Mortgage Lending Rules: No Tax Returns? No Problem!

Summary

WSJ Your Money Briefing

Episode: Mortgage Lending Rules: No Tax Returns? No Problem!
Date: January 24, 2019
Host: J.R. Whalen (The Wall Street Journal)
Guest: Ben Eisen (WSJ Reporter)

Episode Overview

This episode dissects a surprising mortgage industry comeback: lenders offering home loans to borrowers who cannot provide traditional income documentation such as tax returns or pay stubs. Host J.R. Whalen and WSJ reporter Ben Eisen explore these "nonqualified mortgages," their similarities to pre-2008 lending practices, current market safeguards, and concerns from regulators and industry experts.

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Key Discussion Points & Insights

The Re-emergence of Nontraditional Mortgage Lending

[02:32]

• Nonqualified Mortgages (Non-QM):
  Ben Eisen explains that these unconventional loans enable borrowers to qualify using alternative documentation, like bank statements or asset information.

  • Suited for self-employed, freelancers, retirees, or those with non-traditional income.
  • These loans are currently less than 3% of mortgage originations, but this share is growing as traditional lending slows.

  “It's called a non qualified mortgage…one that's particularly popular is the type that's given to people who don't have pay stubs, they don't have tax forms.”
  — Ben Eisen [02:32]

Market Size and Trends

[03:05]

• Still a Small Market Slice:
  While these loans are a fraction of the market compared to pre-crisis days, their uptick is notable.

  • Traditional mortgages are declining as rates rise.
  • Lenders are seeking new borrower groups that may have been previously locked out.

  “It's important to note that this is a very, very small part of the market right now.”
  — Ben Eisen [03:20]

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Differences from Pre-2008 Crisis Lending

[04:03]

• Not Quite ‘Liar Loans’:

  • Pre-crisis, “liar loans” were notorious for allowing stated income without verification, leading to mass defaults.
  • Eisen notes there is greater caution this time:
    • Lenders look for strong credit (high FICO scores) and larger down payments.
    • Alternative documentation (like bank statements) is required.
    • Borrowers must pass an "ability-to-repay" test.

  “I think where you get into trouble is…what folks tended to call the liar loans…where you had people who basically just stated what their income was, didn't provide any documentation to show it, and it turned they were lying and couldn't make payments.”
  — Ben Eisen [04:15]

  “Here, at least what we've seen so far, there's a lot more caution and there's a backstop of sorts in place here. Borrowers…have to pass an ability to repay test.”
  — J.R. Whalen [04:52]

Industry Concerns

[05:05]

• Regulatory Safeguards and Potential Risks:

  • Post-crisis regulations (like the "ability-to-repay" rule) have tightened standards.
  • Eisen expresses concern: If the market grows and competition increases, standards could erode, repeating the 2000s’ risky behaviors.

  “What worries some people is…as you get more lenders in the space and you get more competitions to make these loans, then you start to see kind of the slippery slope of the standards starting to deteriorate.”
  — Ben Eisen [05:05]

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Oversight and Supervision

[05:49]

• Who is Watching?

  • The landscape is now dominated by non-bank lenders, which may fall outside strict regulatory purview.
  • Federal agencies (like the OCC) are monitoring developments, having flagged asset depletion loans (which use assets rather than income as a repayment basis).

  "A lot more loans these days are made by non bank lenders and they don't necessarily have all the regulatory oversight that the banks do. So that's one area of concern."
  — Ben Eisen [06:03]

  “[The OCC] pointed out this type of loan called an asset depletion loan…they just wanted to sort of flag that.”
  — Ben Eisen [06:45]

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Notable Quotes & Memorable Moments

• On Cautious Optimism:

  “Most folks would agree that the underwriting standards are stronger and there's just more caution that's gone into these loans so far.”
  — Ben Eisen [05:05]

• On The Slippery Slope:

  “People are just kind of on guard to make sure they don't happen like that again.”
  — Ben Eisen [05:45]

• On Regulatory Gaps:

  “You've had this growth of non bank lenders…and they don't necessarily have all the regulatory oversight that the banks do.”
  — Ben Eisen [06:03]

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Important Timestamps

| Time | Topic/Quote Summary | |---------|-------------------------------------------------------------------| | 02:32 | Ben Eisen introduces the mechanics of nonqualified mortgages | | 03:05 | Market share and trend analysis | | 04:03 | Discussion of differences from pre-2008 practices | | 05:05 | Regulatory safeguards and discussion of possible future slippage | | 06:03 | Who is overseeing the lending? Discussion of regulatory dynamics | | 06:45 | OCC’s flagging of asset depletion loans |

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Tone and Style

This episode maintains a pragmatic, slightly wary tone, reflecting both the optimism of increased homeownership access and the unease of repeating past mistakes. Ben Eisen speaks with measured caution, while J.R. Whalen pushes for clarity on systemic risks and oversight.

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Summary:
This WSJ Your Money Briefing episode investigates the return of unconventional mortgage lending. While safeguards distinguish today's practices from those of the housing bubble era, expanding nonqualified mortgage options serve as both an opportunity for would-be homeowners and a source of budding concern for regulators and industry watchers. The message: Proceed with caution and vigilance, lest history repeat itself.

