The Movement to Bring Back No-Doc Loans

Like cockroaches the idea that somehow, someway people who can’t document their income should nevertheless be given mortgages just can’t be eradicated. The movement to resurrect this monster is gaining steam.

From Clusterstock:

Realtor.org: No-doc loans are particularly hard to get, locking out people whose incomes are derived from investments or who are able to tax-shelter significant dollars.

The California Mortgage Bankers Association spokesman Dustin Hobbs says the industry understands that banning most alternative financing isn’t the long-term answer.

“It’s a reaction to the current environment,” he says. “There’s such a lack of appetite for risk right now in general that any product viewed as having any sort of risk at all has a tough hill to climb.”

Chris George, president of CMG Mortgage, predicts that no-docs and other nontraditional loans will be back within the next six months as lenders gain confidence. “As with injuries, as with your credit, as with the economy, time heals all wounds,” he says.

Parse what you read here. The rationale offered for no-doc loans is that people who make money from investments or who are able to shelter their income from taxes need these loans. The implication is that these people can’t prove their income. Well that’s true if they don’t file income tax returns.

The simple fact is that an income tax return will show both your pre-tax income and your income tax liability. If you have significant income from investments it goes right on the front page and then gets explained in Schedule D, I believe. Those who have significant income also list their gross income and then via a number of different schedules utilize various parts of the code to reduce their tax liability. It’s a relatively simple procedure for either type of borrower to ascertain the actual after-tax cash flow that the borrower has available to service his proposed mortgage obligation.

The common complaint of the no-doc borrower has always been that his Schedule C doesn’t really reflect his true cash income. You see, because he’s able to itemize expenses he is able to inflate them to an extent that his income tax liability is much less and one should not really underwrite the loan based on the income that the business shows on the Schedule C — wink, wink.

What this guy is telling you is that he cheats the government and you should therefore assume that he’s playing square with you. Well we know how that worked out.

I certainly hope mortgage broker Chris George is wrong about these products making a comeback in six months. If he’s not, let me make a suggestion. Every no-doc loan should be subject to rigorous audit and if any irregularities are found both Mr. George and his client should face criminal fraud prosecution.

Lord can we please learn something from all of this.

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