Wednesday, February 08, 2006

Stated Income favorite

I want to take a look at 2 separate articles and show you (again) why I'm not a big fan of the way stated income loans have been used. Let's take a look at this 'entertaining' article about rock musicians buying homes. It seems that one 'rocker' who hasn't made it yet, is now rockin' the loan business! The niche is doing seminars and getting loans for other aspiring rock musicians.

I really like this intro to the subject of the article: "Patey, 35, moonlights with the band The Raging Teens -- ''The Aging Teens," he quips -- and manages the bands Darkbuster and Emergency Music, plus his wife, singer-songwriter Mary Lou Lord. But for the last year he's also worked full time for Northeast Lending as a mortgage consultant, telling rockers they can buy a house, even with no day job and no savings."

Anybody seeing a problem yet? If not, don't worry....there is more.

At some of the seminars, people concerns that range from improving credit scores -- maxing out the plastic to put together a CD can do a number on them -- to documenting income and having less than $2,000 in the bank.

In response, Patey and realtor Stephen LaBollita, Patey's partner in the seminar venture, suggest such options as interest-only mortgages and loans that don't require income verification.

Great, take borrowers with maxed out plastic, hardly any money in the bank, and get them an interest-only no-doc loan!!! It might have been a 'plan' that worked the past few years, but I have to believe that eventually these 'rockers' will have a slow month or two and start missing payments. After all, they don't have regular jobs, or savings.

I think this is the kicker though: Patey's day-job boss, Northeast Lending's co-owner Geoff Ricks, 28, explains to a reporter, ''It's not that you want to be in [those loans] forever, but you get in the door."

Says Patey, ''You can always refinance down the road." In the meantime, ''Spend the money on other stuff, like Pabst Blue Ribbon, supporting local rock bands that don't make any money."

It's this attitude that makes Patey -- with his slicked-back hair, heavy glasses, and turned-up jeans -- think rockers will feel more comfortable with him than with ''the guy with a suit and tie."

Here are 2 more 'words of wisdom' to live by: Down the road your house will be your most valuable asset. You can use that equity to pay for college tuition . . . or recording an album. and Explore mortgage options. Don't settle for a loan you're worried you won't be able to afford if the gigs stop coming.

On one hand you are 'educating' people on no-doc and interest only loans, then you tell people not to settle for a loan they won't be able to afford if the gigs stop coming? If you don't have a job, or savings, how can you afford the cost of housing in Boston?? Oh, that's right, they already filled in the 'appreciation' part of the equation. Your house will be your most valuable asset...and you can use the equity for college or to record an album.

ROCK ON!! Get a mortgage with no job, no savings...and refinance when you have some equity so that you can buy some beer and help other struggling bands. I guess it is a good thing they don't partner with an honest financial planner. I don't know too many people that would suggest buying homes under these conditions....other than the people that will directly profit from it.

Now that we have looked at the 'cause' side of the equation, lets look at this article that deals with the San Diego market. The author looks at the two main reasons that San Diego real estate is hitting the skids: Two kinds of gamblers are leaving town in a hurry: (1) speculators, or people buying condos to sell them, not live in them, and (2) homebuyers taking on exotic mortgages so they can buy houses they can't afford. The former have been skipping town for a year, and the latter are being restrained by regulators who fear a wave of foreclosures and defaults.

The author then points out the situations that are making things even worse: Two abuses are exacerbating this situation: (1) overblown housing appraisals and (2) false statements of family income on mortgage applications. These deceitful practices -- typical of financial bubbles -- have permitted the gambling game to go on.

Where have you heard about this before? It is just nice that media is finally reaching the 'masses' with what I have seen for years now, and been blogging about for months. But wait, it gets better...

As the real estate bubble expanded, San Diegans had to live with high home prices and low affordability. It was shocking when only 10 percent of families could afford the typical home, and now it's down to 5 percent.

So people took on complex mortgages, with names such as "interest-only" and "option adjustable rate," permitting homebuyers "to buy a bigger house than they ought to buy,

How long do you think things can continue when only 5% of a major metropolitan area can afford the price of homes?

I think this explains exactly what I have seen the past few years: "There has been a race between affordability and exotic financing. Affordability has been trying to keep people out of the market, and exotic loans have tried to keep them in. Over the last couple of years, exotic loans won that race. When the exotic loans start to lose, the San Diego market will lose a lot of demand."

I did a post a while ago that compared the payments of 30, 40, and 100 year loans. I wanted to show that extending the loan term a long time, doesn't necessarily save much on the monthly payment. Eventually the 'market' is going to run out of ways to stretch, extend, or delay the payments that invariably will be due. Oh that's right, I forgot, you just SELL!!! ...because property only goes up!

The article also had an FB story buried down in there: "The price of the asset has gone way beyond its long-term fundamentals," says Robert Campbell, publisher of San Diego's Campbell Real Estate Timing Letter. "It's become a Tinkerbell world." As regulators "tighten up on funny-money loans," those housing prices will come down to earth quickly.

Campbell just heard the story about a San Marcos fellow who bought a $700,000 home in mid-2004 without putting any money down. "Today the home is worth $610,000. It's $90,000 underwater," says Campbell. The fellow hasn't made a mortgage payment in a year. He figured he would have to sell the house for $760,000 to make the back payments and get out even. But his broker told him that the highest price he could get for the home is $610,000, based on comparable prices in the area. "There is a silent crash going on," says Campbell, who talks to real estate brokers every day.

"I have not yet seen a bankruptcy" as a result of the exotic mortgages, says bankruptcy trustee Richard Kipperman. "But we know it's coming."