Transcript

[Small Business Owner]

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[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Consumer Advocacy Group Representative]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. If you couldn't produce a pay stub or a tax return to show income, think you could convince a lender to let you borrow money? Well, it turns out many lenders have no problem with that. We'll compare and contrast that scenario to the run up to last decade's housing crisis in a moment. First, these money and market stories. You should know Americans are in favor of Medicare for all, but they're less in favor of it if it means higher taxes. That's the result of a poll from the nonpartisan Kaiser Family Foundation. 56% of those polled favor Medicare for all, a common theme among many Democratic politicians and presidential candidates. And that number swells to 71% support when people were told that Medicare would guarantee health insurance as a right. But that number drops to 37% when the tax liability is raised. And support is even lower when the idea of potential delays in care is raised. And Hulu is lowering the price for its least expensive subscription plan while raising the cost of its live TV offering. Hulu's basic plan lets users stream TV shows with ads, but doesn't include live sports and news. That'll drop from $7.99 per month to $599 per month starting on February 26th. The move comes a week after Netflix said it would begin charging users more for each of its plans. The housing market is going back to the future. It wasn't that long ago the meltdown was due in part to lenders bringing on borrowers with incomplete financial profiles that might otherwise prevent them from getting loans. Well, lenders are going down that road again. And Wall Street Journal reporter Ben Ison is here with us with some details. So, Ben, in some cases, lenders are giving approvals when people can't produce tax forms or even a pay stub to verify their income.

[Ben Isen]

Yeah, this is a type of loan. It's an unconventional type of loan. It's called a non qualified mortgage, and that encompasses a wide variety of mortgages but one that's particularly popular is the type that's given to people who don't have pay stubs. They don't have tax forms. Perhaps they own their own or they have a side job or they're retired. So instead they provide bank statements that allow them to qualify for the mortgage, or they can use their assets to do that. And this sort of enables them to get around some of the traditional things that kind of block people out from the mortgage market.

[J.R. Whalen]

As you point out in your story, these unconventional loans make up less than 3% of all mortgage originations. They made up less than 3% in the first three quarters of last year. That number is rising, though, while the traditional home loans are declining.

[Ben Isen]

Right. It's important to note that this is a very, very small part of the market right now. And when you're kind of looking back to these types of mortgages before the crisis, those were way more popular then than they are now. The reason it's notable is because it has been growing during a time when the rest of the market, mortgage market, is getting a little bit cooler. You've seen kind of a boom in housing over the last many years, but as rates have started rising, it's made mortgages more expensive. So you've seen purchase mortgages cool little bit. You've seen refis basically stop being done altogether because it's no longer beneficial to do so. And now you have lenders who are looking for new business kind of starting to eye this group of borrowers that perhaps weren't able to get mortgages before,

[J.R. Whalen]

you know, but these unconventional mortgages, they don't meet the criteria to be backed by Fannie Mae or Freddie Mac. Isn't that enough of a red flag that we've seen how this can lead to instability in the housing market?

[Ben Isen]

I mean, it's not necessarily a red flag if you have safeguards in place. So you might use bank statements to verify that you do have an income. And then if you have a high FICO score and you're willing to put down a lot of money as a down payment, that might be enough for a lender to say, okay, we're comfortable making this loan. I think where you get into trouble is you have what folks tended to call the liar loans, you know, during the financial crisis, where you had people who basically just stated what their income was, didn't provide any documentation to show it, and it turned they were lying and couldn't make payments on their mortgages. Here, I think at least what we've seen so far There's a lot more

[J.R. Whalen]

caution and there's a backstop of sorts in place here. Borrowers in these situations have to pass an ability to repay test. But some in the industry that you spoke with for your story say that might not be enough.

[Ben Isen]

Right. You have all these post crisis rules put into place, including the ability to repay rule. Most folks would agree that the underwriting standards are stronger and there's just more caution that's gone into these loans so far. I think what worries some people is that, okay, you have this market starting to open up again, and as you get more lenders in the space and you get more competitions to make these loans, then you start to see kind of the slippery slope of the standards starting to deteriorate. And I think many would say that it's not before the crisis, you didn't necessarily have liar loans as kind of the first type of loan that was being made. It was that you had more cautious loans being made. And over time, the underwriting standards started to deterior. I think people are just kind of on guard to make sure they don't happen like that again.

[J.R. Whalen]

Well, you see, that leads me to my next question is that who or what is overseeing all this and could potentially sound an alarm if it looks like these types of loans could potentially be contributing to the housing market, like possibly going off a cliff again?

[Ben Isen]

I mean, you have a patchwork of regulators, but one thing that I think has changed in the years since the financial crisis is that a lot more loans these days are made by non bank lenders and they don't necessarily have all the regulatory oversight that the banks do. So that's one area of concern that people have talked about, not just in this part of the market, but generally across the market that you've had this growth of non bank lenders. That said, you have seen the bank regulators seem to be keeping an eye on it. You had the occ, in one of their reports late last year, they pointed out this type of loan called an asset depletion loan, which basically calculates your ability to repay based on your assets rather than your income.

[J.R. Whalen]

So they're trying to track all this.

[Ben Isen]

Yeah, they're just, they just pointed out we've seen some of this being done and not all of the underwriting standards are necessarily consistent and they just wanted to sort of flag that. So you do have, you do have some oversight of it and it's something that I think folks will continue to watch.

[J.R. Whalen]

Okay, that is Wall Street Journal reporter Ben Isen here in our studio. Ben, thanks for being here.

[Ben Isen]

Thank you.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See? Banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Consumer Advocacy Group Representative]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.