This entry was posted on Tuesday, February 6th, 2007 at 4:37 pm and is filed under Mortgage Programs, Qualifying, Rants, Stated Income. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
4 Reasons to Keep the Wage Earner Stated Income Loan
In the eye of the hurricane, where mortgage fraud mixes with over-inflated real estate prices, lies the stated income loan. For those unfamiliar with this bit of mortgage slang, stated income loans allow a borrower to claim a level of income they don?t have to prove. How?s that for temptation?? Care for a bite of apple?
Dubbed the liar loan by mortgage pundits and blamed universally for the current foreclosure crisis, there is an irony in all this that I can?t allow you to overlook. The irony is this: the liar loan was created to allow another tribe of liars?the self-employed, who perpetually lie?
to the government about their income?to pay income taxes and qualify for their mortgages using two entirely different income figures. Somehow, that is acceptable. Sure, I?ll stick a bush down my pants.
So if there is a baby in the stated income bath water, it is not the self-employed borrower. It?s the wage-earner, who we have decided should be prohibited from stating one dime more than their verifiable wage income. Why should someone who is not in the fortunate position of lying about their taxable income be allowed to lie about their qualifying income? Aside from the absurdity of that thought, here are four good reasons.
Four reasons to keep the Wage-Earner Stated Income loan:
- Additional Wage Income. Many wage earners have second jobs. Unfortunately, unless the borrower has had that job for two years, the income cannot be used to qualify for a home loan. Unfair? You be the judge.
- Self Employment Income. Wage earners often also have home-based businesses or consulting practices that generate income. If they partly self-employed, shouldn?t they be allowed to claim that income without proving it?
- Support Income. To use alimony or child support income to qualify, one must prove that the income will continue for at least three years. How does that make sense? Child support normally ceases when the child turns 18 or finishes college. At that time, most kids either leave home or work and contribute, lowering the parent?s expenses.
- Note Income. Buyers who have carried paper on prior real estate or business sales frequently have significant short-term note income. Again, if that note income doesn?t continue for three years, it cannot be used to qualify. This is particularly absurd, since most notes are interest-only and their cessation is accompanied by a large lump sum payoff of principal that can be used as income or to generate income.
There is plenty that is wrong within the mortgage industry. And there are problems that desperately need fixing. But before we toss that baby, let?s stop and think for a moment. Are we fixing the problem or just sacrificing the nearest lamb?
Got an opinion or thought on this? Leave a comment below.
Got a question or need help with a loan? Shoot me an email.
Like the article and want to read more? Please subscribe via email blog blast or RSS feed for automatic delivery of my regular articles on mortgage related topics.
February 7th, 2007 at 7:02 am
Good points. There’s no reason to completely drop the stated income loan, and lenders are just as responsible as homeowners for allowing these bad loans to be funded in the first place. Stricter regulation of the industry might be used, along with more education for homeowners, but banning an entire class of mortgage products will only lead to the mortgage industry creating a new form of the stated income loan, just with a slightly different name and angle.
Regards.
February 7th, 2007 at 11:39 am
Thanks for the comment Fish. Yes, we just find ways around the rules in the end. And when the marketing was roaring, nobody cared about gaming the system, not the underwriters or investors themselves. As long as the loans could be sold, the cost of problems could be externalized to someone else’s balance sheet.
We need to behave better.
February 7th, 2007 at 1:14 pm
Traditional mortgage underwriting has created guidelines for documenting income based on years and years of loan performance. Those guidelines have created billions of $ of loan portfolios that produce predictable repayment statistics.
The new guidelines of stated income loans have created a portfolio of loans that are defaulting at an alarming rate … the defaulted loans are going to cause unimaginable financial angst for stock holders and tax payers who will ultimately pay the price.
It is past time that the lending industry polices itself and returns to an environment of predictable repayment with documented abilities to repay mortgage loans. We need to do this before the industry is legislated to do so!
February 7th, 2007 at 3:26 pm
[…] Enough Already With The 55+ Condos - …Those 55+ condos, and Planned Unit Developments, are going to tank badly in the near future. Get your money out of them and into something else real estate related while you can. The reasons are simple » original newsAnalysis: The Condition of HouseValues Own House - What are the main problems with HouseValues business model? Can a new CRM and services offering replace its old lead model? » original newsInterview with Niki Scevek, CEO HomeThinking.com and founder RealEstatevoices.com - I havent listened to the full interview yet, so I’m not sure if he discusses REV, but HomeThinking is in the very controversial business of rating and reviewing real estate agents, how they do it is pure genius. » original news4 Reasons to Keep the Wage Earner Stated Income Loan - The mortgage industry is about the sacrifice the wage-earner stated income loan on the alta of reform. This is a stupid and short-sighted solution to a very real problem » original newsExtate.com - now with live video - Property search engine Extate.com is now live with a snazzy video upload feature inviting vendors to directly upload their own video footage. How agents will react to this is quite obvious and given that Extate only crawls agency sites, no doubt poses a serious dilemma for them, if this feature were to seriously take off. » original news […]
July 25th, 2007 at 11:35 am
[…] This would make it impossible for many self-employed people, not to mention those with income from unseasoned second jobs, notes or child support/alimony lasting less than three years, to secure a home loan. See my previous post on 4 Reasons to Keep the Wage Earner State Income Loan for a better understanding of this issue. Dumb idea? Yes, I think so. […]
July 31st, 2007 at 5:59 pm
The new guidelines of stated income loans have created a portfolio of loans that are defaulting at an alarming rate … the defaulted loans are going to cause unimaginable financial angst for stock holders and tax payers who will ultimately pay the price.
It is past time that the lending industry polices itself and returns to an environment of predictable repayment with documented abilities to repay mortgage loans. We need to do this before the industry is legislated to do so!
May 21st, 2008 at 11:05 am
Kate Spade Handbag…
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you….