Like I discussed in an earlier post titled, What is taking so long? I covered why we aren't seeing the BK's...YET. Over the past 5-8 years, appreciation, and a hot sellers market has 'saved' most people that got into trouble, or in over their heads. It is over this time that interest only, neg-am, option ARM's, and other exotic mortgages became popular.

The article finishes up with the typical "analysts say" bla bla bla...BUT this time it is countered by Campbell who says "Campbell points out that the housing market itself has been a big source of job growth. So an implosion could affect the economy generally. He sees a high probability that Southern California home prices will plunge 20 to 40 percent. His Real Estate Crash Index signaled "sell" in August of last year and continues to plummet.

Unfortunately, San Diegans have been borrowing against the inflated equity in their homes to continue their consumption. If home prices decline and lending regulations tighten up, that game could slow. Sales at retailers, car dealers, and other consumer outlets could suffer. This will impact jobs and, in a snowball effect, further whack the housing market. An economy based on debt is risky. An economy based on dangerously speculative debt could be disastrous.

I know how I think it will all pan out, and I'm sure that many of you feel the same way. It is just going to take TIME! Just wait until people realize their neighbor is losing their house. Wait until "John" and "Sally" are hanging out by the water cooler at work all glassy eyed and shell shocked when they realize their I/O or option ARM is about to adjust, and they can't refi, or make the new payments. Look at our 'rockers'. They are marching down the same path that is leading San Diego to increased inventories and eventually much lower prices. Many people are using these short term loans as ways to 'get' some quick appreciation before they sell. Just look at San Diego to see the results of everybody buying at one time...and now selling at one time.

Everybody talks about the aerospace industry taking a major hit back in the early 90's. I have a question that I don't know the answer to: was 40% of the job growth in California from 1985 to 1990 in the aerospace industry? I doubt it was, but I know that real estate related jobs have accounted for 40% of the job growth in this state the past 4-5 years. I can't find the link right now, but I'm sure one of the readers has it handy.

Before I wrap this up, I need to report that the San Diego inventory per Ziprealty is up to 16,464. That is an increase of 67 properties in about 24 hours! I guess that is part of the 'normal' market the California Association of Realtors told us was coming. The good thing, according to them, is that increases in inventory don't mean price reductions......riiiiiiight!!!!

I want to thank everybody for making the forums a pretty big success in only 6 days! There are over 315 posts and 120 registered members! Keep the excellent content coming!

I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...

...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!



Anonymous Anonymous said...

Is overstating ones income on a loan application fraud?? And if so, won't that make it impossible to discharge in bankruptcy?

2/09/2006 6:34 AM  
Anonymous Anonymous said...

When the tide goes out exposed is lots of corrupt unethical activity.

It's a shame that real home buyers are buying priced out from jerks with no money.

this needs to end now with a Kaboom!
It will be fun watching the realtors builders and mtg brokers squirming for business. the arrogance and greed is widespread in the industry.

2/09/2006 8:41 AM  
Blogger Downturn said...

Q: How do you get the Bass player off your front porch?

A: Pay for the pizza!

2/09/2006 7:53 PM  
Anonymous Anonymous said...

I applied for my first mortgage recently. I'm in graduate school but I have a job lined up for September (offer letter in hand). We would buy in June so it would only be a short time when both of us wouldn't be working and we had mtg payments. But the broker said they couldn't my salary into consideration so we would have to qualify on my wife's salary alone. She suggested doing a stated income loan. I couldn't figure out why we would do this. If we are qualifying on my wife's salary alone, and she has impeccable credit, why not state the income? I thought maybe she was trying, with a wink and a nod, to tell me to overstate my wife's income to include what I will be making. Is this what goes on?

btw- I wouldn't do it anyway, just curious.

2/13/2006 7:14 AM  
Anonymous Anonymous said...

Wow, yet another severely uninformed sky-is-falling "consumer advocate" gets a blog.

I don't even know where to begin trashing most of your theories. First off, stated income loans have many purposes. A lot of the rockers you mention get paid in cash and/or don't get regular paystubs and W2's. However, they do make enough money to buy a house. So an entertainer who makes $50K a year that he can't document doesn't deserve a loan but the peon working at Electronics Boutique making $28K a year who does get a loan @ a 60% Debt to income ratio does? I can tell you from a LOT of experience it's the people who can't manage debt who get BK's and foreclosed upon. NOT people with perfect credit who cannot prove their income. SInce you obviously have zero real-life experience, you wouldn't know that stated income and no-doc loans require a high credit score and several active/on-time tradelines. Meaning, this person has to have had lots of GOOD credit over a few years time proving that he/she can manage their debt.

Don't worry, it's normal for people who don't know what they're talking about to attack those who do and critcize situations they don't understand.

And for those who asked...stating your income is not unethical, illegal and fraudulent. Most stated income programs require a borrower sign a form called a 4506T that allows the bank to pull previous years taxes to make sure their income is inline with what they stated. ALSO, the banks require that the income a borrower states is inline w/ their position, i.e. a receptionist claiming to make $100,000 a year will NOT get a loan.

Bottom line, if you can't manage your finances, it doesn't matter if you make $20K a year or $200K a year.

Oh, and do some research and housing prices, the economy, interest rates, stated income loans, the IRS and finances before you make another uninformed blog.

3/25/2006 5:51 AM  
Anonymous Anonymous said...

To the last guy saying stated income is not fraud. Well it is if you are lieng about it, not if you tell the truth. Also stated income is only for people with good credit. What the fuck seriously you think this. I am a mortgage broker outside of san francisco and I have a bank that will offer a 100% loan up to 950,000 stated income and stated assets. ALL WITH A 620 FICO. So what the fuck do you know about the industry?

4/14/2006 11:34 AM  

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