“Kurt Herrenbruck, a mortgage planner with Fishman Financial Group in Berkeley, saw one client’s financing evaporate in the space of three days last week.
“The client is well-heeled, with (a high credit score), and $500,000 in the bank, making an owner-occupied purchase with a 25 percent down payment,” Herrenbruck said. “He needs a no-doc loan (meaning he cannot provide documents to prove his income) because of an employment hiccup.”
Herrenbruck said Wednesday he found two lenders willing to make a no-document loan. But by Thursday it was down to one. And Friday, when his client’s offer was accepted, there was none. “He can’t buy even though he had the strongest profile of any no-doc: superlative credit, money in the bank and a whopping down payment.”
∙ Mortgage crunch hits Bay Area hard because of jumbo loans [SFGate]
∙ JustQuotes: From Credit Crisis To Credit Squeeze To Credit Crunch? [SocketSite]
∙ JustQuotes, RandomRumors, And Readers Report: Alt-A All In One [SocketSite]
∙ JustQuotes: Forget Subprime In San Francisco, But How About Alt-A? [SocketSite]
An “employment hiccup”? LOL. So in other words, you have a guy who is unemployed, but has some decent savings and is confident he’ll find another job before he depletes his savings. Sounds completely reasonable that the bank would turn him away. The rise of no-doc loans in the past few years was absolutely ridiculous – it’s just not that hard for even the self-employed to provide documentation of income – and banks shouldn’t provide cash to someone without it.
“The rise of no-doc loans in the past few years was absolutely ridiculous – it’s just not that hard for even the self-employed to provide documentation of income – and banks shouldn’t provide cash to someone without it.”
And yet they have in droves. From my experience it wasn’t just the self-employeds that were going no-doc but also plenty of employeds with six figure incomes that simply didn’t have *enough* income to qualify for $800K+ properties based on traditional lending standards.
No doc, no loan.
This is not a crunch. Just back to basics.
What was completely nuts wasn’t just that lenders were throwing so much money at borrowers with no proof of income or ability to re-pay but that lenders were willing to do so without charging interest that was any higher than that charged to proven, creditworthy risks, i.e. essentially no risk premium. It is too bad that good, solid borrowers are now having to pay more, or can’t borrow at all, while the risk analyses get straightened out. Lenders will again lend appropriate sums to good risks, but it will take a while (and the days of liar loans are over).
The problem with back to basics in San Francisco:
1. Reduces the pool of qualified buyers
2. Increases the cost of buying
3. Eases speculative fever
Demand drops. Budgets drop. P/E matters.
And the denouement to the riveting tale we’re all weaving, which no one has touched on yet, is that prices need to fall to restore balance to the market. And yes, I know everyone wants to live here, but anyone catch the article in the Examiner that the city is still losing people?
“People” don’t necessarily mean buyers. A new immigrant couple with three kids moving out of the room they’re renting in the ‘Loin isn’t replaced population-wise by two DINK couples making combined $200,000+, but that’s two sets of buyers compared to zero.
Oh spare us the reactionary rants about the evils of low-doc and no-docs. People often go with no-doc or low-doc loans not because they’re trying to cover something up, or trying to hoodwink the bank into lending to them as they plunge over a cliff. In many cases, people go no-doc because those automatons known as underwriters are often so mechanical in their formulaic application of their criteria that they cannot factor in stuff like, oh, REALITY. Case in point, I was self-employed for a long time and worked with my accountant to minimize my tax burden using everything we could think of. But the flip-side of that is that many years my personal AGI might be only a fraction of my actual available cash flow, making it look in my “docs” like I was a lot poorer than I am. The problem was that the underwriters’ formulas couldn’t cope with the fact that while my AGI seemed relatively modest, those numbers were simply the result of accounting magic. The formulas had no way of factoring in that I somehow was socking away >$40k annually into my down payment fund, even *after* paying $3k/mo in rent. Lo and behold, while I was prepared to make a 35% downpayment and the mortgage payment on my intended purchase would run less than 15% of my average actual monthly income, I couldn’t find anybody who look at my “doc” loan and I had to go no-doc. Yes, some people can abuse no-docs, but before you get all preachy, remember there’s a range of experiences out there and that sometimes you have to do things like a no-doc just to bypass the bureaucratic stupidity.
If it wasn’t one hiccup it would be another and every borrower has a sad story to tell that an Alt A loan would cure in a jiffy.
