CNBC -Diana Olick - 7 June 2016
They were a hallmark of the U.S. housing crash: Mortgages that required little or even no documentation.
During the boom, they were called "stated income" loans, but advertised as "low-doc" or "no-doc" loans. When the damage was done, they were deemed "liar loans." Both lenders and borrowers alike would write basically anything on the mortgage application to get the deal done. Now, nearly a decade after the financial crisis began, a new version of the stated income loan is making a comeback.
"Lite Doc." That is what Quontic Bank, an FDIC-insured community lender in New York City is calling its product. It requires only verification of employment and two months worth of bank statements. For self-employed borrowers, it requires documentation of one year of profit and losses. The Lite Doc loans are five-year adjustable-rate mortgages with interest rates in the low- to mid-5 percent range, according to the bank. Thirty-year fixed-rate loans, which when fully documented can offer rates in the high-3 percent range, are not part of the offering.
Most loan applications today require two years of 1040 income tax statements, two years of employment W2s and at least four pay stubs, in addition to bank statements and credit checks.
The Quontic loan does not have to comply with strict new "ability-to-repay," or ATR, rules established in the wake of the financial crisis under Dodd-Frank legislation, due to a little loophole: Quontic is designated as a community development financial institution, or CDFI, under a small U.S. Treasury program which funds economic revitalization in low-income communities.
The fund, established in 1994, "serves mission-driven financial institutions that take a market-based approach to supporting economically disadvantaged communities," according to the Treasury website. Quontic, based in Queens, New York, meets the requirements because it makes loans to borrowers in a low-income community. CDFI lenders are exempt from having to comply with so-called ability-to-repay rules.
"We no longer have to have our borrowers qualify in the traditional sense," said Quontic CEO Steve Schnall. "Because of this new Dodd-Frank requirement, a lot of people who don't meet the very strict and traditional qualifying guidelines that the ATR requires are simply ineligible for financing. There's a huge swath of the population that simply can't get a loan on a primary residence anymore."
The "Lite Doc" loan is not the "low-doc" loan of the past. It is only for owner-occupied properties, so no investors, and it requires a 40 percent down payment on the property, far higher than most conventional or government loan products. There is a minimum FICO credit score of 700, and the borrower must show he or she has a minimum of 12 months worth of principal, interest, taxes and insurance in the bank at closing.
Schnall said a lot of the bank's customers are immigrants where seven or eight family members may be pooling the money to make the down payment. They don't have the traditional income documentation that other borrowers might have, as they get some payment in tips and bonuses.
"A lot of these lower-income earners, they jump around from job to job to job and that doesn't mean that they're not going to earn consistently, but they might not earn consistently at one particular place of employment," said Schnall. "Most of these borrowers have immaculate credit, they have substantial equity in the property and significant liquidity as the result of gifts from family members."
Schnall admits, however, that Quontic can make these loans to anyone anywhere in the country. The Quontic program is barely a few months old and has closed just seven loans in New York and Miami, but there are more in the pipeline.
"The CDFIs get this privileged status because their sole purpose is to help consumers," said Laurence Platt, a partner at the law firm Mayer Brown who specializes in consumer financial services issues. "They don't have a traditional profit motive. The concern about steering borrowers into inappropriate loans isn't there."
While not the functional equivalent, Platt said the CDFI is like a nonprofit lender where the underlying premise is you don't have to worry about them exploiting customers. He does, however, raise concerns.
"It doesn't mean that it's a prudent loan, it's just not an illegal loan. If you aren't verifying income one way or another, there still is the possibility the borrowers will lie," said Platt.
This is especially true in appreciating housing markets, like New York City. Queens may not be Manhattan, but as both Manhattan and Brooklyn get ever more expensive, Queens is gaining popularity.
"There are certain banks that can carve out niches where such lending can be successful, but you really have to be careful and know what you're doing and stick to your underwriting guidelines rigidly," said Camden Fine, president and CEO of Independent Community Bankers of America, an industry association. "You do have to be careful about your documentation because the regulators are going to come in and examine these loans, and they are going to draw their own opinions, and so you'd better know what you are doing, you better have a lot of expertise in this area before you go down that road."
The mortgage industry has become very stringent in its underwriting practices, gun-shy from the billions of dollars in legal settlements it has had to pay out as retribution for bad loans made during the last housing boom. Some say the pendulum has swung too far and that the credit box for potential borrowers today is too small, but that there is a fine line to walk while loosening those standards.
Other lenders have started offering new products, hoping to lure borrowers who have not been able to qualify in today's market. Wells Fargo recently announced a 3 percent down payment offering, but the loans are fully documented.
Clearly this bank is targeting borrowers who have some financial wherewithal because they have to have a 40 percent down payment, which is a significant amount of skin in the game.
Of course it is not impossible for home prices to fall more than 40 percent, as we saw during the last housing crash. Since these loans do not comply with federal rules governing so-called qualified mortgages, that can be sold to Fannie Mae, Freddie Mac or could be insured by the FHA, Quontic has to hold the loans on its own books. That increased the risk on the bank.
"I see them as extraordinarily low-risk loans. They're mission oriented. The worst-case scenario is that the borrower goes delinquent and you have to foreclose," said CEO Schnall.