
No Pay Stub? No Problem. Unconventional Mortgages Make a Comeback - onetimemanytime
https://www.wsj.com/articles/no-pay-stub-no-problem-unconventional-mortgages-make-a-comeback-11548239400
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docker_up
Subprime or poorly documented loans are absolutely fine and actually help
people, as long as they are marked as subprime loans. The problem with
2008/2009 was that subprime loans were being marked as AAA, because that was
the fraudulent part of it. And then these subprime loans were getting packaged
together with AAA loans, and caused the quality to degrade, dropping asset
prices, etc.

As long as the loans are marked appropriately and the proper risk is taken
with interest rates and there is nothing predatory or exploitative about them,
there is nothing wrong with companies lending to subprime borrowers. In fact,
it helps people break the circle of poverty by investing in them, again as
long as it's not predatory.

~~~
Simon_says
You use the word "predatory" a couple times. What does that mean? These are
contracts that are willingly entered into by the borrower, and the lender has
a lot of incentive to ensure that the borrower can actually pay.

~~~
docker_up
You should research what the predatory loans were during the crisis. Your
assumptions are incorrect, especially during the years leading up to
2008/2009.

Banks would get people who undoubtably didn't deserve loans, would handwave
over the details and then send people on their way with $1M loans and the
borrowers would later fail. I have a friend who worked at Washington Mutual at
the time, and she would routinely reject loan applications, and her manager
would overrule her. The manager was making $30,000/month in commissions from
loan origination, and he didn't give a fuck who was getting the loans because
he was being paid and they were getting packaged up and sold to Fannie
Mae/Freddie Mac.

Meanwhile, people would be getting loans that they couldn't afford, but could
make payments because of the 0% interest loans that were actually increasing
the principal. But they didn't realize this because the lenders didn't explain
all the details to them. It's predatory to take advantage of the fact that
most regular people don't have a higher-level understanding of mortgages, and
by filling their heads with ideas that it doesn't matter anyway because they
will sell the house in a year for a profit.

The lenders didn't care because they were incentivized to originate loans even
if they knew the borrowers couldn't ultimately afford them. The thought at the
time was "the house price will increase in 2 years anyway, so even if you get
a $800k loan on a $1M house, you can sell it in 1 year for $1.2M, and then use
the $200,000 profit for a downpayment on a real home."

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jdpedrie
As a layman (though I worked in the mortgage industry, it was as a software
developer fairly distant from underwriting), I've long considered it an
unfortunate development that manual underwriting had fallen by the wayside.
Now, as a self-employed developer, I've seen how difficult it is to obtain a
refinance mortgage without a W2.

That said, the example used in the article seems frightening. A $600,000
mortgage on a part time student income where the borrower is forced to rent
rooms to make the payments? However unfortunate the normal underwriting
standards are for some portion of the population, it seems that lenders
continue to take whatever rope they are given and insist on hanging themselves
with it.

~~~
tmp092
Read to the end...the example the WSJ used was not a normal situation. Shame
on them for trying to use this person's story as an example of the "new
normal." Hardly.

 _She used the money to fully buy out her grandfather’s house in San Clemente,
Calif. She jointly inherited it with other relatives and said she needed a
loan to pay them for their shares of the property._

~~~
giarc
Read the middle of the article where they clearly state "While that makes up
less than 3% of the $1.3 trillion of mortgage originations over that period,
the growth is notable because it came as traditional home loans declined."

~~~
tmp092
Unconventional is anything that is not underwritten in a conventional manner.
A situation where you inherit a property and take out a mortgage to pay out
others with shared inheritance in a property is almost certainly not
representative of the underlying reason for the growth in the 3%. If the
author is trying to imply a rebirth in reckless lending that caused the last
recession then I'm arguing they picked the wrong subject. If it's because they
couldn't actually find a subject that _definitely_ should not have been given
a mortgage then the entire premise of the article is wrong.

