11 ms·

No Pay Stub? No Problem. Unconventional Mortgages Make a Comeback

woofcat 8y ago
https://outline.com/L7yvs4 https://outline.com/L7yvs4
rhombocombus 8y ago
Article is paywalled, but based on the first paragraph it seems like this might not be entirely bad, as long as the banks are doing their due diligence. My wife's income is 100% 1099 self employed, which has made it challenging to get mortgages in the past. I think that it's critically important to vet borrowers thoroughly for obvious reasons, but I also think that home loans should be available to folks who might not get a W-2 but can still pay their bills.
- jasonparallel 8y ago
  The article says not having "pay stubs or tax forms". Seems like you would have to prove tax evasion to the bank to verify the income.
- onetimemanytime 8y ago
  >>it seems like this might not be entirely bad The problems start when they can't pay back their $600K mortgages with a $17 an hour job or freelancing here and there. Mortgages are pretty old as a product, banks know who is likely to afford it and who isn't. Mortgage payments are due every month of the year for 15-20-25-30 years, and that's the problem.
  - matthewmacleod 8y ago
    Mortgages are pretty old as a product, banks know who is likely to afford it and who isn't. Doesn't the sub-prime crisis basically blow that theory out of the water?
    - giarc 8y ago
      Mortgage lenders likely knew these people couldn't pay it back, that's why they sold the debt as fast as they could.
      - patio11 8y ago
        If this were true, you’d expect America’s largest banks to have had only 60 days or so of subprime mortgages on the books, which would have meant minimal exposure in the scheme of things. In the world we live in, Bank of America fell by 95% or so, Citibank missed nationalization by a whisker, Wachovia was forced to merge, etc etc, and that’s not even counting the investment banks, because they were happily engaged in the traditional business of banking in addition to securitization.
    - onetimemanytime 8y ago
      Nope, the sub-prime lenders deviated from the norm
  - derekp7 8y ago
    The other piece is loan to value. So depending on how many other people the nursing student in the article had to buy out, her share could be as high as 50% of the house (if it was split between 2 people). In that case, there is really no risk for the bank as they would more than recoup their losses in a foreclosure.
    - onetimemanytime 8y ago
      OK, but did you read such mortgages grew by xx% and conventional mortgages went down last year? Not all of them were buying out their relatives. "Lenders issued $34 billion worth of these unconventional mortgages in the first three quarters of 2018, a 24% increase from the same period a year earlier....the growth is notable because it came as traditional home loans declined. Those originations fell 1.2% over the same period and were on track for a second down year in 2018."
- wil421 8y ago
  I know someone who had an issue with 1099 but it was with the lender. They didn’t want to shop around. Here’s a useful article where people were able to get loans on 1099, including VA loans. It seems 24 months is required.[1] [1]https://www.trulia.com/voices/Home_Buying/I_am_a_contractor_can_I_obtain_a_mortgage_Its_a-593628 https://www.trulia.com/voices/Home_Buying/I_am_a_contractor_...
- lordalch 8y ago
  Since I see links to WSJ pretty frequently, I installed https://github.com/danielmichaelni/let-me-read-wsj https://github.com/danielmichaelni/let-me-read-wsj to bypass the paywall
smileysteve 8y ago
This lost me at a nursing student apply for a $610k mortgage. [addendum, then I finished, it's an inherited house and the mortgage is to buy out her relatives; so I start hoping it's not 610k debt but total value.]
- mbreedlove 8y ago
  part time nursing student
  - giarc 8y ago
    I'm not even sure that is the correct term. If she was truly a nurse (student or otherwise) working part time, she would have pay stubs from her employer. The fact that she had to rely on bank statements and client letters tells me she is perhaps working for cash. "works part time providing home care for children and the elderly" is this a veiled way of saying she is a babysitter? If she was actually doing nursing care for children or the elderly, I assume she would be working for a company, back again to the fact that she doesn't have a pay stub, I think she is working for cash under the table.
    - Spooky23 8y ago
      Of course she is off book. She probably provides services equivalent to an CNA, with perhaps some errands or other casual assistance work tied in. There's a big market for this sort of thing. Agency-based homecare is really expensive and usually pretty awful. Traditionally, these sorts of casual labor jobs had to be paired with a spouse's income to avoid IRS scrutiny, but IRS enforcement isn't what it once was due to years of funding neglect. The notion that a bank is recognizing off-book income as income for lending purposes is incredible. Eventually the prospective lender will run into a problem, and usually will take an income hit when they are forced to land a normal job. The other turd about the "part time student" aspect is that she is probably living on student loans.
    - athenot 8y ago
      Or... she could be a contractor to one of those companies, to help them when they have more work than employees can handle.
jdpedrie 8y ago
