The updated consumer protection law that was put in the books earlier in the year is effective as of today. One of its stipulations is that a stated income mortgage loan can be a crime in the state, as interpreted by some legal experts. And that has caused thick smoke to come out of the ears of many in the residential real estate business, and for a good reason. There seems to be genuine ambiguity as to what the new law really means.
Critics feel that the stated income program is going to become nearly impossible to get from now on. And if so, it would have a serious negative impact on housing here in Southern Nevada. This is prime territory for service industry workers and business owners who mainly earn their living from tips, which are hard to document accurately. No one would like to see the market that is already struggling to sink even further.
Other skeptics are also pointing out that the secondary market will cease to buy Nevada's stated loans if they view that doing so may become a felony. They are now saying that at least two good-sized banks are no longer purchasing mortgages originated here and more are perhaps joining their ranks.
On the other side of the coin are those, including the bill's sponsor, who feel that there is nothing to worry about. All it asks is for the loan originator to verify the borrower's income and ability to repay the mortgage should all or part of his income be undocumented. This could be done by checking out the applicant's bank statements, for instance. But then the question arises, would it now be considered a stated program at all? Stated originally meant that income is not verified.
In addition, they add that Wall Street will continue to buy these loans, although some investors decide not to. That's true. Each buyer has its own criteria for the portfolio they like to acquire and thus far the market remains good for them.
The state has published written guidelines about the law to alleviate any concerns, but it appears that more is needed. There still is confusion as to how exactly it works. Perhaps a legal interpretation is now in order, as was suggested by one of the participants to this discussion.
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People who don't understand the lending industry writing laws regulating lending. This is not going to get better...it will unravel further and further, making no sense along the way.
Minnesota has done about the same thing and as you pointed out, in two short months, I have seen 4 good quality borrowers unable to get mortgages because of the new law in our state.
I heard our Attorney General was asking the state mortgage association why after her brilliant changes has the foreclosure rate continued to rise. She ain't seen nothin yet! Without stated income and as a result of no prepayment penalties in the state, self-employed and sub-prime borrowers who's' ARM are going adjustable in the near future will have to grin and bear it. Many of them will simply walk away as they cannot afford the higher payment.
Isn't it great when government gets involved in the private sector!!
Rich,
It's too bad that they keep enacting laws without thinking them carefully through.
Ken,
The private sector is already addressing this problem by tightening underwriting guidelines.
Esko,
It's good to see you address this. I was wondering what would happen to all those people who rely heavily on tips and how that would affect their ability to buy or refinance. Please keep us posted.
Micki,
Hopefully they will soon clarify the issue for everyone.
Sounds like the new laws here in Minnesota. BUT banks do not have to follow state guidelines, we go by federal guidelines.
But there are work arounds that everyone seems to be finding...
Really what has happened/happening is a lot of the independent brokers, working out of their homes are being driven out of business or are joining "Net Branches" in order to be able to do stated income loans. What that is they must apply at different banks and basically become an employee with their own branch. Several people I know have done this and seem to be thriving.
If you do this, be carefull who you sign up with. I have heard of some companies charging as much as $10,000 and others only $1500. But expensive may not always mean better!
Colorado passed a similar law the same day, August 1st, 2007.
Hi Esko,
I wonder if these lawmakers would fee if the shoe was on the other foot.
If someone is using a stated income loan to get a home that they can't afford, do they need legal protection? It's their decision to have that payment they can't afford.
Do the mortgage companies need legal protection? They already charge more in interest or fees to offset the risk. Some have tightened their guidelines to minimize their exposure.
In short, everyone knows what they're doing when they get in to this, and it regulates itself. Let the market correction flush out the bad decision makers, but don't take away a loan product that has its place for the right person.
Getting rid of stated income loans is a cure that may be worse than the disease. But bureaucrats always feel the need to tinker...hence the recent Fed Rate drop.
They seem to want to tighten up on everything because of what's happened!
Good post!
Esko, I don't know what to tell you. Nevada is famous for dim witted politicians. I wish it weren't so because I'm thinking of getting a license there. As for the controversy, "verified" is not "stated" and some lenders allow bank statements for full doc.
Bill Roberts
Eric,
That is a good piece of advice. Thanks.
Neal,
Sometimes it makes you wonder how they arrive at these decisions.
Joey,
Especially in Vegas stated income loan has a wide market and now its future is under a cloud.
Armando,
Some tightening is healthy for the right reasons.
Bill,
Let's see how they sort this thing out in the coming days.
I just hope this whole mortgage mess gets fixed immediately. With these new laws they are implementing,I am hearing people with good credit and money cant even get approve for a loan now.
