No more home-loan income fudging

If you've ever exaggerated your income on a loan application, fugeddaboutit now, especially when that borrowed money is for a mortgage.

Not only will the bank be checking your income against what you report to the IRS, under a new program that began today, lenders will be getting your income verifcation info from Uncle Sam much more quickly. The Income Verification Express Service (IVES) provides two-business-day processing and electronic delivery of individual tax return transcripts.

These are delivered via the Form 4506-T, Request for Transcript of Tax Return, you might have signed if you were unable to provide the lender with copies of your actual prior tax returns. Even if you had copies of your old returns, the bank probably asked you to sign the form anyway so they could verify what you gave them. Dave at Pacesetter Mortgage provides a good  explanation of the whys and wherefores of Form 4506-T and its companion, Form 4506, in this posting.

Before today, the 4506-T process relied on faxing the request to the IRS, notes housing/real estate columnist Kenneth R. Harney in this Washington Post article. That paper-driven process made income verifications slow, says Harney, meaning that lenders used the form data as a way to perform quality-control checks on pools of closed mortgages.

Now, however, with the IRS info arriving in just two days (or less), expect more lenders to run income checks before closing on all home loans.

And that means lenders will be able to spot loan fraud that much sooner.

You might not be hauled off like the fellow pictured above, but do you really want to take any chances when it comes to your house and its financing? I didn't think so.

ARMs, etc., also under the microscope: Speaking of chancy housing circumstances, federal regulators announced on Friday, Sept. 29, new guidelines they hope will reduce the risks of "residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest."

In English, that means those loans, often referred to as "exotics," that make the early payments on a home loan quite small (relatively) so you can afford a bigger house. Of course, that's a limited-time offer, and that's what the feds are worried about.

According to the announcement from Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration:

These products, referred to variously as "nontraditional," "alternative," or "exotic" mortgage loans, include "interest-only" mortgages and "payment option" adjustable-rate mortgages. These products allow borrowers to exchange lower payments during an initial period for higher payments later.

...

While many of these features exist in other adjustable-rate mortgage products, the agencies' concern is elevated with nontraditional products because of the lack of principal amortization and the potential for negative amortization. In addition, institutions are increasingly combining these loans with other features that may compound risk ("risk layering").

Over the last few years, particularly as housing values escalated in many areas, more and more home buyers sought out such loans in order to get into the properties. The trade publication Inside Mortgage Finance reports that 17 percent of all home mortgages in the first half of the year were interest-only, with option ARMs accounting for another 9 percent.

In issuing the ruling, the combined federal agencies noted their concern that some borrowers might not fully understand the products' risks and eventual costs. Regulators urge (and that's all they can do since the guidance is just that, guidance; it doesn't have the force of law) lenders to evaluate the complete costs associated with these types of loans, not just the initial lower amounts, when deciding whether a loan applicant should get the mortgage.

And the agencies want the lenders to do a better job of spelling out to consumers the potential financial dangers of these products.

You can read the official federal press release (with links to the regulations) here. The Wall Street Journal also has a good article on the issue (sorry, registration required). But you can read, for free, Holden Lewis' analysis of the guidance in this entry from his Bankrate.com blog, Mortgage Matters.