As a layman (though I worked in the mortgage industry, it was as a software developer fairly distant from underwriting), I've long considered it an unfortunate development that manual underwriting had fallen by the wayside. Now, as a self-employed developer, I've seen how difficult it is to obtain a refinance mortgage without a W2. That said, the example used in the article seems frightening. A $600,000 mortgage on a part time student income where the borrower is forced to rent rooms to make the payments? However unfortunate the normal underwriting standards are for some portion of the population, it seems that lenders continue to take whatever rope they are given and insist on hanging themselves with it.
- tmp092 8y ago
  Read to the end...the example the WSJ used was not a normal situation. Shame on them for trying to use this person's story as an example of the "new normal." Hardly. She used the money to fully buy out her grandfather’s house in San Clemente, Calif. She jointly inherited it with other relatives and said she needed a loan to pay them for their shares of the property.
  - giarc 8y ago
    Read the middle of the article where they clearly state "While that makes up less than 3% of the $1.3 trillion of mortgage originations over that period, the growth is notable because it came as traditional home loans declined."
    - tmp092 8y ago
      Unconventional is anything that is not underwritten in a conventional manner. A situation where you inherit a property and take out a mortgage to pay out others with shared inheritance in a property is almost certainly not representative of the underlying reason for the growth in the 3%. If the author is trying to imply a rebirth in reckless lending that caused the last recession then I'm arguing they picked the wrong subject. If it's because they couldn't actually find a subject that definitely should not have been given a mortgage then the entire premise of the article is wrong.
docker_up 8y ago
Subprime or poorly documented loans are absolutely fine and actually help people, as long as they are marked as subprime loans. The problem with 2008/2009 was that subprime loans were being marked as AAA, because that was the fraudulent part of it. And then these subprime loans were getting packaged together with AAA loans, and caused the quality to degrade, dropping asset prices, etc. As long as the loans are marked appropriately and the proper risk is taken with interest rates and there is nothing predatory or exploitative about them, there is nothing wrong with companies lending to subprime borrowers. In fact, it helps people break the circle of poverty by investing in them, again as long as it's not predatory.
- Spooky23 8y ago
  How is giving someone an asset-secured loan for $600k who has no income not a predatory act? In the case of the example in the article, if she wasn't given the loan, she'd probably have $100k or more in equity in cash from the sale of the home. The entire scenario is sickening and disgusting -- using hope and taking advantage of people's ego and emotional attachment to separate them from their money.
  - brianwawok 8y ago
    It's an asset secured loan. If you have a 600k house, and the bank is willing to give you a 550k loan on that house - because it's backed by the asset - let it. Just don't let the bank then resell this loan as a prime AAA loan to others, so if it bombs someone else gets the shaft. It's just like organic food. I don't think it should be illegal to sell "conventional" eggs. I only think it should be illegal to sell a tray of organic eggs - where 1-2 of the eggs are "conventional" and hope no one notices. (Especially in a case where the farmer has an inside relation with the FDA inspector that is checking for the organic nature of eggs)
    - toomuchtodo 8y ago
      I think that's where the real confusion comes from. People think the relationship between the loan originator and the borrower is where the questionable practices take place, when it's really between investors and the loan originator. Similar to how Chinese companies do reverse mergers on US stock markets to bilk investors out of their dollars.
GreeniFi 8y ago
I wonder if this is typical end-of-cycle behavior: 1. Sub-prime is back 2. UK lenders announce mortgages where loan amount is set with reference to joint child and parental income 3. Other examples of frothiness welcome. I wonder if banks get to see the end coming ahead of everyone else - but in order to meet business targets, have to relax lending requirements to keep the party going just a little bit longer.
thoughtstheseus 8y ago
Fixed COFI mortgages are an interesting alternative as well.
m348e912 8y ago
Call me crazy, but I've always considered a (non-financed) 20% down payment to be a far better indication of credit-worthiness than a pay stub. With a downpayment there's an immediate means test that the borrower can afford the house they're about to by, the borrower has significant skin in the game to not default, and the lender has a nice 20% equity buffer in the case that there is a foreclosure. My thought is if 80/20 loans weren't a thing and banks required at least 20% cash downpayment, we wouldn't have had the boom and bust debacle we saw in the oughts.
deleted 8y ago
[deleted]

https://outline.com/L7yvs4 https://outline.com/L7yvs4

Article is paywalled, but based on the first paragraph it seems like this might not be entirely bad, as long as the banks are doing their due diligence. My wife's income is 100% 1099 self employed, which has made it challenging to get mortgages in the past. I think that it's critically important to vet borrowers thoroughly for obvious reasons, but I also think that home loans should be available to folks who might not get a W-2 but can still pay their bills.

