H.R. 4173 to Eliminate Stated-Income Mortgage Loans

Austin, TX – U.S. Housing News — The current version of the financial reform bill (H.R. 4173) would eliminate certain types of high-risk lending practices. For one thing, it would outlaw stated-income mortgage loans and make income-verification mandatory.

income verificationEver since the mortgage crisis began in 2008, fewer banks have been offering stated-income mortgage loans. That number could soon shrink to zero, if House Resolution 4173 becomes law.

This bill, currently called the Restoring American Financial Stability Act of 2010, will result in sweeping reforms of the financial-services industry. It includes an enormous list of reform measures, affecting everything from debit cards to mortgage loans. The current version of the bill is well over 1,000 pages, a testament to its far-reaching scope.

The differences between the House and Senate versions still have to be resolved, but final passage of the bill appears likely. According to the Washington Post: “Crucial differences … must be resolved in a House-Senate conference committee, which is expected to begin meeting soon after the Memorial Day recess.”

Most of the media outlets have been focusing on the new restrictions for derivatives trading. That kind of thing is off the radar of the average home buyer (most of whom don’t even know what a derivative is). But there are also some major changes being proposed that would affect the primary mortgage market. In short, there will be fewer mortgage products available.

Stated-income mortgage loans are first on the chopping block. These are also referred to as no-doc loans. This is where the lender allows the borrower to simply “state” his or her income, instead of verifying it through documentation.

At the height of the housing boom, from the mid 90s to early 2000s, there were many lenders offering stated-income mortgage loans. These were the days of easy credit that produced a wide variety of “exotic” mortgage products. But most lenders stopped offering such loans after the bubble bust in 2008. If the bill passes, such loans would be outlawed entirely.

H.R. 4173 Would Eliminate the Stated-Income Mortgage (Sensibly)

Section 1074 (b) of the Restoring American Financial Stability Act states the following:

“No creditor may make a loan secured by real property [i.e., a mortgage loan] unless the creditor, based on verified and documented information, determines that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan … and all applicable taxes, insurance, and assessments.”

The bill also outlines the steps mortgage lenders must take to verify a person’s ability to repay. They must review the borrower’s credit history, current income, current financial obligations, and debt-to-income ratio. To verify the borrower’s income, the lender must review IRS W-2 statements, tax returns, bank records, and payroll receipts / pay stubs.

Of course, all of this can be filed under ‘R’ for Responsible lending. This is the kind of verification process that should take place, across the board. But during the heyday of housing mania, many lenders created “side doors” for people with bad credit and/or shaky income. The stated-income mortgage loan is a prime example of this look-the-other-way mentality.

If this bill becomes law, we can finally say good riddance to such reckless lending practices. At least until the next round of exotic mortgages come onto the scene.