No Income Verification Mortgages Rarer Now
Today it is even harder to qualify for because of the rarity of these loans. This type of mortgage became wildly popular in the early 2000s. While they did help the tiny percentage of individuals with high incomes that could be tough to document, lenders started misusing them for their gain. They began extending the loans to subprime borrowers around the time the housing bubble developed. That made for twice the problem for the financial industry.
It got worse. As lenders continued to extend loans to subprime borrowers, without reliable income, the problem grew. Then those who outright did not qualify began to apply. They knew they did meet the qualifications and they lied on their loan applications to get approved. No income verification mortgages began to get the name “liar loans”. The name liar loans became most applicable in expensive markets where mortgage approvals were extremely rare for all but prime borrowers. The subprime borrowers could not afford the homes for which they applied for mortgages and they defaulted on the loans.
About 2005, the finance industry revamped its low- and no-income verification loans, deciding to try to save themselves by offering more loans. They loosened the requirements which at least meant people no longer had to lie on the applications, but the subprime lenders dropped the qualifications too low in exchange for a higher interest rate. During the period from 2000 to 2007, no income verification mortgage loans more than quadrupled. In those seven years, the loans rose from two percent of home loans to nine percent.
Here’s the deal. Banks and those employed by them have incentives to make loans. Those incentives tipped the scales to them offering too many to people who should not have them. The main reasons are:
- Loan officers earn a commission on every loan. It does not matter if the homebuyer defaults on the loan or not. The loan officer still gets paid.
- Mortgage lenders planned to re-package the loans and sell them to investors as mortgage-backed securities.
- The bank itself makes money on the loan origination fees, so the volume of loans makes them money automatically. Bad or good loan, as long as it went through the system, the bank got paid.
All of the mistakes accumulated and in 2008, the boom went bust, and the banking/financial crisis occurred. According to The Financial Crisis Inquiry Report, by the time the crisis came to a head, investors held more than $2 trillion of the repackaged mortgage-backed securities. They also had invested in about $700 billion of collateralized debt obligations which included mortgage-backed securities.
Delinquencies and defaults occurred the most in what real estate calls sand states – the states of Arizona, California, Florida, and Nevada. Real estate’s expense in these desirable locations caused serious delinquencies – those where payments are late by more than 90 days. That accounted for 13.6 percent of sand state mortgages. Compare that to 8.7 percent nationally.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created a rule set that lenders must meet to end the bad decision-making. It included an “Ability-to-Repay” rule that requires the mortgage lending institutions to confirm each borrower can repay the loan before offering it.
The history lesson comes so you understand just how tough it will be to qualify for one of these mortgages, especially if you live in a sand state. The only loans to which the Dodd-Frank did not apply were those for loan modifications timeshares, reverse mortgages, and temporary bridge loans.