US Self Cert

StevieJ

Not one to spread doom and despondency, but, it appears they not only have a sub-prime problem but are also about to encounter a self-cert problem as well.

http://www.bloomberg.com/apps/news?pid=20601109&sid=arb3xM3SHBVk&refer=home

Apologies if Carolt has already posted this.

mr.broderick

StevieJ wrote: »

Not one to spread doom and despondency, but, it appears they not only have a sub-prime problem but are also about to encounter a self-cert problem as well.

http://www.bloomberg.com/apps/news?pid=20601109&sid=arb3xM3SHBVk&refer=home

Apologies if Carolt has already posted this.

love it...very dry.

HelpWhereIcan

By agreeing to pay only interest for three years, the self-employed salesman didn't have to show proof of income and landed a rate of 6.25 percent.
Now, four years later, Nessen's industrial coatings business has gone belly up and his rate has jumped to 10.6 percent.

Now that is what I call payment shock.

10.6% puts UK svrs into perspective - even a lender like Preferred has a svr in the 9s.

Thank god ARMs like this do not exist in the UK like they do in the US anymore - closest we used to have was deferred interest loans. The last bust saw and end to them.

From what I gather a low introductory rates in the US can sometimes be no more than deferring the interest (unless you buy points which is similar to us paying an arrangement fee).

Shows one of the differences between us and the States.

Generali

So-called no-doc or stated-income loans, for which borrowers didn't have to furnish pay stubs or tax returns to document their earnings, were offered by lenders such as Greenpoint Mortgage and Citigroup Inc. to small business owners who might have found it difficult to verify their salaries.

So if you're Citibank and you have a small businessman paying in say $5000/month into his business account with you and he then comes to you for a stated income loan claiming to be earning $100k pa are you complicit in mortgage fraud (passing on a mortgage to Fannie Mae despite having good reason to suspect that the mortgage application is false) or money laundering (you have reason to suspect the missing $3000/month is being hidden - not passing on suspicions even if you have no evidence is a crime under money laundering legislation).

HelpWhereIcan

Generali wrote: »

So if you're Citibank and you have a small businessman paying in say $5000/month into his business account with you and he then comes to you for a stated income loan claiming to be earning $100k pa are you complicit in mortgage fraud (passing on a mortgage to Fannie Mae despite having good reason to suspect that the mortgage application is false) or money laundering (you have reason to suspect the missing $3000/month is being hidden - not passing on suspicions even if you have no evidence is a crime under money laundering legislation).

Potentially yes.

Depends if you believe that your account is the only one that the customer holds and pays money into or if the business that holds an account with you is the only one they run and their only source of income. People who are likely to fall foul of this rarely apply to their own bank.

Contrary to popular belief, the lenders in the UK do sometimes flag up a case if the application form does not match other information they have about you through other accounts you hold.

Actually a point relevant to the UK. It has been known for customers/advisers to claim that their income is £60,000 pa because they pay £5000 pm into their account.

The obvious flaw in this argument is the fact that it ignores any expenses of the business (remember tax is irrelevant because gross income is declared). Unfortunately the logic in this is lost on some small business owners and they press ahead anyway.

A bit like the double glazing guy who accused me of putting obstacles in his way because I wanted to know what figures his accountant could back up before I would self cert him. He just went off and found someone else who would ask no questions.

The fact that I may have been able to find a 'normal' lender and better rate for him depending on the answers his accountant gave was lost on him.

Never mind

StevieJ

HelpWhereIcan wrote: »

Now that is what I call payment shock.

10.6% puts UK svrs into perspective - even a lender like Preferred has a svr in the 9s.

Thank god ARMs like this do not exist in the UK like they do in the US anymore - closest we used to have was deferred interest loans. The last bust saw and end to them.

From what I gather a low introductory rates in the US can sometimes be no more than deferring the interest (unless you buy points which is similar to us paying an arrangement fee).

Shows one of the differences between us and the States.

What are US base rates 2%?

HelpWhereIcan

Yes - 2% so he is paying 8.6 over their base rate - very very unusual here for someone to be paying 13.6% (can't think of anyone I have personally seen and I have seen some horrors).

Even the LIBOR based sub prime deals tend to be about 4% over 3 mth LIBOR at worst on SVR which would give about 9.7%.

The rate he is on is possible in the UK - but probably only applicable to the worse end of adverse credit lenders.

turbobob

HelpWhereIcan wrote: »

Thank god ARMs like this do not exist in the UK like they do in the US anymore - closest we used to have was deferred interest loans. The last bust saw and end to them.

From what I gather a low introductory rates in the US can sometimes be no more than deferring the interest (unless you buy points which is similar to us paying an arrangement fee).

Shows one of the differences between us and the States.

Was just wondering, what was the cause of deferred interest mortgages being removed from the UK market? Lenders just deciding to withdraw them (did they have to write off large amounts of bad debt?) or was there any other factors?

Generali

turbobob wrote: »

Was just wondering, what was the cause of deferred interest mortgages being removed from the UK market? Lenders just deciding to withdraw them (did they have to write off large amounts of bad debt?) or was there any other factors?

IIRC, they existed in the late 80s and the lenders got hurt badly on them. They learned their lesson in the UK (although not in the US it seems).

HelpWhereIcan

turbobob wrote: »

Was just wondering, what was the cause of deferred interest mortgages being removed from the UK market? Lenders just deciding to withdraw them (did they have to write off large amounts of bad debt?) or was there any other factors?

Yes, lenders lost alot in the amount of bad debt they had to write off due to repossessions with shortfall, arrangements etc but a lot was to do with the bad publicity that they received. Many people on deferred interest mortgages suffered very badly in the last crash.

Not only did their interest payments rise due to the end of the deferred period, but interest rates had also risen dramatically. Add to this that the deferred interest was added as a lump sum to the mortgage debt, increasing the debt on which this higher rate of interest was being charged, but also the fact that house prices had fallen making it harder for people to remortgage.

Having a 100% mortgage taken out in the years before house prices fell was bad enough. It was bad enough having Mortgage Indemnity Guarantee premiums, arrangement and other fees added increasing the debt to more than you orginally borrowed. Not only all that, but the lender added £000s to your debt to cover interest that had been deferred leading to massive payment shock at the worst time possible.

So, the publicity was bad forcing lenders to offer them less often.

I would also argue that the increased competition in the mortgage market and rise of remortgaging was also responsible as lenders were forced to become more competitive (daily rather than annual interest, end of erc overhang etc).

What must not be forgotten though is the level of regulation in the UK. Mortgages (at least since Nov 2004) have been more heavily regulated than in the US - believe it or not.

No borrower given all the facts required under current regulation would agree to a deferred interest mortgage.

Maybe the same would have been the case of some ARMs in the US had loan officers been required to give the customer the same info a UK mortgage broker does.

I did a mortgage for a US citizen in 2003 and it struck me how alien the concept of remortgaging was to him - a bit like trying to explain the idea of remortgaging to people in the UK when I first started in 1995.

turbobob

Thanks for the information.

When I was working on endowment complaint cases I saw some pretty bad examples of these. As you say, mostly 100% mortgages. You also had the type that paid the first x years endowment premiums and added them to the mortgage, sometimes in conjunction with deferred interest, for a double whammy payment shock!

My understanding was that they were originally aimed at a very specific target group - professionals starting out who would be expected to have a big increase in earnings in the first few years. But they ended up being sold to people who simply could not afford a mortgage, and had no obvious prospects of earnings increases. Terrible products..