Comptroller Speaks, Comptroller not happy

Do you know who the Comptroller is, or what a Comptroller does? The Comptroller governs the larger, national banks and current Comptroller of the Currency John C. Dugan had the following remarks the other day about stated income loans. (h/t CR) Good stuff, and reiterates some of my thoughts on stated income loans. (emph. mine)

While reliance on stated income is not the only cause of todayâ??s problems, Mr. Dugan said, â??I do find it telling that, when faced with new housing market conditions, lenders have responded first by tightening standards on stated income.â?? In addition, he said, one of the first things loan servicers do when trying to decide whether to restructure or foreclose on a mortgage is to seek verification of income.

â??Apparently verified income is viewed as a critical factor in determining whether a loan can be saved, which of course begs the question: if loan verification is such an important predictor of the borrowerâ??s ability to repay in the current environment, why wasnâ??t it equally important when the loan was first made?â?? Mr. Dugan asked.

The Comptroller said there are clearly some circumstances in which reliance on stated income is appropriate, such as a straight refinancing that doesnâ??t involve a cash take-out and which is underwritten by the same lender. The lender not only has experience with the borrower, but knows that the new mortgage will be more affordable, and hence more secure, than the one it replaces.

But he said such uses of stated income lending should be the exception, rather than the rule for three key reasons:

Stated income is too great a temptation for misrepresentation and, in its most extreme form, outright fraud.

The
practice also undermines transparency: â??How can lenders seriously talk
about debt-to-income ratios, for example, if the denominator of
â??incomeâ?? is really an unknown variable that can be whatever the
borrower says it is?â?? he asked.

It is not a
safe and sound underwriting practice to make mortgage loans that
substitute future house price appreciation for borrower income as a key
source of repayment, as appears to have been the case in many subprime
loans underwritten in the last few years.