Liar, Liar,
Pants On Fire…"Liar Loans" Lead To A Spike In Mortgage Foreclosures
by:
Dale Rogers
It starts out
all so innocently, the loan application (1003) is filled out while gathering the
income and debts verified through credit reports and mortgage payoffs. Then the
Debt To Income Ratio (DTI) is calculated dividing the debts including the new
housing expense by the income and wham, it happens. The DTI is over 60%.
Conventional loan guidelines historically have been around 28% for housing
expenses including taxes, insurance, private mortgage insurance and homeowner
maintenance fees. The total debt ratios had been around 36% for all monthly
debts including the housing expense. With computer modeling and automatic
approvals some DTI ratios have been allowed to float up in some cases to 50% to
60% if the borrower has lots of assets and the loan is on a full doc basis. As
time passed, more and more hybrids began to show up. Mortgage Brokers were
inundated with this new loan product called Stated Income. Simply the borrower
would state their income on page two of the 1003 loan application and ratios
would fall within lender acceptable limits. The original thinking by lenders
were grounded in the premise that many busy well to do borrowers didn’t have
time to compile tax returns and a litany of proof of their assets. This
especially applied to borrowers who owned a multitude of income producing
properties or had filed for extension on filing a personal or corporate return
for a self-employed borrower. This was a very popular plan and billions of new
mortgage originations were sold using the Stated Income or other derivations of
the basis plan. It was great for self-employed borrowers who found it difficult
to compile in a timely manner all the documentation for a fully documented loan
which would use tax returns and a year to date statement from a CPA.
Later on, due to the heavy volume of mortgage business and a desire on part of
lenders to expand this popular niche into other areas W-2 wage earners were
allowed to state their income as well as those on fixed income such as social
security, disability and pensions. For a few years this seemed to be ok.
However, as time went on, and the economy in various parts of the country began
to slow down, borrowers with stated income loans began to have an inordinate
amount of foreclosures. At this time, Stated Income mortgage loans rival the
Option ARM for frequency of foreclosures. Fraud reared its ugly head as
participating players in the loan process were structuring deals with phony
baloney borrowers who didn’t exist. These phony buyers are called “straw buyers”
by prosecuting attorneys. Many times the first payments were never made. Most
mortgage brokers and lenders have buy back agreements from the secondary markets
so when a loan goes bad the originator is on the hook to buy the loan back. If
fraud was involved, that shop many times already closed up and had run away with
any ill-gotten gains together with the rest of the crew who were working the
scam. Those players are prosecuted and serve prison time for their sins.
The other borrowers who were just trying to get a loan to pay off debts and a
few months down the road after the new mortgage was in place were not able to
make their payments. A Notice of Default is sent to the borrower with
foreclosure action following when mortgage payments are not made. In a
foreclosure process, the lender holding the bag goes back through all the files
looking to perform an autopsy on the loan to determine what happened. Every
piece of paper is examined, verifications are double-checked with a high powered
microscope. All who committed a fraudulent lending practice are sought out and
demands are made for redemption and loan buy back. Some enterprising
participants had provided false bank statements and other loan documents, which
were in fact fraudulently created on a fine computer word processor. The fix had
been in.
Many of these stated loan products were all the rage then the fraud hit the fan.
Borrowers could not afford the payments and did not even come close to having
enough to even live on. Major changes are afoot. Many mortgage brokers exercise
much self-discipline and will not even consider a Stated Loan with someone on
fixed income. Where is the “real” money going to come from? Guidelines are
tightening well after the horse has escaped from the barn. There is a web page
called www.salary.com that gives the high and low range of income for various
occupations. Lenders will immediately check this to see if the Stated Income is
within this range. In the past, many times, these loans were done with a wink.
This is no longer the case. Recently, Form 4506, which is an IRS form that a
borrower signs allowing the lender to check with the IRS and determine income
from the borrowers tax returns and W-2s if any. Formally this verification
process with the IRS was a time consuming endeavor, but this is not the case
anymore. For like $4.00 per file, a lender can access, with the borrower’s
written permission, an online web site and access the IRS site to verify income.
Many lenders will not close the Stated Income loan without an IRS Form 4506
being signed. Many of these loans are sold into the secondary market that helps
keep the mortgage money supply flowing. As more and more foreclosures ensue from
the Stated Income Mortgage Products there will be a major shake out with
tightening of regulations and a search for any player, including the borrowers,
who may have had a hand in this “Liar Loan” product. The fallout is already
underway.
What is a borrower to do? For one, look for mortgage products that do not
require stating a phony income number. A No Doc loan requires stating No Income
on the 1003 loan application. A No Ratio does not require income to be listed
but verifies employment and term on the job. It has to make sense. The days of
loose lending may be over for many. Bottom line, if it doesn’t make sense, it
probably is not a good loan. Think long and hard about using a Stated Income
loan product. If it conforms with what it originally designed loan program for
the busy borrower with lots of cash and assets and no time to pull things
together, great. If not, think about passing for some other loan product. It
could impact your walk around freedom. A negative loan experience will certainly
impact a borrower’s credit and help precipitate a long and painful recovery from
this credit blemish resulting from a foreclosure. Find another mortgage product
to achieve your financial goals.
Dale
Rogers is a thirty-year mortgage veteran and frequent contributor to the
Broken Credit Blog. The BCB is a free website created to assist the general
public with information about credit repair and responsible mortgage
lending.
