Undocumented income makes it hard to get a loan Mortgages

Jennifer France (left) and her partner Pouneh Toutounchian work in a home office at their home in San Carlos, Calif., on Thursday, July 2, 2009. The couple has been unable to refinance their home with a 30-year loan despite drawing good incomes from their self-employed businesses. less Jennifer France (left) and her partner Pouneh Toutounchian work in a home office at their home in San Carlos, Calif., on Thursday, July 2, 2009. The couple has been unable to refinance their home with a 30-year ... more Photo: Paul Chinn, The Chronicle Photo: Paul Chinn, The Chronicle Image 1 of / 3 Caption Close Undocumented income makes it hard to get a loan 1 / 3 Back to Gallery

With more than $300,000 in combined annual income, tens of thousands of dollars in the bank and credit scores that top 800, Jennifer France and her partner would seem like ideal candidates for a mortgage refinance.

But when they applied to swap an interest-only loan on their nearly $1 million San Carlos home for a 30-year fixed that locked in today's low rates, they were summarily denied. The reason: effectively, because both operate their own businesses.

"I was really surprised, I had been preparing to refinance for years," said France, a landscaper and gardener. "It's hard for the self-employed; that puts us in a bind."

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While the amount they make is easily enough to qualify for the new loan, tax deductions for self-employed workers dropped their official income below the threshold that banks wanted to see.

A few years ago, theirs would have been the ideal scenario for a stated-income or no-documentation loan, which allowed individuals with ample but unconventional sources of income to secure home loans. But after untold numbers of borrowers lied about their financial wherewithal to buy homes they couldn't afford, often with a wink and nod from mortgage brokers, nearly all lenders stopped offering what became known derisively as "liar loans." Now even the well-qualified borrowers for whom the products were first intended can't get them.

Stricter rules

Most real estate professionals acknowledge that lending rules need to be stricter than during the go-go days of the housing boom, when nearly anyone could qualify for a $500,000 mortgage. But many worry that the industry has overcorrected for the subprime lending fiasco by discarding nearly everything but traditional loans, trapping people in costly products and preventing transactions when the market needs them most.

"They've made it across the board, for everyone, no matter how much you have in assets and what you've done," said Fif Ghobadian, a broker with Guarantee Mortgage in San Francisco, who worked with France and her partner, freelance Web designer Pouneh Toutounchian, on their attempted refinancing.

The refinancing would have saved them nearly $2,000 in monthly payments and allowed them to begin paying the principal on the mortgage. They were ultimately able to modify their loan through one of the federal stimulus programs, but it lowered their payment by only about $1,500 and the loan remains an interest-only mortgage.

Ghobadian said she could point to at least 20 similar cases in recent months. One client retired from a bank with nearly $1 million in assets but was turned down for a refinancing by that same bank because the individual's income, while substantial, consisted mostly of 401(k) disbursements and rental income.

Missing the point?

Eliminating certain loans is a simplistic solution to the credit market turmoil that misses the bigger point, said Richard Redmond, a broker with All California Mortgage in Larkspur. Given the evolving shape of the workforce, there needs to be a wide array of flexible tools to meet the needs of responsible consumers, he said.

The real problem wasn't any particular type of loan but a lack of accountability that allowed lenders to push risky mortgages off their books by packaging them and selling them to third parties.

"There was no responsibility up the chain," he said. "The guy who made the loan couldn't care less if the loan went bad, because nothing happened to him. If loans go bad, a price should be paid by everyone."

The Obama administration's proposed overhaul of the financial regulatory system, outlined last month, includes a plan to force lenders to retain a portion of the loans they originate.

The California Mortgage Bankers Association, a Sacramento trade group representing real estate lenders, hasn't taken a position on that part of the proposal, spokesman Dustin Hobbs said. He did say that banning products isn't the right approach and stressed that the industry's decision to stop underwriting certain loans isn't permanent.

"It's a reaction to the current environment," he said. "There's such a lack of appetite for risk right now in general that any product viewed as having any sort of risk at all has a tough hill to climb."

Chris George, president of CMG Mortgage in San Ramon, predicts that no-doc loans and other nontraditional mortgages will begin to re-emerge over the next six months, as creditors gain confidence.

"As with injuries, as with your credit, as with the economy, time heals all wounds," he said.