Lanre,
Politicians often get pressure to fix things and then they do a poor rush job on the new laws.
Good post! I am a "service provider", who was able to re-finance my mortgage using stated income. Having my business ran out of my home, stated income is the only way I could go. I know that alot of the foreclosed homes were written on "bad" paper due to the "stated income", but it would be a shame to see stated income purchasers and re-financers not be able to get a loan because Uncle Sam says they don't make enough.
It makes me wonder what some of these lawmakers did while they were in college. Did any of them EVER wait a table or work in the service industry? Did any of them try to start their own business? But of course, that doesn't matter NOW.. their paychecks are pretty fat & they aren't worried about a re-fi.
Great blog! We here at the beach are probably going to be dealing with the same thing as well! Most of our industry is Hospitality.
I have seen 4 good quality borrowers unable to get mortgages because of the new law in our state.
Unless they can document their income, how on Earth can you make that call?
I honestly don't understand the resistance. If you really have the income, and you're not a tax cheat, then you have the tax returns, which are adequate documentation. So what's the problem?
Pamela,
Let's hope they will get this issue resolved in a professional manner.
Scot,
Stated is an important program in all communities across the land.
Robert,
Stated is the only way many people can go or will go.
Esko thanks for an update. It will be nothing less than exciting to see how this all plays out. You brought up some very good points about the unique economy we have!
Renee,
The new law seems to be confusing to many people and it needs clarification.
The law makers always go for over kill.
There are lenders in NV STILL accepting stated income loans...always a loopjole it seems!
:-)
Vicky,
It would work more efficiently if the lawmakers considered every angle before deciding on a new bill.
Kris,
Stated is still alive and well here, it's just the confusion over how to interpret the new law.
Very informative, thanks for the info.
Kirk Mulhearn, Long Beach, Ca. 90807
Interesting post. Interesting how different areas have different issues.
Personally I have never understood how a stated income loan was ever possible. If I am loaning money to someone I want to understand their ability to pay the loan back. With out proof isn't it all hocus pokus? Even a tip earned can document their income if they really wanted too. The people I have seen using this type of programs were purchasing homes that they couldn't really afford and really should not be buying.
I think this whole stated thing should be done away with. I am not in the business of loans nor an expert on the subject but that is my feeling.
Kirk,
Thanks for stopping by.
Bob & Carolin,
The mortgage upheaval is pressuring governments to do something, whether needed or not.
Darrel,
There is a good-sized market for a stated loan for a variety of reasons, that's why it's available.
Stated loans are for the self-employed and I think its good that their assets be verified but not their income. If someone is stating they make $10k a month yet they have no money in the bank that doesn't make any sense to the bank when their liabilities are only about $2,000 a month. SISA loans I believe are great for some but I think this is a greater risk the bank is exposing themselves to. With so many foreclosures banks want to limit their risk. In California these loans are out except for the self-employed. Great post and this will definetly impact the housing market.
Adrian,
Lenders have already tightened underwriting guidelines for stated, so legislation might be overreaching.
Good post. If the lenders are going to offer the stated programs at all, they need to accept the nature of the program and not try to underwrite a stated product as a full doc. Same goes for the legislation.......it's either legal or it's not and this should be crystal clear.
Seth,
Let's see how they will clarify the new law's meaning.
I think this letter from the Nevada Mortgage Lending Division should clear things up.
September 13, 2007
To: Mortgage Banker Licensees
Mortgage Broker Licensees
From: Mortgage Lending Division
Re: Mortgage Lending Division Letter No.: 2007-2
Assembly Bill 440
The Mortgage Lending Division (the "Division") has become aware that there exists
some confusion amongst licensees regarding certain amendatory language to Nevada
Revised Statutes Section 598D.100 as contained in Assembly Bill 440 of the 2007
Session ("AB 440"). The purpose of this Letter is to advise licensees on how the
Division interprets this language and how its examiners will examine in regards thereto.
Upon issuance of an opinion by the Attorney General or the Legislative Counsel Bureau,
this letter will be reviewed and amended or rescinded, as necessary.
********************************
Effective October 1, 2007, AB 440 amends NRS 598D.100, in part, to make it an unfair
lending practice for a lender to:
"(b) Knowingly or intentionally make a home loan, other than a reverse mortgage, to a
borrower, including, without limitation, a low-document home loan, no-document home
loan or stated-document home loan, without determining, using any commercially
reasonable means or mechanism, that the borrower has the ability to repay the home
loan."
Many licensees have expressed concern as to the meaning of "commercially reasonable
means or mechanism" in the context of determining that the borrower has the ability to
repay the home loan.