But too many of those alt a loans were fraudulent or otherwise not getting paid back. U.S. investors realized the problem years ago and bailed out. So Bear Stearns and others went to Asian investors and kept the party going another couple of years.
Then the credit agencies seemed to remember suddenly that these kinds of investments are risky (about 5 minutes after the losses started appearing) and Bear Stearns called and told the investors they had lost all their money. The Asian investors took off and there was no greater fool to keep fueling the fire. So Alt A Loans are toast. No one will believe the repackagers of these loans any more, and now rumors are starting to swirl that the servicers are holding off sending notices of defaults to prevent investors from realizing just how bad things are out there while some other set of suckers is located to take up the slack again.
This memo says it all, and note the date: literally hours before the problems started appearing and the funny lending got shut off. In it, he predicts the collapse as being perhaps hours away.
http://www.dealbreaker.com/images/pdf/HaymanJuly07.pdf
sometimes you have to do things like a no-doc just to bypass the bureaucratic stupidity
Wait, by bureaucratic stupidity, are you talking about the stupidity that allowed you to make it “look” like you were making much less, or…
Here’s the deal – you use accounting shenanigans to lower your visible income, you lower your chances of getting a loan, or at the very least, increase the cost of that loan.
Excellent point Brutus. When people talk about the expected population boom in San Francisco over the next 20 years they never seem to mention that the vast majority of these people couldn’t afford to buy a home here even if they wanted too. Your hypothetical is just that.
you are spot on Sidney W., I just bought a home with my fiancee on the loan by herself, going no-doc. she is self-employed and has done just what you have done – saved money every way possible!
what’s more, i wasn’t on the loan because my credit was considered “poor”. According to the automatons at the bank and Equifax I have poor credit because I haven’t been tested. i am guilty until proven innocent, because I have had one credit card my entire life, which I pay off in full every month. In reality, I am fully employed by a great company, over educated, and more creditable than most. But according to their rules I was unqualified to get a loan.
just another example of why the flexibility of no-doc loans can be a good thing.
From yesterday’s earnings conference call w high end home builder Toll Brothers:
…
Don Salmon, Toll Brother Mortgage Co.: Alex, just to reiterate, which hopefully people know, we always still do run credit scores on people, even if they are not providing us any documentation.
Robert I. Toll, CEO: Yes, as a matter of fact, the average FICO score on the stated income, stated assets for us was 758. It exceeded the full doc mortgage.
Alex Barron – Agency Trading Group: You mean for the stated guys?
Robert I. Toll, CEO: Yes, for stated income, stated assets, but it’s not verified, the FICO scores, because you still do a credit search, were 758.
Alex Barron – Agency Trading Group: Why do you suppose they don’t just go through the normal process then?
Robert I. Toll, CEO: Because they are lying, cheating dogs not paying their taxes.
Alex Barron – Agency Trading Group: All right.
Robert I. Toll, CEO: That’s just a guess.
@sidney W/anon 1147: Staying in your comfort zone, could you provide some more details? It sounds like you were doing something illegal/covering something up. If you have income, it has to be declared (gross income) even if you aren’t paying taxes on it. Even if you are a drug dealer (I believe that’s how they get some drug dealers, by the way — tax fraud. That’s why money laundering was invented).
Also, the lender does not know you are such a bigshot, so if all you are giving is your AGI, what is the lender supposed to do?
You surely aren’t claiming most of these no-doc loans are being taken by financial wizards/tax cheats such as yourself are you?
saith the esteemed SF Comical …
“The client is well-heeled, with (a high credit score), and $500,000 in the bank, making an owner-occupied purchase with a 25 percent down payment,” Herrenbruck said. “He needs a no-doc loan (meaning he cannot provide documents to prove his income) because of an employment hiccup.”
Hmmmm….since we are not told by these so-called journalists, all that any of us can do is speculate and assume…and/or…ask more questions..
“25 percent down payment”:
25% of what? How much is he trying to borrow?
“$500,000 in the bank”:
Of the $500K in the bank, how much of that would be used for the down payment? We are not told that the 25% is coming from that $500K.
“Well-heeled?”:
Looks good in a suit? Goes to the right parties? Has a picture with Gavin and/or Nancy and/or Barbara and/or Diane?
“high credit score”
Absolutely high? Relatively high?
“needs a no-doc loan”
How handy.
