New law tightens lending


The end is near for so-called stated-income mortgage loans in Nevada because of a consumer protection law enacted earlier this year, some mortgage lenders say.

Assembly Bill 440, sponsored by Assemblyman Marcus Conklin, D-Las Vegas, contains a provision that makes stated-income loans -- mortgage loans made with little or no documentation of a borrower's income -- a crime, according to some legal interpretations.

Stated-income loans have been common in Nevada because of the number of business owners and workers who rely on tips and cannot provide documentation for much of their income.

When AB 440 becomes effective Monday, pessimists say stated-income loans will become harder if not impossible to obtain. Conklin, however, said critics are misinterpreting the law and dismissed claims that the law will make such loans illegal.

The new Nevada law only tells mortgage originators that they must investigate a borrower's income and ability to repay if all of his income is not stated on documents.

"You have an obligation Mr. Bank or Banker, to verify that the story you're being told (about the buyer's income) is true," Conklin said.

He noted, for instance, that a lender could use the borrower's recent bank statements to verify his income.

Nevada Mortgage Lending Commission Joseph Waltuch has already issued written guidance that his office will not take action against mortgage brokers who collect evidence about a borrower's ability to repay when documents aren't available to verify the all the borrower's income.

But critics say that hasn't persuaded lenders on Wall Street and big banks, who still believe that buying stated-income loans may become a felony in Nevada.

Given the possibility of jail time, "nobody is going to do that," said Brock Davis, president of the Southern Nevada Chapter of the Mortgage Bankers Association. "The risk is too big."

Davis worries that stated-income home loans will no longer be available in Nevada.

Some banks and institutions continue to buy stated-income home loans, Brock acknowledged. "The reality of this new law really hasn't hit them yet," he said.

Other lenders are already pulling back.

Sources said Wells Fargo & Co. and M&T Bank, a $57 billion-asset bank in western New York state, said they will stop buying stated-income loans from Nevada. The sources also indicated Credit Suisse has stopped buying any home mortgage loans from Nevada.

A Wells Fargo official said the bank has implemented a "conservative" interpretation of the new law but declined to elaborate. The other two institutions did not return calls for comment.

Sean Corrigan, president of Aspen Mortgage, also fears that many buyers of mortgage loans will shun stated-income mortgages from Nevada.

He hopes that state officials write a legal interpretation of AB 440 that eases out-of-state lenders' fears about being prosecuted if they purchase stated-income loans.

"If this doesn't get straightened out, it could be catastrophic to the state's housing," Corrigan said. "If it didn't (get resolved), it would put the housing market in Las Vegas, Nevada, in a much more negative position than we could have ever seen."

Many people who took out adjustable rate loans during the housing boom are already facing the possibility of not being able to make their monthly payments when the interest rates are reset higher, Brock said.

The new law could make it even more difficult for many of those homeowners to refinance their mortgages, because they won't be able to offer proof of income, Davis said. To sell, these homeowners often must write a check for the difference between the amount owed and the amount the house is sold for.

For many of the homeowners that get caught by higher mortgage bills, foreclosure will be the only other option, he said.

"That's the big wave of foreclosures that's about to happen," Davis said.

Scott Bice, former mortgage lending commissioner and now director of mortgage lending at Town and Country Bank, disagrees with all of the concerns, though.

"I don't view it as 'Apocalypse Now'," he said. "There will be some Wall Street investors that do decide they don't want to purchase these loans. There will be other people who step in and do buy stated-income loans."

Bill Ochs, owner of Nevada Mortgage, agreed with Bice. While some institutions will no longer buy stated-income loans from Nevada, others will continue to do so, said Ochs, who continues to originate stated-income loans and find institutional buyers for those loans.

The law "does make it a little more difficult but not impossible" to make stated-income loans," Ochs said.

However, "it was overkill in the Legislature," Ochs said. "The marketplace will straighten itself out."

He and other mortgage lenders note that Wall Street has stopped buying so-called "liar loans" and curtailed other lax lending practices.

Conklin said increasingly conservative lenders and mortgage loan investors -- but not the bill he sponsored -- are making it harder to get mortgage loans in Nevada.

"Some of these loans aren't going to be made anymore. They're just bad investments," Conklin said. Complaints about the new law "have been completely blown out of proportion," Conklin said. "Stated-income loans are not illegal in the state of Nevada."

Conklin said he requested a written opinion from the Legislative Counsel Bureau, which he plans to make public in effort to calm lender fears about the new mortgage law.