No-Doc Loans Returning?

The undocumented income or no-doc loans got a bad reputation when the housing crisis occurred. Some borrowers who used the loans misstated and inflated their income, (some with the support from now out-of-business brokers). The loans thus became labeled, "liar loans". But experts say these types and other alternative loans may soon be making a comeback.

"There's little appetite for no-doc loans at this time," says Dustin Hobbs, spokesperson for the California Mortgage Bankers Association (CMBA). Hobbs spoke to me via telephone from the CMBA's 37th Annual Western Secondary Market Conference in San Francisco.

While Hobbs doesn't know exactly when these types of loans will return, he believes they will make a comeback. Some experts say they could return in six months. "There's definitely a segment of borrowers, that in some cases, this is the only product that will help them purchase a home. [The loans] will come back at some point; it's just a matter of how fast the economy turns around and how fast we get back to a period when lenders and investors are willing to take on some level of risk," says Hobbs.

The self-employed who are actually appropriately qualified are finding that getting a loan is a bit difficult. Hobbs says, "Don't give up hope." The no-doc loans "have been painted with a broad brush by the media and some political circles as being a nasty product but, as people who are self-employed know, it's the only product they can use to qualify," says Hobbs.

But some people can't wait for the no-doc loans. They need help now, Hobbs recommends this. "For folks unable to fully document their income and who are looking to purchase or re-finance soon, it's important that they go above and beyond to document and prove their credit-worthiness. They should provide contracts, bill payment history, and any tax information they have. The key is to be creative—be active in their attempt to convince their lender that they are a low-risk borrower, in spite of their inability to fully document their income." Some say the overcorrection to the lending industry has missed the real issue. According to Hobbs the elimination of a particular type of loan does not solve the problem. Various types of mortgages are needed to meet the needs of diverse borrowers. The real disaster occurred not because of one type of loan but instead because of a lack of accountability—the lender making the loan wasn't necessarily concerned if the loan defaulted because these risky mortgages were pushed off lenders' books and packaged up and sold to third parties.

President Obama's proposed plan to help overhaul the financial regulatory system would require lenders to retain a portion of the loans they originate. Hobbs says that those attending the conference know better days will come. "There is a lot more positive energy here than there probably will be at our commercial multi-family conference [coming up] in a few months. That sector is definitely hurting and probably will be for a few years," he says.

What's making the difference in the residential market? "The incentives for homebuyers has definitely helped and low rates have helped on the refinance side as well as some of the new programs that have been springing up at the national and state level," he says.

This article appeared in Realty Times
Written by: Phoebe Chongchua, July 17, 2009

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