~~~
giarc
But that doesn't change the fact that this underemployed person still owes
$610K.

~~~
tmp092
It says at the end, she'll rent out the rooms. San Clemente is in prime beach
front Orange County. 1) She will be able to rent a single room for at least
$750-$1000. 2) The property is in a highly desirable, wealthy area and will
likely continue to grow in value over time. 3) Her earnings will grow over
time once she graduates.

~~~
giarc
That's a lot assumptions... 1. that she'll be able to rent the rooms 2. she'll
be able to get a job where she lives.

I'd be scared s __ __ __* if my $610K mortgage depended on getting a job and
renting out multiple rooms every month.

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woofcat
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m348e912
Call me crazy, but I've always considered a (non-financed) 20% down payment to
be a far better indication of credit-worthiness than a pay stub. With a
downpayment there's an immediate means test that the borrower can afford the
house they're about to by, the borrower has significant skin in the game to
not default, and the lender has a nice 20% equity buffer in the case that
there is a foreclosure.

My thought is if 80/20 loans weren't a thing and banks required at least 20%
cash downpayment, we wouldn't have had the boom and bust debacle we saw in the
oughts.

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smileysteve
This lost me at _a nursing student_ apply for a _$610k_ mortgage.

[addendum, then I finished, it's an inherited house and the mortgage is to buy
out her relatives; so I start hoping it's not 610k debt but total value.]

~~~
mbreedlove
_part time nursing student_

~~~
giarc
I'm not even sure that is the correct term. If she was truly a nurse (student
or otherwise) working part time, she would have pay stubs from her employer.
The fact that she had to rely on bank statements and client letters tells me
she is perhaps working for cash.

"works part time providing home care for children and the elderly" is this a
veiled way of saying she is a babysitter? If she was actually doing nursing
care for children or the elderly, I assume she would be working for a company,
back again to the fact that she doesn't have a pay stub, I think she is
working for cash under the table.

~~~
athenot
Or... she could be a contractor to one of those companies, to help them when
they have more work than employees can handle.

~~~
giarc
In that case she would have a paystub..... or at least a contractor agreement.

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GreeniFi
I wonder if this is typical end-of-cycle behavior: 1\. Sub-prime is back 2\.
UK lenders announce mortgages where loan amount is set with reference to joint
child _and_ parental income 3\. Other examples of frothiness welcome.

I wonder if banks get to see the end coming ahead of everyone else - but in
order to meet business targets, have to relax lending requirements to keep the
party going just a little bit longer.

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rhombocombus
Article is paywalled, but based on the first paragraph it seems like this
might not be entirely bad, as long as the banks are doing their due diligence.
My wife's income is 100% 1099 self employed, which has made it challenging to
get mortgages in the past. I think that it's critically important to vet
borrowers thoroughly for obvious reasons, but I also think that home loans
should be available to folks who might not get a W-2 but can still pay their
bills.

~~~
onetimemanytime
>> _it seems like this might not be entirely bad_

The problems start when they can't pay back their $600K mortgages with a $17
an hour job or freelancing here and there. Mortgages are pretty old as a
product, banks know who is likely to afford it and who isn't.

Mortgage payments are due every month of the year for 15-20-25-30 years, and
that's the problem.

~~~
matthewmacleod
_Mortgages are pretty old as a product, banks know who is likely to afford it
and who isn 't._

Doesn't the sub-prime crisis basically blow that theory out of the water?

~~~
giarc
Mortgage lenders likely knew these people couldn't pay it back, that's why
they sold the debt as fast as they could.

~~~
patio11
If this were true, you’d expect America’s largest banks to have had only 60
days or so of subprime mortgages on the books, which would have meant minimal
exposure in the scheme of things.

In the world we live in, Bank of America fell by 95% or so, Citibank missed
nationalization by a whisker, Wachovia was forced to merge, etc etc, and
that’s not even counting the investment banks, because they were happily
engaged in the traditional business of banking in addition to securitization.

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thoughtstheseus
Fixed COFI mortgages are an interesting alternative as well.

