Ken Harney – The Trouble with No Income, No Asset Mortgages

You can call them liar loans. You can call them NINAs. But whatever you call them, two of the country’s largest private mortgage insurers have their own word for them: trouble.

NINA is the lending industry’s acronym for No Income, No Asset verification home mortgages – a fast-growing segment of the frothing real estate market of the past three years.

NINAs are the ultimate form of “limited documentation” lending. You basically show nothing. In exchange for an interest rate that may be anywhere from 1 1/2 percent to 3 percent above the going market rate, the lender asks for almost no personal information about you at application.

You write down your name, the address of the property you’re buying and allow the lender to check your credit score. You don’t have to prove you hold a job, earn income or pay taxes. You don’t even need to prove that you have a bank account or own any assets.

Some large banks that offer NINAs to high-income customers seeking maximum privacy require high FICO (Fair Isaac) credit scores and substantial down payments as conditions for making the loans. But some mortgage brokers and bankers offer NINAs to home buyers with spotty credit and as little as 5 percent down. Virtually all NINAs with down payments less than 20 percent require private mortgage insurance to protect the lender against costly defaults. But now, the two biggest providers of mortgage insurance on NINAs say they are either suspending or sharply cutting back their activities.

“We have informed our customers that it is our intention no longer to insure (NINAs) in the near future,” said Kurt Smith, vice president of risk management for United Guaranty Residential Insurance Co. The CEO of a second prominent underwriter, Curt S. Culver of Mortgage Guaranty Insurance Corp., said his firm is also limiting its appetite for new NINAs.

The reason in both cases: Too often, NINAs turn out to be liar loans indeed. Smith said that as of the end of 2003, delinquency rates on NINAs were five to six times that of other, full-disclosure home mortgages insured by his company. Even NINA applicants with high FICO scores are poor risks. NINA borrowers whose applications indicated they had cream-puff FICO scores of 740 or higher turn out to be 12 times more likely to default than full-doc applicants with 740-plus FICOs.

Worse yet, a case-by-case investigation by United Guaranty of a sample of NINA home buyers who defaulted in the first 12 months of their mortgages found that roughly 90 percent of the loan officers involved knew that the applicants were not financially qualified to handle the monthly payments, said Smith.

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A spokeswoman for United, Liz Urquhart, said high default rates on NINAs are not just a problem for the mortgage insurers out thousands of dollars in claims.

“The borrowers themselves are also hurt,” she said, especially “when they’ve been steered to complete transactions they don’t understand and don’t qualify for.” United Guaranty’s research documented that NINAs sometimes were used by unscrupulous loan officers who put home buyers into properties far beyond their economic means. Other common situations included identity thieves buying homes by using their victims’ names and Social Security numbers.

None of this surprises experienced mortgage brokers such as Paul Skeens of Carteret Mortgage Co. in Waldorf, Md.

“NINAs are bad news,” said Skeens. When they involve low down payments, “the only reason why anyone would want to pay a higher rate to hide their true income and assets is that they’re not sufficient to qualify them” for the mortgage needed to buy the house. If the realty agent and the loan officer know the client isn’t qualified, but go for a NINA to close the deal and reap their fees, “that is really abusive,” said Skeens.

The bottom line on NINAs? If you want the cloak of financial privacy and you’ve got excellent credit scores and a solid income, a NINA may work for you, provided you’re willing to pay the higher price. But why not

consider some other form of limited-doc loan, such as a “stated income” mortgage that allows the lender to verify your assets but not require W-2s or tax returns?

Most stated-income mortgages have lower rates than NINAs, and work well for self-employed individuals who prefer not to spread years worth of company and personal tax returns in front of the eyes of strangers.

Ken Harney is a real estate columnist for The Washington Post