I scratch my head to figure out why this is news, then I consider the stenographers that wrote it and the Romper Room that they write for.
dub dub,
i surely don’t claim to be a tax wizard, just someone who pays attention to how i get taxed and what I can do to lessen my tax burden, which i believe is something every responsible person should do. (i agree with the bumper sticker that says: if you are not outraged, you are not paying attention)
there is nothing illegal about it.
but it does run counter to the system the mortgage industry (in this case) has set up to determine the worthiness of its applicants.
I’m not saying the banks are wrong to do so, necessarily. i don’t want people to default on their loans. that’s not good for them, certainly, but it is also not good for the industry as a whole, which I am now a part of.
i’m just saying that flexibility that no-doc loans offer can be a good thing. so before everyone calls for their demise, it’s worth understanding that on a case-by-case basis they can be a good option.
“No doc” is NOT the same thing as stated income, stated asset or even stated income/stated asset. With any “stated” loan, you still have to verify employment history even if they don’t verify how much you actually make; the no doc loan is different b/c you don’t have to verify employment history.
I’m self employed and I pay my taxes by reporting my actual income.
Sidney W. – did you ever stop to think that paying your fair share of taxes is not only a legal requirement but a fundamental obligation? If you’ve gone beyond fact to “accounting magic”, then let’s not mince words: you’re a criminal.
I think what happened was that anon used his/her self employed status to sock away $40K per year in a SEP IRA, a perfectly legal device, but one that is above the AGI line, and thus is subtracted out of your AGI when qualifying.
Congress allows self employed people to deduct a heftier chunk of their income because those people (of which I am one) don’t have the big resources of a pension (which may be funded by employees behind the pensioner) and lifetime insurance after retirement that were common when SEP IRAs were set up. So to make up for the fact that self employed people won’t have this untaxed nest egg later, congress allows them to build one up privately. If you can imagine a self employed person making $140K, and a salaried person making $100K, the thought was that these people are really exactly the same, that the extra $40K is not really income, it’s just making up for benefits they won’t have later.
I’m a little shaky on this next part, but I think it works this way: If you withdraw the money before retirement, you have to pay normal income tax on the amount withdrawn, plus a penalty. But if you withdraw for a significant event, they will waive just the penalty portion. One significant event is to use the money as a downpayment on a home.
Now, some people who are using technique would like to have their cake and eat it too. They would like to think for tax purposes, that they are just making up for lost pension money, and so they should be taxed as a salaried person making $100K. But for qualifying for a mortgage purposes, they would really, really appreciate it if the bankers would just look the other way and treat them like a salaried person making $140K. The fact that they will need that extra money later should be ignored, because, well, gosh ddarn it, they want a bigger house.
The mortgage bankers see through this argument and refuse to consider it. If the home doesn’t go up in value like a rocket ship and the self employed person retires, they will need that extra money just like anyone else. So they don’t include it as income: the self employed person who reported $100K on their taxes after deducting the $40K they socked away in their IRA only gets credit for $100K of income.
But to the home purchaser, that is merely “bureaucracy” that is to be gotten around. Thus, one uses a no-doc loan, because the entire mortgage industry is “stupid” and the buyer is “smarter” than they are.
See, no doc loans harmed no one. Except the investors, of course. Next up, are people who add back in their social security deductions and count that as income, because, gosh, that’s really just something they won’t need as long as greater fools come along and pay more and more for a house.
And you wonder why the industry collapsed?
A 25% downpayment is “whopping”? Sounds like a good bit of leverage to me…60% down is “whopping”. Coming from a banker, no doc is used due to an irratic or non-existant employment history…end of story. Everyone has a story in the subprime world. These people should have stuck to renting in the first place, and kept their “whopping” 5% downpayment funds in their savings accounts.
