Are 'Liars' Loans' Bad for America?

Posted by: Peter Coy on July 7, 2006

Comptroller of the Currency Barbara Grunkemeyer (pictured) has been in the forefront of the fight against so-called “liars’ loans”—that is, loans that don’t require documentation of income.Grunkemeyer.jpg
The biggest victims of liars’ loans are the lying borrowers who overstate their incomes, buy houses they can’t afford, and go bust. Here are three pieces on the topic:
A report last year by Grunkemeyer’s office on the problem of predatory lending;
A first-person story (can’t verify its accuracy) by a woman who bought a house with a liars’ loan and got into deep financial trouble;
A column by ace blogger David Porter of Pacesetter Mortgage, who says liars’ loans ought to be banned.

Reader Comments

David Sterling

July 9, 2006 3:25 AM

I do not believe one word of the first person story. WHy would she be writing a story with 3 bucks in her pocket?

Remember, President Bush is awesome !!!!!!!!!!!

Sally

July 10, 2006 11:21 AM

These type of shenanigans won't stop because it's a win-win situation for mortgage brokers and real estate sales, not to mention taxes for cities & counties. The loser is the consumer who is delusional about owning a home. There are some people so obsessed, as the lady in the article, they will steal lie borrow do whatever it takes to get a home - which, incidentally, they don't "own", they are leasing it for the next 30 years. The bank "owns" the home. If you follow the Automatic Millionaire's advice, 30% of income should go for housing costs. That's it period, no argument. 30% not 50%, not 60% as most (I guess) Americans are doing today.

Tim

July 10, 2006 12:44 PM

Funny I should bump into this thread about "liar loans," because I commented on this subject on a thread over at the Seattle Post-Intelligencer real estate blog: More Houses for Sale thread. My comment is #8277.

One of the local agents discussed that she would shun these types of deals, including 100% ARM loans presented via an offer on her listings. As if it were rare.

I just about fell out of my chair. My response was that our escrow office closes these transactions all day long!

Do the Loan officers know that they are fraudulent? If they are honest, heck yeah.

For example, we had a nice young couple sign their purchase paperwork last quarter. Problem was they were late to sign closing docs by over an hour and said, "we missed the bus." All this while holding a bag of McDonalds. What did his loan application say his gross income was? $11K/mo. as a painter. But, who am I to judge? Maybe he did make that income, but not by the clothes he was wearing and the ball cap twisted to the side of his head, with his i-Pod music screeching through the ear plugs. Very young adults making that money would own a car, particularly a painter who uses a van to haul equipment.

David Porter

July 12, 2006 3:08 PM

Peter,

I suspected that this topic wouldn't be a particularly popular opinion in my industry. In fact I had someone swearing me up one side and down the other on my blog.

At the end of the day, I believe that as the rise of short term rates begins to permeate these "stated income" portfolios and deliquencies begin to rise, we will see a significant tightening of these loans and their corresponding guidelines.

There is also a significant amount of regulatory attention on these loans as well.

I guess time will tell.

Mike

July 13, 2006 5:54 AM

Two points:

1) How could something nicknamed "liar loans" NOT be bad? Realtors love anything that will allow unsophisticated/unqualified buyers to buy a home, it effectively increases demand. The realtors suffer no ill effects (over the short term). Mortgage brokers love them because they get to sell more products even if the buyer is not qualified and suffer no ill effects (over the short term). The people holding the bag are investors in the secondary markets who will bear the brunt of the costs of these bad loans. Over the long term, there will be less realtors and brokers making money once the situation has corrected itself (reduced demand due to people not being able to qualify for the "new" tightened lending standard version of these loans).

2) Which brings me to the real issue of why these loans have gotten to the status they are at. There is not enough "risk premium" built into the loans (higher interest rates) relative to the risk taken. This provided a "loophole" (or a good deal, depending on your POV) for unqualified buyers to get into homes. If the risk premium was properly adjusted for ALL market conditions and borrowing types the loan would be so unaffordable that it could only be used in very special situations (its original purpose). The secondary markets are slowly coming around to reality, once the party is over in just a few markets the secondary market for the loans will evaporate effectively getting rid of these type of loans.

steve

July 14, 2006 3:26 PM

My name is Steven Krystofiak, President of the Mortgage Brokers Association for Responsible Lending. www.mbarl.org I have a letter in a word document form that highlights the risks of the current loan industry unrealized by regulators and economists alike, mainly due to stated income loans.
Email me at contact@mbarl.org if you want me to send you a copy.

