As published in Scotsman Guide's Residential Edition, May 2011.
When a borrower defaults on a stated-income mortgage loan, many secondary-market purchasers of these loans try to force the original lender or broker who closed the loan to repurchase it (see sctsm.in/4138). When demanding repurchases, these secondary-market purchasers often argue that the borrower's stated income was not reasonable at the time of loan origination and underwriting and that the original lender and mortgage broker knew it.
A common strategy used for these repurchase demands is to compile information from online salary databases. These sites contain a great deal of information and income data for thousands of job titles. Online salary databases typically are limited to producing data derived from the most-recent 12 months, however, which limits the data's usability and applicability. This makes using current salary databases to determine the reasonability of a borrower's income four or five years ago indefensible.
Further, there are four critical aspects when determining true reasonability of stated incomes:
Home versus employment ZIP code
Years of experience
Bonuses or overtime income
Often, not ensuring that these four characteristics are applied correctly can lead to completely erroneous results and repurchase demands that do not hold water. And data obtained from online salary databases are only as accurate as the information used to gather the data. To protect and defend themselves against stated-income buyback demands, brokers and other mortgage originators should understand these factors.
Using the right ZIP code
There has been much debate about which ZIP code to use when searching salary databases — the borrower's residential address or employment address. Most often, the correct ZIP code to use is the borrower's employment address.
This is because when someone is offered a job, the location is a critical factor in the income the employer offers. The employer's offer must satisfy two criteria:
The employer must make sure that the borrower is paid a comparable wage to similar jobs within its location.
The employer must pay a wage that is competitive with other employers in the metropolitan area.
Those two reasons support why stated-income reasonability tests must use the ZIP code associated with the employer's address.
Underwriting a mortgage application involves the three C's: credit, collateral and capability to repay. Looking at a borrower's capability to repay, underwriters must ensure that the borrower makes enough income to meet all current obligations and the pending housing payment. In doing so, the underwriter is only concerned about the source of income.
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