Isn’t it only around $10k you could potentially “withdraw” for use as a down payment on a primary residence? If that is in fact true, that’s just a drop in the bucket for a place in the City (compared to the outskirts).
well those of you who think self-employed people getting sound tax advice is “cheating,” you have your heads up your posterior oriface. I’ve never balked at paying my fair share, but I’m not paying a penny more, especially given the fact that the big corps I compete with get huge benefits and subsidies under the laws of our great nation. If you’ve got a problem with the fact that I take advantage of the meager protection offered to small and individual business people, you can take your sanctimony and insert it as per your head (see above). I’ll wager that the average tax rate I pay is higher than yours, and given that my tax bill is higher than the median income of the area, please bite me. 🙂
“accounting magic” has a good side and a bad side. The good side is that you lower your tax burden and are able to put more money in your bank account. The bad side is that you won’t qualify for a loan because your tax returns don’t show enough net income to qualify. If your actual income is higher than what you are showing on your tax returns, your accountant must have created an expense that is not really a true expense. Mortgage underwriters are trained to add back expenses to your income that aren’t actual cash expenditures such as depreciation/amortization. However, they can’t add back to your income any expeses that were created by your accountant to minimize your tax burden just for the sake of you minimizing your tax burden.
My partner is self-employed and makes decent gross income. Since he first started his business, I encouraged him to only expense his true expenses and to show his true income on his tax returns. He took my advice and when we bought a condo last year, we were able to qualify with a full doc loan because he showed good, steady income on his tax returns for 3 years.
No document loan infomercial – “Get a free vacation for you and your spouse after your loan closes!”
I went to Sliders in the Castro for lunch today, and they usually have some mindless Judge Judy type stuff on the TV. Today, I sat and laughed at a Union something or other mortgage company’s infomercial that kept saying “Bad or no credit? No worries – call us. We offer no documentation loans. And how about a free vacation after your loan closes?” I couldn’t believe that crap was on the TV at this point in time.
Unreal.
“Also, the lender does not know you are such a bigshot, so if all you are giving is your AGI, what is the lender supposed to do?”
If you’re self-employed, the lender only looks at your AGI. They ask for your Schedule C, but they disregard your gross income.
“Next up, are people who add back in their social security deductions and count that as income, because, gosh, that’s really just something they won’t need as long as greater fools come along and pay more and more for a house.”
Actually, this is exactly what happens in underwriting. If you are a W2 employee, the lender counts your GROSS pay.
@sidney — please one concrete example of what you are doing! Tipster above suggested a possibility — you can actually “invest in” real-estate w/ SEP-IRA funds, and if that’s what you are doing, just say so.
But see here [realtor.org]: you can’t use the property as your primary residence or vacation home — “you can’t have personal use or benefit from the property”. So what, exactly, are you doing? One example please!
I’m all for not giving the guvvy more than their fair share, but you are not being specific about how you have managed this legally. I’m genuinely curious is all (about the legally part) 🙂
Sidney –
It’s “orifice”.
And making assumptions about others’ income levels and tax rates is not particularly productive. Based on a readership survey, a very significant percentage of Socketsite readers/posters make in excess of $500K/year… which is in the highest tax bracket there is. Those of us at risk of the AMT know all about this.
As for your directive to bite you because you pay more in taxes than the median area income… thanks, but I’ll pass. You certainly are special, though. I’ll grant you that.
I am loving all of these news about the credit crunch, and the stock market volatility of the past few days due to the subprime mess.
I am in silicon valley, and I am so tired hearing from agents saying that housing in cupertino, sunnyvale, mountain view, and any good school distric homes are still very hot, with multiple bidders, and with increased prices, etc. I also follow patrick.net daily news. Also I look at sites like curbed.com, which still shows so many houses in SF in the millions of dollar prices, so I wonder if whoever is buying those million dollar properties in SF, could it be that they are really rich, maybe they paid cash, maybe the are all google employees, maybe they are foreign business people, maybe from those rich Taiwanese. HKnese? If all of these bad news, don’t make the prices go down, then whoever is still buying don’t need loans at all.
Dude wrote: “And yes, I know everyone wants to live here, but anyone catch the article in the Examiner that the city is still losing people?”
Actually, according to US Census estimates, the population of SF was actually higher in 2006 than in 2005 or 2004.
http://factfinder.census.gov/servlet/GCTTable?_bm=y&-geo_id=04000US06&-_box_head_nbr=GCT-T1-R&-ds_name=PEP_2006_EST&-_lang=en&-format=ST-2S&-_sse=on
The news the Examiner was reporting on was just the release of figures on ethnic composition.
Of course, according to the State of California Department of Finance estimates, the population of San Francisco has now reached an all-time high of 808k– the State thinks the US Census estimate is off by more than 60k.
I don’t want to start a debate on the accuracy of the population of San Francisco, but your link for the Census shows essentially that growth was more or less flat between 2004, 2005, 2006. A difference of 2-3k relative to the total population is a drop in the bucket. You do see a downward trend from 776k in 2000 to 744k in 2006.
