- Loans to asset-heavy borrowers without documentable income, or any income at all, and to borrowers with unsual income, have both been curtailed.
Since the great mortgage crash (aka “the bubble”) blew in 2007, two types of mortgages disappeared, both long in use. Possibly held hostage in some Potomac River warehouse or nearby closet, but gone.
By “long in use,” I mean that these were not some Frankenstein creation during the bubble, but one as old as banking itself, probably recognizable in Caesar’s Rome, and the second very well-tested and successful since exactly 1980.
The first: the asset-heavy borrower without documentable income, or any income at all. The second, a variant: the borrower with unusual income, but in plain sight, just not on IRS forms.
The most basic asset-heavy loan: a family is willing to put, say, 50 percent down to buy a home. A lender cannot possibly lose money on that deal. Not even in the Depression (my Granddaddy the banker would testify). Maybe in Phoenix in 2005, at the absolute top, but no loan was sensible there and then.
The obvious protection to bankers making a loan versus 50 percent down: If you have to foreclose, you’ll be made whole. But the second-order protections are even stronger: Very few people will risk 50 percent down unless they are secure, and even if they do get into trouble after all, they can sell the place — and will.
Today, we have only a few asset-based loans, and — crazy — all mostly disregard the size of the down payment. Instead, by one means or another, we examine financial assets left over in the borrower’s hands after closing, and turn that money into an income. The simplest and most hard-headed: divide the assets by the 360-month term of the loan and use that as a qualifying income.
Suppose you need $8,000 per month in income. On path one, you need a mere $2,880,000 in savings. “Asset depletion” models work only for the very well-off.
Except for one offered by plain old Fannie, and that’s not a good idea unless the borrower has more assets than the ones we see. If you are of retirement age, we can turn an IRA (401(k), 403(b) …) into an income by dividing the retirement account balance by 36 — three years’ withdrawal. To get to the same $8,000 in qualifying income, we need retirement assets of only $288,000. That, and a counselling conversation: “If I make this loan to you, what are your plans at the end of three years?”
The second MIA loan type was made before 1980, but in that year it got a name: “stated income.” You want to buy a good house, have fine credit, a year or two’s worth of house payments in your savings after purchase, but your income won’t fit Fannie. But you do have a good story: a verifiable career, a place of business or incorporation. And this key throughout the 1980s: 25 percent down.
The failure of stated-income was not the popular misconception, “Liars’ loans.” In the Bubble “verifiable career” was forgotten or abused, but the failure of the loan type began in the 1990s as the minimum down payment fell to 20 percent, then 15 percent, then 10 percent, and by 2002, nothing. Had stated-income loans required 25 percent down during the subprime disaster, the Bubble would have been far smaller, perhaps manageable.
Still lost on regulators, the public, and Congress: What legitimate income might a borrower have that does not show on tax returns? Most common: an on-paper loss in start-up years of valid businesses. The ramp-up years of a borrower on commission. An IT hotshot with a fine career who moves from all-salary to salary plus bonus at a household-name employer. A small business repaying loans from owners to businesses in early years. Borrowers in any of several kinds of transaction businesses, sound but inconsistent streams of income: one year they sold stock, the next a high salary, the next sold an investment property.
The Bubble had such a violent end and did so much damage to innocents that it will be some time before search parties are able to rescue these MIAs.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at firstname.lastname@example.org.