~ Steve Krystofiak
13 main points in the letter are;
1. Stated income loans are associated with fraud, and started to become popular in 2002.
2. Banks originate these loans because they are profitable and then sell them to reduce their risk.
3. Fraud is encouraged by the banks
4. Stated income loans help no one.
5. Exotic loans originated with stated income are now causing foreclosures or forcing homeowners to refinance into negatively amortized loans.
6. Stated income loans are why home prices have skyrocketed. They have caused a large demand in the US housing supply.
7. Banks have sold their loans and have already made their profit. Investors will soon realize stated income loans are too risky and stop purchasing them.
8. Almost anyone can get a stated income loan for $950,000.
9. Stated income loans cost consumers hundreds of dollars a year because of higher interest rates.
10. Stated income loans allow tax cheats to purchase homes easier.
11. Stated income loans are not always faster than fully documented loans.
12. Appraised values are often inflated. Underwriters are basing their decision on inflated home values, inflated incomes and inflated assets. The only “real” number is the FICO (credit) score. This is why underwriters have become focused on FICO scores.
13. Rules are not enough, they must be enforced.

marjoriemoore

August 4, 2006 3:08 PM

To my knowledge, almost all loans have been
"stated income" loans for years and years. Having been involved with IRS for a long time, I
know that practically no one reports the correct
amount of income on his taxes - therefore, how
can anyone believe those docs that are always(until the last few years) thought to be so accurate??? I know this will be an unpopular
opinion for your posters, however, it is the
absolute truth.

Amanda

September 12, 2006 7:15 PM

Can anyone answer me a question? I am hearing about 1% loans to be bad? Anyone know why that is? I have no idea if I should even be writting this here. Any responce would help so much. Thanks!

MW

September 15, 2006 2:04 AM

To the person who asked if a 1% loan was bad....it's unlikely you'll see that interest rate in the final loan. No matter how big or friendly the company, mortgages are written under pretty much the same basic rules wherever you go and vary only by a percent or so. You asked this question sincerely and you asked it here, which indicates you are probably one of the million of home buyers who deal honestly with their lender but their lender/broker has already profiled them for fraud because you aren't a mortgage professional and depend on them for information on the deal they're constructing for you. As a nonprofessional, you have no frame of reference what rates are "too good to be true" and chances are good the broker knows it and may well be already designing your paperwork to take your money.

Here are some guerrilla tactics to consider to protect yourself during these perilous times:
You should seriously consider another lender if not as a replacement, then as a back up if the deal goes sour in the closing room - that is to say, the papers are switched on you; don't sign a bad deal even if the kids are in the new school and you have earnest money invested or you don't want to look for another house. A foreclosure is much worse after years of trying to make payments by draining the kids college fund or your retirement to keep a roof over your head. In these times of rampant fraud keep a real estate attorney of your own choosing close and watchful over your papers (be wary of legal references from your broker) and have him/her look over your purchase contract and other forms during origination before the closing and be sure your lawyer is looking over your papers at the closing itself. Collect a copy of your appraisal during origination, read all your copies when the agent comes back from the copy machine. Better yet, follow them there.


While not definitive of a bad loan, here are some possible warning signs and tips to consider:

1. If it takes 60 days or more to close your loan even though your credit is good, your employment verified and your down payment available - secondary banks are generally looking for people like you and it shouldn't be too hard to find a buyer; Also, listen if you are steered into a loan with a mandatory, not discretionary escrow account. This is not necessarily a BAD loan, but sometimes a predator may add overhead of other property deals to your escrow balance and call it 'taxes'. ALWAYS compare your escrow charges to your tax and insurance bills from your insurance company and local tax offices.

2. Be alert if there are alot of extra "errands" you have to run during these two months or frequent excuses by the lender/broker why you can't close by the time they said. Sometimes these errands are used to exhaust your time extensions so you are under pressure to sign the bad loan because your lender has allowed the delays to trap you with the purchase agreement. In addition, there are crooked lenders/brokers who use your identity to purchase properties around the country and need these two months to complete the flippings and then roll the overhead back into your loan by the time you close;

3. If you are able bodied and of right mind, don't sign a Power of Attorney without the advice of the attorney sitting next to you; If they need additional signatures, there's no need to authorize them to sign for you in abstentia with a POA. They can certainly call and send the forms to you. Never send a newly signed document back without an exact copy for yourself. Have the attorney look it over, especially if it's a document they "forgot" at closing to be signed a couple months later. Beware especially if you opted out of escrow but the new forms put you right back in.