If you are going to compare apples to apples, it would be nice to have the population figures calculated by the State of California for the prior years as well. My understanding is that the Census and the State of California do not use the same methodology to estimate population. Hence, the two different numbers.
What is interesting to me regarding S.F. population is the statistic I am going to try to find and post later today that San Francisco is no longer the magnet for people between 20 – 35 yrs. old. (A while back on this site this was brought up in the Economist Article “City in a Bottle”) Talk about a change from previous decades! All one needs to do is look around you when going about the city, and compare it either to times past, or to visits to other urban regions and there is no doubt this city is getting OLD. Cities that are younger, and cheaper are more interesting and fun.
“But the exodus from the San Francisco Bay Area appears more pronounced considering all the other surrounding cities that also suffered big population declines” from Citymayors.com.
So why is the cost of housing going up if we are loosing population?
anon @ 6:21 –
As others have mentioned here, the Census figures do not show SF losing population – we already lost population following the dotcom fallout. The last few years have been static to low growth. But, if you’re asking the question why cost of housing would be going up while losing population, you have to remember that we’re a very small part of a very large metro. The metro is NOT losing people. Therefore, one can assume that demographic shifts (not employment decline) are causing the population decline within SF.
As I said before, a family of immigrants, with two adults and three kids, is not replaced population-wise by two DINK couples making $200,000+, yet two sets of buyers (causing increased demand and prices) are added to SF, while we lose a family that was not in the market for buying.
It is unclear whether the population of San Francisco is flat, as per the US Census estimates, or whether the population is growing, and at an all-time high, per the state of California estimates. Both are estimates, not a count.
The vacancy rate in San Francisco remains low. The change in population is partially to do with demographic changes over time, as Brutus points out. Dot commers squeezing into shared flats starting in the late ’90’s, then going home between 2001-2004 probably accounts for some of the population blip during those years. However, all of these population estimates, including the decline in the number of young adults, must be taken with a grain of salt, since the state and federal numbers diverge so greatly. We’ll have a better idea what happened after the 2010 Census.
– “Based on a readership survey, a very significant percentage of Socketsite readers/posters make in excess of $500K/year…
Hey amused ( Aug 9) – where did you get that info? Thanks
It is a fact that the city is losing children. That can not be denied. You are seeing evidence of this with school closures. You are seeing families giving up and moving out of the city.
@confused: There was a reader survey awhile back where readers anonymously volunteered they make an average of about 200k/ year (or was it 250k/year?). I think amused doubled that, then added another 100k on top to punctuate his/her point 🙂
Of course, I think the reader salary survey was bogus for obvious reasons, unless we are talking martian year 🙂
anon @ 10:04,
I don’t think anyone is disputing that the city is losing children – which is probably a large part of any population stagnation or decline. The question posed before was “why are prices so high if population is declining?” In reality, in a place like SF (small city in large metro area), prices can increase dramatically WHILE population is decreasing, as double income couples, retired folks, second homers, and other richies displace middle class families. I’m not implying that it’s a good thing, but the idea that somehow population gain or loss in one small section of a metro somehow should mean supply increases is pie-in-the-sky.
Average salary at over $200K/year.
Some make far more, some make far less. What I make is my own business, which is why I don’t share it.
My point was that Sidney had no grounds for declaring him/herself superior to me/us due to inflated self opinion.
While it is entirely possible that the average socketsite reader has an income of $200k, wasn’t this just based on a survey of just 500? And how many unique hits does this site get? Just to throw this out there, the median family income for 2005 in the city of San Francisco was $73,180. Median household income was $57,496. A far cry from the $200k.
The average San Franciscan doesn’t buy a place here – SF is two thirds renters.
i think it’s normal to assume that when given the survey, which i did not see or participate in, the ones w/ higher salaries/education/ownership are probably more eager and willing to participate. also the ones with higher salaries and education probably incidentally have more insightful things to say or are more articulate, and thus tend to post more. based on this i would say the survey is skewed towards the upper end.
I’m still doing “no doc” loans. These borrowers have flawless credit, stable long-term employment (which is verified), and a down payment. The lender needs a purchase contract, an appraisal, a preliminary title report, an application, and a credit report. Income and asset verification are not required. I’ve been doing these for years and none of these borrowers are in default. “No doc” isn’t always irresponsible lending.