Liar Loans

From the Wall Street Journal:

'Stated Income' Home Mortgages Raise Red Flags

Martha Aikens was on the verge of losing her home in early 2004. The culprit: a loan that she had been induced to take out a year and a half earlier but was never able to make a single payment on.

Ms. Aikens, a widow in her 70s, sought to refinance the mortgage on her home in Evanston, Ill., near Chicago, in May 2002. To qualify her for a higher-rate loan and get a commission, her mortgage broker grossly inflated her income and falsified her employment information to make the overstated income look plausible, according to a complaint later filed against the broker.
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In the case of the borrower Ms. Aikens, at the time she went to the broker, 1st Metropolitan Mortgage, she had a monthly income of about $1,400, including $800 from Social Security and $600 from working part time as a housekeeper for a couple down the street. However, her loan application, prepared by the broker, said she made $7,225 a month as a housekeeping supervisor for a large institutional employer, according to the complaint filed on May 16, 2005, against the broker in the Circuit Court of Cook County, Ill.

Ms. Aikens says she had no knowledge that the information was falsified.

A month later, through the broker, Ms. Aikens received a loan of $149,000 with a monthly tab of roughly $1,029 -- almost three-quarters of her entire monthly income. She was never able to make a single payment, says Daniel Lindsey, a supervisory attorney with the Legal Assistance Foundation of Metropolitan Chicago, which represented Ms. Aikens in her case. Her lender, Countrywide, filed a foreclosure action against her in January 2004.
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"It's just too easy to cheat," says Tom Miller, Iowa's attorney general. He says fraud related to stated-income loans often is initiated by lenders and brokers, leaving unsuspecting consumers in the dark.

Industry experts say loans with reduced documentation now account for about 40% of the entire mortgage pool. In some cases, to compensate for the increased credit risk, lenders charge more for stated-income loans, with rates typically an eighth- to a quarter-point higher than those on a loan with full underwriting requirements.

Loans requiring no income check have been around for many years, and were originally intended to offer convenience, time savings and financial privacy to self-employed borrowers with high credit quality and large down payments. A qualifying borrower may need to submit only his or her business license, a signed letter from his or her accountant confirming a two-year history of the business, and an Internal Revenue Service form verifying the income source -- not the amount.

But greater competition and the desire to simplify and quicken the loan-origination process has led more lenders to extend stated-income loans to borrowers with lower credit scores, higher loan-to-value and debt-to-income ratios than traditionally allowed.