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Stated Income Loans Going Away

I’ve heard from several sources that stated income loans, also known as “liar’s loans” may become a thing of the past as mortgage lenders continue to tighten underwriting guidelines.

In the last five plus years, stated income documentation was the most common doc-type selected by borrowers on mortgage applications.

Stated income documentation became an option after self-employed borrowers complained that providing lengthy tax returns was time consuming and cumbersome.

And much like any other loophole, it was soon exploited.

It wasn’t long before stated income deals were the most common option selected by borrowers applying for a mortgage, mainly because it was the easiest option with the fewest pricing adjustments.

Unfortunately, stated income deals have led to a good chunk of the problems we are seeing now, largely because applicants overstated income and lied about job positions to qualify for homes they couldn’t truly afford.

From what I hear, IndyMac and Countrywide may be removing most of their stated income loan programs, likely because secondary investors are gearing up to reject loans that don’t verify income.

Stated income may still be offered to self-employed borrowers, but probably won’t be an option for W-2 borrowers who have little excuse not to document pay stubs.

While the news will likely limit loan production even further, it should have a positive effect on the quality of loans that ultimately fund.

The measure should reduce mortgage fraud and improve the marketability of loans on the secondary market, though it could be too little, too late.

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