4. Be wary if the lender doesn't show up to the closing due to a 'funeral' or a 'conference' but allows a non- lender/broker to explain your new loan terms to you. Because of a possible loophole of some loans, new terms must be explained to you UNLESS the lender is absent; (!}

5. Watch if the closing agent gives you one sheet at a time to sign and collects it, then brings your 'copies' of their own selection back to you from the Xerox machine. Typically, you have two identical documents and you sign one and then the other after comparing them line for line - one signed copy for you and one for the lender. Otherwise, the 'copies' you get back may not include the documents you'll need to prove fraud or protect yourself in court later on. Try signing both and then intermittently switching the right with the left document - if they are identical, it shouldn't make any difference. If they contain a slight variation you missed, the predator can't be sure they get the sheet they wanted; don't sign more than one assignment of mortgage; don't sign any blank tax forms; cross out any blank spaces and draw a diagonal across the open fields, touching typed letters so it can't be white outed later and paragraphs substituted for photocopying in mortgage fraud to the secondary bank. Draw a line from the end of a sentence to the margin. Be sure you've gotten all the documents you were supposed to get according to the escrow instructions before you leave the closing. Don't send any payment checks to a lender/broker who is not licensed to service loans in your state - sometimes they will use your lack of experience to have you send payments to their office(usually inflated payments) even though your actual loan is to be serviced elsewhere. Keep all your postmarked mail and staple the letters with the envelopes. Keep excellent records in one place.

6. Be sure the property description is attached to your documents, as this mortgage may be interchanged with other properties if flipping is done in other states.

7. Watch for mail that comes in the names of other people, particularly court notices, phone bills and credit card bills. These are often the sign of identity theft and may well be the person you have become in re-milled mortgage documents. Of course return the mail to sender, but take down the name and creditor because you may have to file an identity theft report with the police department and need to report these new names as possible aliases for strawbuying. Likewise, keep track of 'wrong' numbers on your telephone from creditors and law firms asking for people you never heard of or have received mail for. Big red flag. Copy everything from the Caller ID to a log book.

These are just a few tips and there will be others included in a blog I'm setting up for first time buyers and nonprofessionals like yourself. My apologies to your lender if your 1% loan is real or extends beyond the first payment. But if you sign a bad loan, you will be surprised at how many smug people will blame you for your misfortune, though they themselves only cursively looked at their own real estate papers, trusting their own mortgage professional, their money or their lawyer to keep them safe.

In fact, to anyone who has been swindled in their home loan: It was NEVER your fault. You were DECEIVED. Don't let anyone make you feel small or stupid for being honest. Be careful to the extent you know how and take an attorney with you.

PSF

January 24, 2007 5:43 PM

Excellent information! I wish I had this before my last refinance. Luckily, I caught the "errors" and walked out of the closing.

Clancey

March 4, 2007 4:22 PM

You are all stupid. Are any of you actually DEEP in the mortgage business? You postings are all so far off of reality is laughable.

Craig

March 18, 2008 3:15 AM

I like liars Loans! They've afforded me the oppertunity to live well beyond my means,buy cars I usually wreck and Drink until YOU ALL wake up in the morning! "Only go around once"!!! He he he!

Aubrey Clark

August 20, 2008 10:32 AM

Over the years taxes have steadily risen for everyone but have been particularly hard on the self employed. In lieu of the tax hikes, congress engineered deductions and write-offs for small businesses to use in order to offset the additional tax burden. On average, small business owners will pay over half of their income that they are unable to write off on their tax returns. Without these deductions many self employed small businesses owners would be in serious jeopardy of having to close their doors.

Unfortunately, Freddie Mac, Fannie Mae and FHA (Conventional Mortgages) will only recognize the adjusted gross income that is left after deductions when underwriting a mortgage. Everyone knows that self employed, small business owners make more money than they show at the "end of the day" on their taxes. If the underwriting guidelines were changed to calculate income from a gross revenue formula like they do for wage earners we wouldn’t have a need for stated income documentation loans. Self employed borrowers do not have the luxury of showing a W2 as wage earners do and are therefore unable to prove enough income to qualify for most mortgages.

Stated income loans were born out of a necessity to accommodate small business owners who found their selves in this predicament. Admittedly, they were abused and ultimately share a large part of the blame for why we are in the financial mess we are today. However, if we adopt a universal threshold for debt to income ratios without addressing the underwriting guidelines for conventional mortgages we will cripple small business and the mortgage industry.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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