Pay Stubs? We Don’t Need No Stinkin’ Pay Stubs

January 24, 2019 at 9:25 am Leave a comment

Image result for badges we don't need no stinking badgesThis is one of those stories that made me mumble at my Kindle on my bus ride in to work this morning. The Wall Street Journal picked up a story by Inside Mortgage Finance reporting that a mere ten years after the Great Mortgage Meltdown, more and more lenders are making questionable loans to asset rich, cash poor individuals who don’t qualify for traditional conforming loans.

The Journal reports that lenders issued $34 billion in these unconventional mortgages in the first three-quarters of 2018, a 24% increase from the same period a year earlier. The Journal notes that while this only accounts for 3% of mortgage lending, it is sure to grow as lenders look for qualified borrowers during a time when all other types of mortgage lending is decreasing.

The hot new unconventional product is the asset depletion or asset dissipation loan. I went onto a couple of mortgage lender websites who offer this “product” and the basic idea seems to be that lenders rely heavily on the rate at which a member would deplete his or her assets in making mortgage payments. For example, one website described how to underwrite a retiree with plenty of assets in the bank but very little income coming in. The WSJ profiled a graduating nursing student who was able to qualify for a five-year arm based in part on money she expects to receive from inheritance. She plans on refinancing the loan as soon as she gets a job. Of course she does but I’m not holding my breath. The OCC is concerned enough that in December it questioned the underwriting standards being used by some lenders qualifying borrowers based on this underwriting method.

Now don’t get me wrong. I’m not saying that all asset depletion loans are bad. Of course it’s crucial to take into account a mortgage applicant’s assets. Furthermore, I believe that underwriters should have the ability to take into account a given mortgage applicants unique lending profile in determining if they can afford a mortgage. Requirements which are too stringent one way or another have the effect of denying people houses they can afford.

Besides, even the CFPB recognizes that there are situations when it is perfectly acceptable to extrapolate a person’s assets over a 12 month period. As it explains in its Ability To Repay Compliance Guide, “you could verify a Christmas tree farmer’s income via tax returns showing that the farmer earned $50,000 a year during the past three Decembers and nothing else the rest of the year and divide that $50,000 evenly across 12 months.” (See Page 22 of the Ability to Repay and Qualified Mortgage Rule, Small Entity Compliance Guide explaining how to determine an individual’s ability to repay under 1026.43(c)(1). The problem is that I don’t think anyone anticipated that a small but growing group of lenders would rely so heavily on asset depletion rates to qualify consumers to get a mortgage.

Of course proponents who are seeing their revenue grow argue that times have changed and that these members actually do have the ability to repay their loans. The problem is, we won’t know if they are right until these homeowners try to make payments in an economic downturn which may be right around the corner.

RIP Russell Baker

Nothing at all to do with credit unions but for my money one of the best newspaper columnists ever, Russell Baker passed away a couple of days ago. If you’re looking for a great read, you could do a lot worse than reading “Growing Up” by Russell Baker in which he describes what life was like for a child being raised by a single mother during the depression. Baker would eventually become a columnist for the New York Times.

Entry filed under: Mortgage Lending, Regulatory. Tags: , , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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