A loan product that almost crippled several big banks and thrifts in the early '90s is making a comeback.
The mortgages, which can be obtained with little or no documentation other than an appraisal, cater to customers who want a home loan fast, have a pile of cash, and have income that can't be easily verified.
Several lenders have begun offering the loans-sometimes called no-doc or low-doc loans-in the past 12 months to boost thinning mortgage profits. Meanwhile, established companies in the no-documentation arena are racking up increasing volume.
"I remember a time when low- and no-documentation loans were considered very risky, and now they're de rigueur," said Tom Foley, analyst at Moody's Investors Service.
But the practice is drawing severe criticism from mortgage observers. "It's a dicey process," said Stuart Feldstein, president of SMR Research, a Budd Lake, N.J., consultancy.
Economically, now is not the time to be extending credit without strict underwriting, Mr. Feldstein said. "Given the escalating bankruptcy crisis, we should be seeing the opposite," he said.
Chemical Banking Corp.-now Chase Manhattan Corp.-Citicorp, and Dime Savings all offered no-doc or low-doc loans in the 80s. After the New England real estate market collapsed, all three banks virtually discontinued the product, some after swallowing multi-million dollar losses.
Losses on no-doc and low-doc loans were blamed for big cutbacks in Citicorp's mortgage division, and forced Dime, New York, to take a $247 million loss in 1991.
But newcomers to the field argue the risks of these loans can be managed by requiring hefty down payments-typically 30% to 40% of the purchase price-and levying premium interest rates. With that kind of protection, the borrowers' assets and income are almost beside the point, one lender said.
"What do I care what they have, if they've got a good credit score and a valuable piece of real estate?" said Joseph Passerino, senior vice president at Life Savings Bank, a $79 million-asset thrift in San Bernardino, Calif.
Life Savings bought a pool of no-documentation loans from Barclay's Bank last year and is now originating its own.
The thrift's advertisements have raised eyebrows-not only because they offer the no-doc loans but because they tout them with a photo of a backlit brunette in a lowcut dress. "She won't talk about her income and she doesn't discuss her assets," the provocative ad copy reads.
Life Savings expects overall origination volume to reach $650 million in 1997, up from $240 million in 1996, partially on the strength of its no- income-verification loan.
Life Savings is careful not to concentrate the loans in one region, Mr. Passerino added, to avoid the overexposure to a bad market that hurt the institutions making loans in the Northeast in the 1980s.
CWM Mortgage Holdings Inc., the conduit spun off by Countrywide Credit Industries, and Greenpoint Savings Bank are seen as the leaders in the sector.
CWM has been making no- and low-doc loans since its inception in 1993. These loans made up some 30% of its $5 billion origination volume in 1996, said CWM president Michael Perry.
CWM predominantly makes the loan to individuals with excellent credit, he said. "Mobile professionals, who want to move first, then find a job ... the older couple that moves to Newport, owns their own business, and wants to live off their savings."
Correctly appraising the value of the home is key to making these loans, said Ralph Hall, president of Greenpoint.
A typical Greenpoint customer is one recent retiree from IBM, Mr. Hall said. "She had a ton of cash and no income. She wanted a retirement home and had been turned down from three different lenders," Mr. Hall said. "We didn't even ask her how much she makes or where she was going to get the money to pay the loan. ... We have the down payment in case something goes wrong."
New immigrants are also prime candidates for no-doc, low-doc loans, he added.
Greenpoint made $2.5 billion of such loans in 1996 and is expecting that volume to expand significantly in 1997, Mr. Hall said.
But at least one lender has already pulled out of the business. Aames Financial Corp., Los Angeles, stopped making no-doc loans after experiencing high delinquencies in 1996 loan pools, said Darrell Hendrix, an analyst with Freidman, Billings, Ramsey.
And those that have already been burned have no intention of going back to the fire. "There may be increasing demand, but we're not interested in increasing our participation," said a Chase Manhattan Bank spokesman.