There seems to be a new movement in the home buying environment. One that is quite the opposite of the last 5 years of trends or ever according to my well informed counter part.
This is the home buyer that wishes to buy a home (similar in size & location) that is priced remarkably cheaper than the outstanding debt on their existing property. The case is being made by the purchaser (it would seem) that buying this newly affordable home would be a practical step given current home prices. Since we're all full-doc now the additional argument is being made that this buyer is going to owner occupy the new purchase despite their being upside down or equal weight (mortgage to value) on their current.
The question becomes, how do we council these borrowers and what sort of moral hazard are we entering by furthering the conversation with these folks?

The first piece we all have to reason with, thank goodness, is that in a full-doc world you're going to have to extensively document your various reserves and wages etc. What other items will we have to address outside of income and assets? You'll need a rental survey to evidence by third party that what your borrower is hoping to achieve for rental income is realisitic for the given market place (this means, also thankfully, that lease agreements don't get to carry much weight for qualifying).
So, you've shown our borrower can swing two payments and you've shown our true rental cost but now you've got to show how your borrower is motivated to make a move from a presumably same style, size home to another location within close proximity (within the same town/general area). The imeptus is truly on the borrower to disclose and document this motivation, believe me when I say this is not a gimme loan.
What would cause a borrower motivation?
Better/Improved Neighborhood; Larger Home (room count/sq. ft.); Better school district; shorter commute; even issues that can be physical in nature (ie. wheel chair bound moving from a two story to a flat rancher).

Now the part about the Moral Hazard. In looking more closely at these loans and what it would seem are some of the conversations: Dear Loan Officer: I would like to buy this home because I can barely swing this payment but could afford this other payment here (at lower prices). Would you be able to help me qualify?
The answer is hidden inside the borrowers purpose and must always be unequivocally: no. They're getting ready to walk away while still carrying a credit rating worth lending on. These deals can't be carried forward. Primarily because many a secondary agreement with regard to credit can catch this kind of activity. And more importantly it will lead to far too many questions from people that shouldn't be involved in our lives (See: Federal Bureau of Investigation) that most certainly will consume time & cost expenses that would not be advisable under any circumstance.

So: If you feel you have a valid reason to lend make sure you've obtained your AE's council  prior to submission and be sure that your documentation  provides detailed motivation from the borrower.
If your borrower is in effect elluding to, or you feel that they are going to, walk-away be sure to council these people against this action and advise them of their options post fore-closure. At least with the FHA you only have to wait for 3 years to come back. If it wasn't meant to be the first time it may very well not be meant to be the follow-up time until further down the road with better savings and cash-flow in tow.

You've probably read some or all of what I've had to say over the last couple of months but if you haven't you can keep abreast of the change(s) and my commentary on my Blog Here: