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Reports US

US stock market daily report (August 15, 2014, Friday)

August 18, 2014, Monday, 05:19 GMT | 01:19 EST | 09:49 IST | 12:19 SGT
Contributed by Millennium Traders

Stated income loans - not the 'liar loans' as they were referred to prior to the housing bust - are making a comeback. Although the three largest banks in the USA are not offering them, others are. Small business owners or certain investors looking to buy real estate they intend to rent, who demonstrate the ability to repay the loans, verify their income through statements from their bank or broker and who don't fall under the same rules imposed by the 2010 Dodd-Frank financial reform legislation - are aiming for state income loans. Lenders involved in making 'stated income loans' look for enough assets to pay six to 12 months of payments with many requiring down payments to reduce the chance of default. The potential lenders generally can't prove their income from tax returns or pay stubs. Many small business owners keep income in their business to reduce their personal income tax obligation.

The Dodd-Frank law states that, for all owner-occupied mortgages made in the United States, lenders must make sure the borrower has the capacity to repay, or face enforcement from the Consumer Financial Protection Bureau as well as consumer claims in court, where lenders could be liable for up to three years of finance charges and fees. Ability-to-repay rules apply only to mortgages for people who will live in the house. That means there is potential for abuse if borrowers apply for the mortgages saying they'll rent out the property when in fact they intend to live there. Because these kinds of loans are not subject to ability-to-repay rules and require less documentation, borrowers could be talked into taking on mortgages they cannot afford.

The new stated income loans are being referred to as "alternative documentation loans," "alternative-income verification loans", "asset-based loans" and "portfolio programs." Lenders are targeting small business owners, whose personal income tax returns may not reflect their ability to repay a loan. The new names for the loans remove the stigma that occurred during the housing crisis. The shrinking mortgage market is prompting some lenders to expand their potential pool of customers. Mortgage Bankers Association forecasts lending volumes are down 30% for 2014 mortgage compared to 2013 levels.

Credit scores required for the new loans vary from as low as 300 and higher. The line between subprime and prime appears to be 640. Qualifying borrowers typically pay one-half to three-quarters of a percentage point above conventional mortgage rates.

Westport Mortgage founder Paul Lebowitz said, "This is not a return to the wild and wooly days of, if you fogged the mirror, you can have a loan. They have a smarter edge to them now."

Los Angeles-based National Mortgage Service started offering stated-income loans earlier this year and is doing $15 million worth of stated-income loans a month. Jae Chang, president of National Mortgage Service said, "We are targeting those borrowers who have excellent credit and a lot of liquid reserves, but who are having difficulties proving their income."

There is no available data about how widespread stated income mortgages are. Experts anticipate there is nearly $1 trillion of U.S. home loans anticipated for 2014.