What is Stated Income / Stated Asset Mortgage (SISA)
A stated income-stated asset mortgage (SISA) loan application allows the borrower to declare their income without verification by the lender. These loans were designed to ease the application process for buyers have incomes which are difficult to document, such as the self-employed and those who depend on tips as a significant portion of their income. SISA loans are one loan in a category of products called Alt-A. SISA loans are also known as no income-no asset (NINA) loans and liar loans. Loosened lending requirements allowed the SISA loan to play an influential role in the 2008 subprime financial crisis.
BREAKING DOWN Stated Income / Stated Asset Mortgage (SISA)
The stated income-stated asset mortgage (SISA) originated as a tool for potential homeowners in specific financial situations to apply for a mortgage. Self-employed individuals, for example, often maximize tax deductions to reduce their adjusted gross income (AGI), and thus have access to cash flows which may not appear on individual tax returns. Usually, lower AGIs would make these borrowers less attractive to lenders. The SISA loan is also designed to help buyers who income may come in the form of tips, or other unconventional cash payments.
Initially, these loans had stringent conditions to offset the risk presented to the lender by lowered income disclosure requirements. SISA borrowers faced a combination of higher interest rates, more substantial down payments, and higher credit score requirements than traditional loans required. The borrower might need to have considerable cash reserve available in their bank accounts. Also, the loan might limit the new monthly mortgage payment to a particular percentage over their current housing payment.
Loosening of Mortgage Requirements in the 2000s
Mortgage market conditions encouraged lenders to loosen mortgage requirements in the early 2000s. Stated income-stated asset mortgage (SISA) and other Alt-A loans became popular. These loans served both the needs of lenders and borrowers. Lenders wanted to clear as many loans as possible before re-selling those loans on the secondary mortgage market. Borrowers were happy to avoid documentation requirements, especially as SISA loan terms and interest rates approached those of traditional loans. The alignment of interests led to unqualified borrowers receiving, and defaulting on, loans which were beyond their spending power. Foreclosure on these liar loans accelerated in 2007, as the financial crisis took hold.
In the wake of the 2008 meltdown, legislators and regulators scrutinized SISA loans, and the marketplace for these loans tightened once again. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act severely restricted SISA loans, making them unavailable for owner-occupied properties. Now, these products are the venue for borrowers seeking to purchase investment properties.