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30-year mortgage rate nears 5%, jumping to 7 ½-year high

By Jeff Lazerson

10/11/18

What I think: In September 2016, I first reported to you that averaging deposits from 24 months of bank statements would be acceptable to count as income. In August 2017, I first reported that stated income loans are back.

Ever since, common cries from many readers have been, “Here we go again” and “Didn’t lenders learn the lesson from the mortgage meltdown?”

With a hot economy and low mortgage rates and skyrocketing home prices at our backs, of course these loans have been performing just fine. As evidence, I point to Irvine-based Attom Data Solutions that just announced foreclosure activity is at a 13-year low.

So, now a current and closer look is in order.

The stock market is on a wild ride with stocks dropping more than 800 points last Wednesday.

Mortgage rates have spiked. At 4.90 percent, we haven’t seen the Freddie Mac 30-year fixed this high since April 2011. Home prices are flattening. Even that same Attom report indicates 36 local markets are seeing a year-over-year increase in foreclosure activity with Los Angeles up 2 percent.

Since I continue to see the bank-statement and stated-income underwriting bar go lower and lower, I figured it is time to poll 10 industry experts as to what they think. What will trigger the new race to crossing that underwriting line into irresponsible lending, I asked.

Currently, I can find a bank-statement loan for self-employed borrowers with as little as 10 percent down, a 600 middle FICO credit score for up to $2.5 million. I can find a stated-income loan with 30 percent down, a 680 credit score for up to $1 million.

One respondent thought zero down using bank statements is the danger zone.

Three respondents thought we’ve crossed that line when lenders require a down payment of 5 percent or less using 12 months of bank statement deposits as the income qualifier.

Two others thought that anything less than 20 percent down on a bank-statement loan is over the line, and one thought anything less than 25 percent down on a bank-statement as well as a stated-income loan gets dangerous and irresponsible.

Susan Ashton, sales manager at Plaza Funding thought that underwriting is key.

She points out that in 2000, files were underwriting in less than 2 hours. Today, the underwriter is lucky if he or she gets through one per day.

“If underwriters quit looking at the details — every line of the bank statement — than we’re in trouble,” said Ashton.

Raymond Eshagian, CEO of Greenbox Loans said, “Nothing I see worries me like the olden days.”

Guy Cecala, CEO of Inside Mortgage Finance, points to risk layering as key to staying away from crossing that line — large down payment with less income or less down payment with substantial income, payment reserves, credit history and credit scores, individuals properly managing debt, especially during a healthy economy.

When a lot of lenders are doing irresponsible loans, “then it’s a race,” Cecala said.

My view: Being able to independently validate a borrowers’ tax return income through the IRS provides the truest income picture.

In a thriving economy, 10 percent down is safe in my book for a bank-statement loan and 20 percent down on a stated-income loan is good.

In a housing downturn, we are crossing that line into irresponsible lending when we put less than 20 percent down on a bank-statement loan or less than 40 percent down on a stated-income loan.