AB 440 does not prohibit specific mortgage products or types of documentation that may
be utilized in the making or underwriting of home loans. Instead, AB 440 recognizes,
and specifically defines, "low-document", "stated-document" and "no-document" home
loans. [These definitions will not be repeated here. All licensees are advised to review
AB 440 in detail for a complete understanding of the new law.]
What all of these definitions have in common is that they specifically pertain to the
borrower establishing his or her ability to repay a home loan, in other words, what
income and asset documentation, if any, the borrower may submit to prove his or her
ability to repay. These definitions do not address the lender's obligation to verify the
accuracy of the information the borrower has submitted or otherwise determine the
borrower's ability to repay.
This obligation is embodied in NRS 598D.100(b), which requires that lenders use a
"commercially reasonable means or mechanism" in determining a borrower's ability to
repay a home loan. The Division believes that all home loans as defined in NRS
598D.040 are subject to this requirement, even home loans that have been approved, but
not funded, by October 1, 2007.
The Division is unaware of any specific legal definition of the term "commercially
reasonable means or mechanism". In the absence of such a specific definition, the
Division believes it means that licensees must inquire into a borrower's current and
future income and financial status, but without dictating what specific methods must be
utilized as long as they are reasonable and frequently used within the lending community.
The remainder of this Letter will set forth suggested guidelines that the Division
considers to constitute a reasonable inquiry into the borrower's ability to repay. Since the
Legislature was clear in stating that "any" commercially reasonable means or mechanism
may be utilized, and that other means or mechanisms not considered herein may exist,
licensees are not required to follow these suggested guidelines. However, until the
Legislature or the Attorney General or Legislative Counsel Bureau clarifies this matter,
licensees who in good faith follow them will be presumed for examination purposes to
have used a "commercially reasonable means or mechanism" in making their
determination of ability to repay.
Guidelines
Licensees should meet with their borrowers [that means all borrowers obligated on the
particular loan] in person, over the telephone, or in other ways where personal contact is
achieved, and discuss their economic situation, including their employment, credit
history, current sources and amounts of income and assets, and the likelihood of any of
these items changing [up or down] in the reasonably foreseeable future. While no
particular time span is contemplated, for purposes of this guidance, the reasonably
foreseeable future should at least encompass a time span past the first adjustment date of
a variable rate home loan. This list is not exclusive of the items that should be discussed
with borrowers, and each licensee may add or subtract from this list as it deems
necessary. Licensees should also review with borrowers all of the information contained
in the home loan application.
Licensees must verify the information that the borrowers provide. The Division
recognizes that there are some general sources, such as Salary.com or the Department of
Labor, which may be utilized to verify income in those situations where verification of
employment, pay stubs or tax returns are not utilized. The Division will not recommend
any particular source(s), only that it be generally utilized by the lending community and
that its or their usage is properly documented in the loan file.
It is also important that licensees document for examination purposes that these
discussions and verifications have occurred. One suggested method for doing so would
be the completion of a worksheet for each home loan, a sample of such a worksheet being
attached hereto as Exhibit "A".
Licensees who in good faith complete this worksheet, or a similar worksheet that
properly documents the discussions and verifications, for all home loans funded on or
after October 1, 2007 will be deemed for examination purposes to be in compliance with
the "commercially reasonable means or mechanism" provisions of AB 440.
Joseph L. Waltuch
Commissioner
Terry,
As you can see in the linked article people are still confused.
Good post. Stated income loans have been given a bad name by the press and media because of the abuse. They are actually a great program for helping self employed borrowers and contractors qualify for financing. If the secondary market is still buying them then these products will stay.
Steven,
Despite the recent name-calling, stated will stay and deservedly so.
I think that if they are going to get rid of any program, it should be STATED W2, since this is the loan that was abused the most. I have RARELY seen a case where it was necessary to use it, and I have personally witnessed it being abused. On the flip side of things though, I think what you will find is lenders changing their guidelines to help self employed borrowers still obtain mortgages, like opening the guidelines for bank statement programs (since many lenders don't currently allow this program). We already have some lenders that will take their gross income before deductions into consideration, not to mention you can still add some depreciation and capital gains back into their income (and this has been true for many years on full doc loans). I know loan officers that don't even know how to read taxes, which results in the borrower being put in the wrong loan in many cases. If a borrower hides ALL of their "money", there's a possibility that there is no money to hide. They're going to put it somewhere, and most likely it will be through their bank accounts whether personal or business. And if they put it in a "jar in the backyard", well that might just have to change that process and pay taxes just like the rest of us.
