Those Mortgages Blamed for Housing Crisis? They're Back

The so-called "liar loan" mortgages often associated with the toxic subprime loans of the boom years are tiptoeing their way back into the housing market.

But, believe it or not, the latest crop of "stated-income" loans may represent a step forward for today's sluggish market.

California based mortgage company Rancho Financial recently began originating loans that do not require applicants to submit pay stubs or tax returns, HousingWire reports. Stated-income loans proliferated during the housing boom, and acquired a stigma and became widely known as "liar loans" after lenders started shedding other requirements from loan applicants, along with pay stubs and tax returns.

But Rancho Financial's loans seem to be a far cry from the toxic mortgages that blew up during the financial crisis.

Rancho only lends to well-heeled borrowers, originating loans that currently average about $500,000, the company told HousingWire. Some of the loans are jumbo loans, high-interest mortgages whose amounts exceed the threshold of those that government-sponsored investors such as Fannie Mae, Freddie Mac and the FHA are permitted to back.

But just because the government isn't willing to guarantee jumbo loans, doesn't mean they're necessarily subpar. In Rancho's case, most borrowers must make a 30 percent down payment and have a credit score of at least 740, a two-year history of self-employment, a 12-month reserve and a business license or letter from a certified public accountant, HousingWire reported.

"The down payment and credit standards, among others, more than offsets the no-doc risk," said Mark A. Calabria, director of financial regulation studies at the politically conservative think tank, the Cato Institute. "So in general, this is a good thing. More loans should help housing demand and are not a risk to the taxpayer."

Mortgages of this strain may fill a gaping hole in the real estate market that has lingered ever since the housing meltdown, according to Jack Guttentag, an emeritus professor of finance at the University of Pennsylvania's Wharton School who offers mortgage advice on his website, mtgprofessor.com.

"This is an attempt to deal with a serious void in the market, which is the part of the market that is devoted to self-employed borrowers," he said, adding that stated-income loans, by not requiring paystubs or tax returns, make it easier for self-employed borrowers to acquire mortgages. And by originating many jumbo loans, they are also satisfying pent-up demand among well-paid entrepreneurs and freelancers, as well as other affluent borrowers who want big loans to buy pricey homes.

So why haven't more companies taken the plunge into stated-income loans already? Experts say that most investors remain haunted by the memory of toxic subprime loans, many of which did not require borrowers to submit pay stubs and tax returns.

Rancho's market play, therefore, marks the arrival of some daring investors. Well, make that one daring investor: Rancho told HousingWire that it sells its loans to a single portfolio investor, whom it would not identify.

"They are really creaming the market in my view," Guttentag said. "It's amazing that there aren't more of them out there. Not many investors out there have the appetite to acquire this kind of paper, but they ought to."

Rancho declined to provide comment for this story.

See also:
Why Millions May Be Leaving Mortgage Assistance on the Table
Home Affordability: How Much House (or Apartment) Can I Handle?
Home Costs: 4 Crucial Questions Reveal Hidden Expenses

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