jasonparallel 8y ago
The article says not having "pay stubs or tax forms". Seems like you would have to prove tax evasion to the bank to verify the income.
onetimemanytime 8y ago
>>it seems like this might not be entirely bad The problems start when they can't pay back their $600K mortgages with a $17 an hour job or freelancing here and there. Mortgages are pretty old as a product, banks know who is likely to afford it and who isn't. Mortgage payments are due every month of the year for 15-20-25-30 years, and that's the problem.
- matthewmacleod 8y ago
  Mortgages are pretty old as a product, banks know who is likely to afford it and who isn't. Doesn't the sub-prime crisis basically blow that theory out of the water?
  - giarc 8y ago
    Mortgage lenders likely knew these people couldn't pay it back, that's why they sold the debt as fast as they could.
    - patio11 8y ago
      If this were true, you’d expect America’s largest banks to have had only 60 days or so of subprime mortgages on the books, which would have meant minimal exposure in the scheme of things. In the world we live in, Bank of America fell by 95% or so, Citibank missed nationalization by a whisker, Wachovia was forced to merge, etc etc, and that’s not even counting the investment banks, because they were happily engaged in the traditional business of banking in addition to securitization.
  - onetimemanytime 8y ago
    Nope, the sub-prime lenders deviated from the norm
- derekp7 8y ago
  The other piece is loan to value. So depending on how many other people the nursing student in the article had to buy out, her share could be as high as 50% of the house (if it was split between 2 people). In that case, there is really no risk for the bank as they would more than recoup their losses in a foreclosure.
  - onetimemanytime 8y ago
    OK, but did you read such mortgages grew by xx% and conventional mortgages went down last year? Not all of them were buying out their relatives. "Lenders issued $34 billion worth of these unconventional mortgages in the first three quarters of 2018, a 24% increase from the same period a year earlier....the growth is notable because it came as traditional home loans declined. Those originations fell 1.2% over the same period and were on track for a second down year in 2018."
wil421 8y ago
I know someone who had an issue with 1099 but it was with the lender. They didn’t want to shop around. Here’s a useful article where people were able to get loans on 1099, including VA loans. It seems 24 months is required.[1] [1]https://www.trulia.com/voices/Home_Buying/I_am_a_contractor_can_I_obtain_a_mortgage_Its_a-593628 https://www.trulia.com/voices/Home_Buying/I_am_a_contractor_...
lordalch 8y ago
Since I see links to WSJ pretty frequently, I installed https://github.com/danielmichaelni/let-me-read-wsj https://github.com/danielmichaelni/let-me-read-wsj to bypass the paywall

smileysteve 8y ago

This lost me at a nursing student apply for a $610k mortgage. [addendum, then I finished, it's an inherited house and the mortgage is to buy out her relatives; so I start hoping it's not 610k debt but total value.]

mbreedlove 8y ago
part time nursing student
- giarc 8y ago
  I'm not even sure that is the correct term. If she was truly a nurse (student or otherwise) working part time, she would have pay stubs from her employer. The fact that she had to rely on bank statements and client letters tells me she is perhaps working for cash. "works part time providing home care for children and the elderly" is this a veiled way of saying she is a babysitter? If she was actually doing nursing care for children or the elderly, I assume she would be working for a company, back again to the fact that she doesn't have a pay stub, I think she is working for cash under the table.
  - Spooky23 8y ago
    Of course she is off book. She probably provides services equivalent to an CNA, with perhaps some errands or other casual assistance work tied in. There's a big market for this sort of thing. Agency-based homecare is really expensive and usually pretty awful. Traditionally, these sorts of casual labor jobs had to be paired with a spouse's income to avoid IRS scrutiny, but IRS enforcement isn't what it once was due to years of funding neglect. The notion that a bank is recognizing off-book income as income for lending purposes is incredible. Eventually the prospective lender will run into a problem, and usually will take an income hit when they are forced to land a normal job. The other turd about the "part time student" aspect is that she is probably living on student loans.
  - athenot 8y ago
    Or... she could be a contractor to one of those companies, to help them when they have more work than employees can handle.

