The Two-Minute Drill Play # 3 - Taylor Swift's Mortgage
She would never need a mortgage of course. Taylor's cat, Olivia Benson, is worth almost $100 million.
Taylor Swift's cat Olivia Benson, estimated Net Worth $97 million
Yet for tax reasons she, Taylor, not Olivia, might want a loan that does not fit neatly into any standard mortgage program. These non-conventional programs are now benignly called “Non-QM (non-qualified mortgage) loans.” But like Swift’s song I remember “All Too Well” when Non-QM went by another non-descript name, “Alt-A” or Alternative A paper. History revealed that for lack of controls, Alt-A loan flexibilities and lower documentation rapidly devolved into “NINA” then “NINJA” loans. No Income, No Asset, No Job loans were a primary driver of the 2008 real estate crisis. For a trip down not so distant memory lane, check out this true to life clip from the movie “The Big Short” depicting the utter disregard for prudent lending practices during the years leading up to the collapse.
Fortunately, current Non-QM lending has maintained documentation and loan to value discipline and are performing well. My point here is that quality control testing of these loans must be even more rigorous than on qualified mortgages and tailored to the specific loan terms. The crucial lesson from the crisis is that even if a loan does not require standard documentation to be approved, post-closing quality control must still independently validate after closing the truth of that alternatively documented loan term. QC must establish conclusive evidence of the borrower's willingness and ability to repay the loan. Lenders may not be exposed to repurchase if misrepresentation is discovered during QC of a low/no doc loan, but it does provide feedback to the origination team that the credit quality of the loan was not what was expected, and pre-closing controls may need to be adjusted. Otherwise, with the current desperate search for new loans, the slippery slope to “NINJA” and “liar loans” could happen again. The current record low volumes and significant industry overcapacity create perfect conditions for a race to the bottom on credit and documentation. Has anyone seen that starting to happen?
SWS Risk Advisory LLC helps lenders design customized quality control for all mortgage types. And in case you were wondering, things were so out of control in 2006 it’s probably better than 50/50 that Taylor’s cat could have obtained a mortgage loan. I am certain she would have purrrrfect credit. Meanwhile, here’s hoping Olivia will include me in her will.
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