice the employment section, income section, and asset section are left blank. The lender will look at your mortgage history to see if you have experience handling the payment. This is what we call payment shock. If you can handle 50% of your previous mortgage/rent payment, you can get a No Doc loan that high.
The ultimate safeguard for a large loan amount is equity. With the lender matrix I am looking at, $999,999 means you have to have a OO SFR with a 70% LTV with a 580 mid FICO. For non-jumbo No Doc loans, you can buy a house at 95% LTV without providing any information. Of course, the rate is higher as is MI or secondary financing. There is also a nice PPP involved as well.
As long as a borrower has a good FICO score, they can pretty much buy whatever they want. With the No Doc loan, they don't even verify where your downpayment comes from. I imagine if you can verify that you have made a big rent payment for the past year, you can qualify for anything.
Your wife is correct. It is scary seeing how easy it is to qualify for mortgage financing. It has changed quite a bit since I came into this business 11 years ago. No one could comprehend how someone could buy a house without putting any of their own money into the transaction. Easing the lending standards has created a lot of new homeowners, but it is a shaky foundation when families will be putting the majority of their income into house payments.
The system has never been tested like this, where you have so many people borrowing so much money with so little proof that they can repay the obligation. It has probably artificially raised property values, but if the foreclosures start, it will go back down almost as fast.
I would think the industry would start to crack down, but a few weeks ago I got a sheet from a lender stating they would do 100% financing, stated only, to borrowers with a 560 or 570 credit score. These are not conforming lenders, but they are really desperate to keep the party going. I do notice the Alt-A price up's on No Ratio and No Doc loans going up as with the rates charged on 2nd mortgages. It will ultimately be decided by the investors and governments that buy the MBS's. If they decide there is too much risk, these products will go away.
To follow up to both of these posts, I spoke with a bond trader last week, and asked them about the MBS market. I asked why people keep buying these 'crappy' loans. We didn't talk very long or get too in depth, but the trader said that as crappy as the loans might be, the return is much better than many foreigners can get in their bonds. They said that many people are aware that there is the possibility of large defaults. Defaults would hurt the returns, but they would still 'probably' be ahead than if they were buying bonds in another country. That said, I know from talking to some people in capital markets that the investors are demanding a much higher return. This is especially true on 2nd mortgages and high LTV loans. Rates alone won't 'pop' this bubble, but they will certainly curb the 20-30% annual returns many people accept as the 'norm' after the past few years.
If the add-ons and hits to commission are any indication, most companies are pushing 40yr mortgages, instead of interest-only mortgages. I think this has something to do with the way I/O loans are performing on the secondary market, but I cannot confirm this. I just know that the secondary market dictates our rates, guidelines, and pricing ads. When mortgage rates and guidelines change...it is safe to say...it's about the money!
I look forward to the comments and feedback.
I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...
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