jdpedrie 8y ago

As a layman (though I worked in the mortgage industry, it was as a software developer fairly distant from underwriting), I've long considered it an unfortunate development that manual underwriting had fallen by the wayside. Now, as a self-employed developer, I've seen how difficult it is to obtain a refinance mortgage without a W2. That said, the example used in the article seems frightening. A $600,000 mortgage on a part time student income where the borrower is forced to rent rooms to make the payments? However unfortunate the normal underwriting standards are for some portion of the population, it seems that lenders continue to take whatever rope they are given and insist on hanging themselves with it.

tmp092 8y ago
Read to the end...the example the WSJ used was not a normal situation. Shame on them for trying to use this person's story as an example of the "new normal." Hardly. She used the money to fully buy out her grandfather’s house in San Clemente, Calif. She jointly inherited it with other relatives and said she needed a loan to pay them for their shares of the property.
- giarc 8y ago
  Read the middle of the article where they clearly state "While that makes up less than 3% of the $1.3 trillion of mortgage originations over that period, the growth is notable because it came as traditional home loans declined."
  - tmp092 8y ago
    Unconventional is anything that is not underwritten in a conventional manner. A situation where you inherit a property and take out a mortgage to pay out others with shared inheritance in a property is almost certainly not representative of the underlying reason for the growth in the 3%. If the author is trying to imply a rebirth in reckless lending that caused the last recession then I'm arguing they picked the wrong subject. If it's because they couldn't actually find a subject that definitely should not have been given a mortgage then the entire premise of the article is wrong.

docker_up 8y ago

Subprime or poorly documented loans are absolutely fine and actually help people, as long as they are marked as subprime loans. The problem with 2008/2009 was that subprime loans were being marked as AAA, because that was the fraudulent part of it. And then these subprime loans were getting packaged together with AAA loans, and caused the quality to degrade, dropping asset prices, etc. As long as the loans are marked appropriately and the proper risk is taken with interest rates and there is nothing predatory or exploitative about them, there is nothing wrong with companies lending to subprime borrowers. In fact, it helps people break the circle of poverty by investing in them, again as long as it's not predatory.

Spooky23 8y ago
How is giving someone an asset-secured loan for $600k who has no income not a predatory act? In the case of the example in the article, if she wasn't given the loan, she'd probably have $100k or more in equity in cash from the sale of the home. The entire scenario is sickening and disgusting -- using hope and taking advantage of people's ego and emotional attachment to separate them from their money.
- brianwawok 8y ago
  It's an asset secured loan. If you have a 600k house, and the bank is willing to give you a 550k loan on that house - because it's backed by the asset - let it. Just don't let the bank then resell this loan as a prime AAA loan to others, so if it bombs someone else gets the shaft. It's just like organic food. I don't think it should be illegal to sell "conventional" eggs. I only think it should be illegal to sell a tray of organic eggs - where 1-2 of the eggs are "conventional" and hope no one notices. (Especially in a case where the farmer has an inside relation with the FDA inspector that is checking for the organic nature of eggs)
  - toomuchtodo 8y ago
    I think that's where the real confusion comes from. People think the relationship between the loan originator and the borrower is where the questionable practices take place, when it's really between investors and the loan originator. Similar to how Chinese companies do reverse mergers on US stock markets to bilk investors out of their dollars.

GreeniFi 8y ago

I wonder if this is typical end-of-cycle behavior: 1. Sub-prime is back 2. UK lenders announce mortgages where loan amount is set with reference to joint child and parental income 3. Other examples of frothiness welcome. I wonder if banks get to see the end coming ahead of everyone else - but in order to meet business targets, have to relax lending requirements to keep the party going just a little bit longer.

thoughtstheseus 8y ago

Fixed COFI mortgages are an interesting alternative as well.

m348e912 8y ago

Call me crazy, but I've always considered a (non-financed) 20% down payment to be a far better indication of credit-worthiness than a pay stub. With a downpayment there's an immediate means test that the borrower can afford the house they're about to by, the borrower has significant skin in the game to not default, and the lender has a nice 20% equity buffer in the case that there is a foreclosure. My thought is if 80/20 loans weren't a thing and banks required at least 20% cash downpayment, we wouldn't have had the boom and bust debacle we saw in the oughts.

deleted 8y ago

[deleted]