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7 things you should know about low doc loans

Low-doc loans a risky business

6. Lucrative proposal Usually as seen the world over, low documentation loans cover up to 80% or more than three quarters of the residential property in case the candidate intends to acquire one for investment purpose in the days to come. The remaining 20% of the amount has to be infused by the person into the portfolio. This makes the proposal lucrative for the people intending to invest in some property and in need of urgent loans with minimum of paper work involved. 7. Beware of cheats With the boom in the low doc home loan market in recent years, many lenders with dubious credentials have mushroomed the world over and are claiming to provide loans at lower rates than credible institutions. This has resulted in numerous scandals. <br>For the original version including any supplementary images or video, visit

Low taxpayer risk with low-doc loans

The attraction of such mortgages for lenders or brokers is that they come with higher rates and compensation for the loan originator. Low-documentation mortgages were only a small continue fraction of the market in the 1990s, but today they are big business. This year they represent more than 16 percent of all new home loans, according to Inside Mortgage Finance, a Bethesda trade publication. Wall Street rating agency Standard and Poor's says volume jumped by 50 percent from mid-2005 to mid-2006, based on mortgage securities pools it analyzed and rated. Unlike in earlier periods, however, today's low-doc borrowers are much more likely to be people who could, but choose not to, document their income with W-2 forms or pay stubs. According to a comprehensive survey sponsored by Inside Mortgage Finance and conducted by Campbell Communications, 39 percent of all low-doc borrowers this year are salaried wage-earners, the same percentage as self-employed borrowers. Why do they prefer to go the low-doc route? Survey designer Geosegment Systems of Nashua, N.H., asked a representative national sample of 2,140 mortgage brokers active in the limited documentation field this question and came up with some eye-opening answers. While 63 percent of brokers said they knew their self-employed clients had "unreported income" that they wanted to keep off the record, 71 percent said their borrowers' applications were dependent on additional income "from a household member with poor credit." For example, say a married couple earns $10,000 a month, but one spouse had filed for bankruptcy or lost a house in a previous marriage. <br>For the original version including any supplementary images or video, visit >]content

Its name came about because borrowers need fewer documents to apply for a loan. Rather than provide payslips or tax returns, a borrower can simply state what their income is, a process called "self-verification". Low-doc loans are primarily for self-employed people with limited records of their income. But they can also be used by borrowers who have understated their income for tax purposes and wish to declare the correct, higher amount, to their lender. The ATO is conducting a pilot review this year of businesses which use low-doc loans, in an attempt to reconcile their tax records with loan repayments. Already, it has uncovered a smash repairer who just bought a home in a wealthy Sydney suburb and had substantial business assets. While his loan repayments were $70,000 a year, he earned only half that amount, according to his tax return. People like the smash repairer don't concern the Reserve Bank. It is more concerned about borrowers who use low-doc loans to overstate their income and get their hands on more money. In its biannual Financial Stability Review, released this week, the central bank put low-doc lending on its watch list, citing it as a potential threat to the banking system. So why are the major banks taking more interest in what is becoming an increasingly controversial and scrutinised part of the lending market? <br>For the original version including any supplementary images or video, visit

The Lowdown on Low-Doc Loans

"Can't claim it is risk free, but we claim our approach minimises the exposure to taxpayer," Australian Office of Financial Management (AOFM) chief executive Rob Nicholl told a parliamentary committee in Canberra on Friday. Mr Nicholl said the AOFM had no sub-prime loans among the mortgages underpinning the residential mortgage-backed securities (RMBS) in its portfolios. The parliamentary inquiry was examining the Australian banking sector in the aftermath of the global financial crisis. The collapse of the US sub-prime mortgage market in 2007 was the precursor to the global financial crisis. Mr Nicholls said the AOFM`s mortgages with at least 30-day arrears were just 1.1 per cent of its portfolio. He said this was less than that for full document and broader prime loans. The AOFM's investment in RMBS was $11.1 billion as at August 31, with the mortgage pools backing these investments being $25 billion, Mr Nicholls. Of these, less than two per cent, or just over $400 million, were low-documentation loans, a type of loan usually given to people who did not gain approval for mortgages from more traditional sources. Liberal senator David Bushby acknowledged the Labor government was right in boosting the RMBS market following the global financial crisis. Mr Nicholl said the AOFM had "some good stats" following Mr Bushby's comments that the AOFM had made money on RMBS products. <br>For the original version including any supplementary images or video, visit

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