Two of the country's biggest private mortgage insurers are yanking the plug on a popular way to buy or refinance a home without disclosing virtually anything to the lender -- so-called NINA loans.
NINA is the acronym for No Income No Asset verification mortgages, which allow applicants to provide no proof of income, bank accounts or other financial assets. Lenders do get applicants' Social Security numbers, check their credit files, and obtain an appraisal on the property. But that's pretty much all they see.
Frequently used by high income business owners and other professionals who don't want anyone rooting around in their tax returns or financial records, NINAs have also become a hot product for home buyers with small downpayments and even spotty credit. Rates tend to be high for all that privacy -- often two to three points higher than full-documentation loans of comparable size.
For several years, Mortgage Guaranty Insurance Corp. (MGIC) and United Guaranty Residential Insurance Corp (UGC) have provided mortgage insurance on low-downpayment NINAs, where the applicant's equity stake is below 20 percent. But in a major switch that is likely to shut down part of the no-verification market overnight, both insurers confirmed last week that they are withdrawing from the NINA niche.
The reason: NINAs, which some mortgage and realty brokers have dubbed "liar loans," too often turn out to be just that. The people signing up for them too often cannot really afford the house, and they quickly fall behind on their payments. Delinquencies on NINAs at both companies average five to six times those of full-doc loans of comparable size.
"It may be stating the obvious," said Curt Culver, president and CEO of MGIC, "but you can't document what you don't have, and in many instances (NINAs) are allowing borrowers to do just that. Why wouldn't a borrower choose to fully document their income to assure that they get the lowest rate possible?"
The answer, says Culver, is that they might not qualify for the mortgage -- or the house -- if they really had to come clean and document their assets and earnings.
United Guaranty's Kurt Smith, vice president for risk management, said "we have informed our customers ... that it is our intention to no longer insure (NINAs) in the near future."
A United Guaranty postmortem investigation of delinquent NINAs found that in 90 percent of the cases that went bad, the mortgage or real estate professionals working with the home buyers knew that they couldn't really afford the house. Sometimes they simply were hoping things would work out somehow for the client. In other cases, the entire loan application was fraudulent or based on identity theft.
United Guaranty provided internal case-by-case investigative summaries to Real Estate-Realtor Times. In one case, a real estate rehabilitation company colluded with loan brokers to persuade home buyers to purchase renovated properties priced above what they could afford. Mortgage documents indicated that the home buyers made a downpayment that in fact was fictitious.
Liz Urquart, a United Guaranty spokeswoman, said that in many cases home buyers themselves are the victims of high-ratio NINAs. In other cases, loan brokers and realty professionals opted for NINAs as a means to close commissionable transactions that otherwise couldn't be closed.
With the cessation of insurance availability, abusive financing schemes like these should be tougher to pull off, if not impossible.