Monday, June 8, 2009

No Doc Jumbo Loan

Today I just found myself reminiscing about the rock and roll mortgage days when no doc jumbo (reduced documentation) loans actually existed.  You know that  loan that only required the borrower to basically put his or her social security number on the 1003 form and sign their John Hancock.  Yep, it was that easy!  No bothersome questions like; how much do you make! Doesn’t matter at all because it’s a no doc jumbo.  What are your debts?  No need to list that on the 1003; it’s a no doc Jumbo loan.  

Sure, the credit report is going to list your obligations, but the only thing an underwriter is going to look at on a no doc jumbo is the score.  As a matter of fact, the only thing the underwriter was going to look for on entire application is the social security number and the signature.  That’s it.  This isn’t even a lie to me loan, this is a I don’t want to know anything about you loan.

  Looking back, it almost seems surreal, but believe it or not, there was a legitimate need and purpose for no doc jumbo loans  and  no doc loans in general. 

Think about how the economy has changed in the last 20 years, when the no doc jumbo first appeared.  

Americans were no longer working for a company where they would spend their entire lives or getting regular paychecks every Friday and putting in their 30 years then retiring.  No, Americans were changing jobs and  doing  jobs that didn't even exist 5 years earlier.  They were starting small businesses and availing themselves of sophisticated tax solutions. If someone were to look at their tax return, it would show an income of next to nothing.  Instead of wasting Mr. Bankers time applying for a $500,000.00 loan where his response might be "what are you doing here  you should be at the welfare office applying for food stamps and housing assistance". Everyone knew what was actually happening.  

These were good, credit worthy borrowers who took care of their personal business and that was reflected by their credit scores.  There was plenty of equity in the homes they were seeking to encumber as the loan to value (LTV) ratios at inception didn’t exceed 80%. This was simply a mortgage product that was devised to fill a need that was created by the modern economy.

Problems began to emerge when lenders stretched the no doc jumbo to fit the unqualified borrower that was sitting across from them.  While they had good credit, their debt to income ratios wouldn’t support the loan.  But, the numbers were only off by a smidge.  If the borrower just didn’t eat out as much, the numbers would work.  But why worry about getting the borrower to take the steps?  Let’s just do a no doc jumbo, and that’s how it all started.  Soon, hotel maids with a yearly income of $50, 000.00 were taking out $250,000.00 no doc jumbo refi loans and on $350,000.00 houses they bought a couple years earlier for $100,000.00.

I’m not trying to pass judgment on the mortgage industry or speculators or just homeowners that got caught in the fiction of the free lunch real estate boom.  What I am doing is mourning the passing of the no doc jumbo.  There is still a legitimate demand for this product and those who can afford and utilize them. Unfortunately they are getting harder and harder to get. I sure wish the no doc jumbo was here today.

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