Stated Income Loans: Business As Usual

Kaye Thomas of Manhattan Beach asks why we just don't shut down stated-income loans:

Truth is that I was hoping that the mortgage market was going to see some major changes.. but Brian Brady seems to think that the only thing that will change is the upfront price of the mortgage.  In other words it will be business as usual but it will cost a little more for those who are not truly credit worthy.  I'm sorry but I don't get it.

Come on guys this isn't Rocket Science.. if you make loans to people who don't really qualify for them... they will stop making payments and their  houses will go into foreclosure.  A good part of the country is having some serious problems with foreclosures.  So why would you keep doing it?  Am I missing something here?

I think my opinion is being taken a tad out of context.  In times of crises, change and liquidity are imperative.  Loan guidelines will change; they'll be reset to 2002.  Stated income loans were made with 20% down, no doc loans were made with 25-30% down back in 2002. 

The premium charged for those loans will be higher as will the down payment requirements.  The "business as usual" comment I made reflects a much longer term view.  Usual, in my world, references the world prior to the post 9-11 attack easy money frenzy.

Now, I mentioned that change is important but so is liquidity.  Rate adjustments to reflect the higher risk these borrowers present are necessary.  The rate adjustment, however, is preferable to a complete shut down of alternative documentation loans; that would "reset" usual to 1985 .

Market forces drive participants to act exactly as those forces dictate. Did Realtors sell homes to those stated-income borrowers?  Of course they did.  I'd venture to say that every commenter on here was involved in a transaction that may result in severe hardship to a borrower in the next 6 months or 6 years, including me.

Why?  Market forces drive market participants to act exactly as those forces dictate.   A SoCal Realtor who refused to represent a buyer who used alternative financing would have to exclusively operate in the $1,500,000 market. Even then, they wouldn't be exempt from the occasional alt-doc loan.  A soCal originator who refused to offer alt-doc products from 2002-2007 is out of business today.  Market forces drive market participants to act exactly as those forces dictate. 

And what did the whole easy money boom accomplish?  What will it accomplish when all is said and done?  The homeownership rate in this country will stand far above where it was in 2002.  We'll be back to business as usual (my reference for "usual"  is 2002). 

I apologize to all if my opinion wasn't precise about my definition of "usual".  I hope this provides clarity to my statement.