No-Doc Loans: Who’s Taking Them Out and Why?
If the IRS wants to spot large numbers of people stiffing tax collectors, it might want to consider auditing a fast growing segment of the mortgage market, writes Kenneth Harney in the Columbus Dispatch.
New research suggests that more than one out of six borrowers who take out limited documentation or no documentation mortgages do so in part because they have significant under the table income that they do not report on their federal tax filings.
Limited-documentation and no-doc loans once were used primarily by self-employed professionals, small-business owners and individuals who are heavily dependent on periodic bonuses or commissions.
In limited- or no-documentation programs, applicants typically state their income and assets to the loan officer but aren’t required to show detailed proof of that information for the mortgage company’s files.
Generally, applicants are required to have good credit histories, but at the extreme — NINAs (no income verification, no asset verification) — they need not document much of anything when qualifying for a mortgage. The allure of such mortgages for lenders or brokers: They come with higher rates and compensation.
Such home loans were only a small fraction of the market during the 1990s, but today, they’re big business for both mortgage lenders and home mortgage brokers. This year, they represent more than 16 percent of new home loans, according to Inside Mortgage Finance, a trade publication in Bethesda, Md.
Unlike in earlier periods, however, today’s low-documentation borrowers are much more likely to be people who could — but choose not to — document their income with W-2 forms or pay stubs.
Why do they prefer to go the low-documentation route? Survey designer Geosegment Systems of Nashua, N.H., asked 2,140 brokers active in the field this and came up with some eye-opening answers.
While 63 percent of mortgage brokers said they knew their self-employed clients had “unreported income” that they wanted to keep off the record, 71 percent said their borrowers’ applications were dependent on additional income “from a household member with poor credit.”
For example, say a married couple earns $10,000 a month, but one spouse had filed for bankruptcy or lost a house in a previous marriage. Most lenders would want to know about that to underwrite the new mortgage and charge mortgage rates high enough to cover the added risk. But with low- or no-doc loans, only the spouse with good credit would count as the borrower.
Forty-five percent of the brokers in the study said a significant reason for their clients to avoid full documentation is that they are self employed but have not filed tax returns. Forty-three percent said their clients “can’t qualify under standard (debt-to-income) ratios.”
In other words, if they documented their income and monthly bills, the new mortgage debt might represent 50 percent or more of their income — far beyond what most lenders consider acceptable.
Twenty-two percent said clients for low- or no-doc loans had “divorce or other legal circumstances” that complicated their financial profiles. One out of every seven said the “immigration status” of borrowers was an important issue, while one of 12 said they knew that their low documentation stated-income borrowers actually were unemployed.
Mortgage companies that make or invest in low-documentation mortgages largely agree, but they think the risks are controlled by the higher rates and fees they charge. If a loan officer knows that the applicants have adequate income and assets to handle a mortgage at the point of loan origination, that’s what’s really important — not that the standard documentation isn’t in the file.
But what about stiffing Uncle Sam?
Lenders say they do not approve of people illegally hiding income, but that the loan officer’s or lender’s main job is to make certain the mortgage is properly underwritten. Brokers and lenders “are not paid to do the work of the IRS,” one agent said.