Had loan officers bothered to ask some of these borrowers how much they actually make before deductions, INCLUDING the self employed borrowers, and not just stating whatever income made the loan qualify, then it wouldn't have resulted the way it did. There is new legislation before the Senate to make it easier to go after the scum bags that abuse the system.
The investors on Wall Street, and the Politicians proposing these bills are not stupid as I've seen mentioned, their duties lie in protecting consumers, not lining loan officers pockets. This is a very serious situation, and something has to be done. There are plenty of credit worthy people out there that we can still do loans for. This market is flooded with loan officers that do not have the consumers best interest in mind, and they will not last if they don't do loans the legal way. Sure, they might make a lot of money right now, but it won't matter when they're in prison or no one is referring deals to them because they're shady. These changes in financing will clean the market out. I know many loan officers & brokers that have completely left the business already. Many of them didn't belong in the business to begin with.
Even if they ban all stated income loans, investors will find a way to get self employed borrowers with good credit financing. Hopefully this will change the countries "bad credit, no problem" attitude.
Shawna,
Thanks for commenting. Stated programs are here to stay, although somewhat adjusted from the old days.
STATED INCOME SHOULE BE A CRIME!! IT'S SIMPLY A LOAN FOR PEOPLE WHO NEED TO LIE ABOUT THEIR INCOME TO QUALIFY TO GET A HOUSE. THEN THEY GET THE HOUSE, AND VOILA... FORECLOSURE 6 MONTHS LATER!!
WELL, THEY'RE EITHER LYING ABOUT THEIR INCOME, 'OR' LYING ON THEIR TAX RETURNS. WHICH IS WHY THEY CAN'T PROVE INCOME. SCREW 'EM, THROW 'EM IN THE BRINK.
Randy,
There has been abuse, but stated continues to have a place in the product mix.
Here in California the stated programs have all caused some havoc. Good news is they still exist only requirement is 660 min fico score now if you want to go no ratio all your client needs is a 700 fico score. I know a great source to help you help your clients with some credit repair or rapid rescoring visit my site http://www.stepuptofortune.com/ or send me an email so I can share with you how I am funding my deals!!!
Angie,
Thanks for the info. I'll keep you in mind for later.
Esko ~ Wow! That seems particularly harsh. Add to that the fact that there is admittedly ambiguity to the situation. When it gets all sorted out, please keep us posted. While this is not yet in Oregon, governments and legislations are a bit like cliff jumpers. They all just follow one right after the other, for the most part! Thanks for the heads up. I will be watching!
Sarah,
As soon as there is something new on this I'll post it.
Greg,
Stated product serves a certain market segment and will prevail. Ever consider who created all those exotic mortgage products on the wholesale level and offered them to brokers?
I would not touch a stated deal at this point, the entire model has been decimated by everyone. If originated correctly the product does have a solid demographic of borrowers that have to submit a ton of documentation under alt or full doc requirements.
No biggee unless they have K'1s that are a foot thick.
True stated products will survive, the demographic it will fit into will shrink to a more realistic size for a terminate period of time.
No worries, the demographic is a large enough kink in the market place to keep it on the shelf until long after we are done making paper.
Apply it correctly and give anyone who doesn't a beating, I really don't want to have to resort to selling only agency paper again anytime soon.
Have a good one.
Matt,
Stated is a rare bird nowadays, but a bird anyway.
Mortgage Companies are in trouble.
Nicholas,
The mortgage business is still rather fluid.
Hi Esko,
I am a Mortgage Broker in MN and we had this bill passed in September. I totally agree with you & I truly fell sorry for the 680+ self employed people that have to now pay more taxes to qualify for a home mortgage. Was it a bill that was passed originally a few years ago called home ownership for all or something of the sort? Funny that our government & cerain states are so fast to reprimand the people that offered it but did not originate the program? Think positve becasue hopefully this also will pass!
Jason,
Life goes on and we just have to adjust to market changes.
Esko,
I can certainly understand your frustration. There is nothing worse than the confusion and doubt that stems from ambiguous law making. How in the world is one to determine a borrower's exact ability to repay a loan? And for how long is one on the hook for his or her decision to arrange a stated loan? What if the borrower's circumstances change?
In my opinion, the law about which you have written is little more than a public relations driven over-reaction on the part of the government to provide the appearance of "protecting" its constituents. It might work in Fantasy Land, but has no place in the United States. And, unfortunately, it is going to wind up hurting far more people than it helps.
Steven,
Now that some time has passed from the law's inception, we in Nevada have a much better understanding of how to go about our mortgage origination.
Sean,
Stated mortgages are very important here in Las Vegas and are still available.