Loop Hole has Lite Doc Making a Come Back


Most loan applications today require two years of 1040 income tax statements, two years of employment W2s and at least four pay stubs, in addition to bank statements and credit checks.

However, there is a way to not have to comply with strict new “ability-to-repay,” or ATR, rules established in the wake of the financial crisis under Dodd-Frank legislation, due to a little loophole: As long as you are designated as a community development financial institution, or CDFI, under a small U.S. Treasury program which funds economic revitalization in low-income communities.

The fund, established in 1994, “serves mission-driven financial institutions that take a market-based approach to supporting economically disadvantaged communities,” according to the Treasury website.

One bank, Quontic, based in Queens, New York, meets the requirements because it makes loans to borrowers in a low-income community. CDFI lenders are exempt from having to comply with so-called ability-to-repay rules.

“We no longer have to have our borrowers qualify in the traditional sense,” said Quontic CEO Steve Schnall. “Because of this new Dodd-Frank requirement, a lot of people who don’t meet the very strict and traditional qualifying guidelines that the ATR requires are simply ineligible for financing. There’s a huge swath of the population that simply can’t get a loan on a primary residence anymore.”

The “Lite Doc” loan is not the “low-doc” loan of the past. It is only for owner-occupied properties, so no investors, and it requires a 40 percent down payment on the property, far higher than most conventional or government loan products. There is a minimum FICO credit score of 700, and the borrower must show he or she has a minimum of 12 months worth of principal, interest, taxes and insurance in the bank at closing.

Schnall said a lot of the bank’s customers are immigrants where seven or eight family members may be pooling the money to make the down payment. They don’t have the traditional income documentation that other borrowers might have, as they get some payment in tips and bonuses.

“A lot of these lower-income earners, they jump around from job to job to job and that doesn’t mean that they’re not going to earn consistently, but they might not earn consistently at one particular place of employment,” said Schnall. “Most of these borrowers have immaculate credit, they have substantial equity in the property and significant liquidity as the result of gifts from family members.”

Their “Lite Doc.” program requires only verification of employment and two months worth of bank statements. For self-employed borrowers, it requires documentation of one year of profit and losses. The Lite Doc loans are five-year adjustable-rate mortgages with interest rates in the low- to mid-5 percent range, according to the bank. Thirty-year fixed-rate loans, which when fully documented can offer rates in the high-3 percent range, are not part of the offering.

What Happened to Rates Last Week?


Mortgage backed securities (FNMA 3.00 MBS) lost -7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.

Just about all the economic data last week would have justified a larger sell off in mortgage backed securities which would have drive mortgage rates upward.  But international events continued to provide fantastic demand for our MBS and as a result kept rates low.

The primary force driving foreign dollars into U.S. bonds (and therefore keeping rates low) is global concern over a “Brexit”.  That stands for the potential Exit from the European Trade Union by Great Brittan.  Polling results last week showed that the “leave” votes look to outnumber the “stay” votes by 10 points and has been trending upward whereas a month about the “stay” vote looked to have a commanding lead.  The vote will be June 23rd and has basically frozen the markets with fear over the economic fallout if Great Brittan were to leave.

Domestic Flavor:
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims were lighter than expected, coming in at 264K vs est of 2070K.  The more closely watched 4 week moving average dropped below 270K (269.5K).  Continuing Claims were also lighter than expected (2.095M vs est of 2.171M).  So, we continue the trend of every single jobs related report has been trending positive which means that the NFP report is bubkis.

The April Job Openings and Labor Turnover Survey (JOLTS) showed 5.788 million jobs that are UNFILLED and was much higher than the market expectations of 5.672M and a nice jump over March’s revised 5.67M.  So, if there are basically just under 6M jobs that are unfilled, how can the number of jobs added as reported in last week’s Non-Farm Payroll report be only 38K?  Does it jive at all?  Only if the answer is a very tight labor market.

Unit Labor Costs jumped up +4.5% which was higher than market forecasts of 4.0% and follows Q4’s jump of 4.1%, so there is clearly a strong trend in wage growth with this report.

Wholesale Inventories:
The April reading was six times higher than estimated (0.6% vs est of 0.1%).  The Fed has said very clearly that they are  2nd QTR data dependent and this is a reading that will cause economist to upwardly revise their estimates for 2nd QTR GDP.

The Talking Feds:
Yellen is Yelling:  As expected, she walked a fine line and seemed to try to caution the markets about getting too excited about the upcoming economic projections and dot plot chart that will hit next week.  She said: “Next week, concurrent with our policy meeting, the FOMC participants will release a new set of economic projections. Those could, of course, differ from the previous set of such projections in March. But speaking for myself, although the economy recently has been affected by a mix of countervailing forces, I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.”
Regarding the weak NFP report, she said “Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report,”

Atlanta Fed President Dennis Lockhart told Bloomberg today that he still sees enough Fed meetings left in the year with enough economic data to hit to potentially still see three rate hikes but he felt more confident that there would be at least two.  Asked about June….he said that it would be difficult for him to support a hike due to the uncertainty of the “Brexit” vote.

Boston Fed President Eric Rosengren still sees rate hikes on the table despite the jobs report although June is less likely.

What to Watch Out For This Week:


The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.

It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets.  Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.

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Taff Weinstein

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