Here’s a nice story about the conspiracy, and a bit of background (warning pdf) that was used in the article. Interesting data point, in the study cited, 60% of these loans had incomes inflated by 50% or more.
The banks knew damn well that tons of “stated” incomes were seriously inflated, but didn’t take any steps to verify income, or discourage the use of stated income loans, because that would interfere with their sales. The banks knew these loans would potentially go bad, but they re-sold them on the secondary market, and figured they were covered by the home’s value anyway.
Thanks. I have actually been following the unfolding industry SNAFU (thank you, This American Life and Marketplace), but is there evidence that’s what happened in this case, or are we just assuming it to be true?
I’m assuming it’s true because his finances were in a complete shambles, no job, no money, mounting credit card debt, and the bank wrote him a check for $347,000. Is there any explanation other than the bank just wanted to sell a loan, regardless of the borrower’s financial status?
No. That’s how those loan programs worked. If it wasn’t one of those loans, it would not have been approved without verification of income. Plenty of blame to go around here.
Brokers don’t fund or approve loans. The broker submitted the loan to a lender, which underwrote the loan according to the loan program rules, which were in turn based on what sorts of loans could be sold on the secondary market. If the broker knew the guy’s income was false on the application forms, he’s equally guilty (criminally and morally). I’ve dealt with plenty of crooked brokers. We’ve had fake documents, broker-forged signatures, faked appraisals (in one, the comps were 20 miles away in a different city), I even had one submit absolutely fake bankruptcy papers and when I pointed out that they were faked and I knew because I’d checked the bankruptcy court files he started to give me a lecture about bankruptcy law.
The lender lacks the moral high ground because this sort of loan program encouraged people to falsely represent their income. But the borrower also knew he was falsely representing his income. I have a difficult time believing that he thought that was ok. Sure, that’s what he needed to do to get the loan, but that’s a pretty result-oriented morality.
Liability-wise, the broker could be required to repurchase the loan or indemnify the lender. It’s more likely if the broker actually knew the income information was false. Every contract I’ve seen requires repurchase or indemnity for submitting documents that they know are false. Of course, most of the brokers who dealt in that sort of loan are out of business anyway. Most of them made their money on loans that just don’t exist anymore. And even if they didn’t, most brokers lacked the capitalization to make good on even one bad loan. I’ve actually sued a broker or two out of existence.
In 1977, when I was in the market for my first home, realtors and bankers alike would see a big gap between my stated income–I used base wages times 2080 hours-- and my income taxes for the past 3 years which included varying amounts of OT. They’d keep at me to let them qualify me at my 3-year-average income, saying that there was nothing dishonest about it, but I held firm to being qualified @ base wage because it didn’t feel right to me.
Another thing they wanted me to go for was this then-new concept of a variable-rate mortgage where they’d qualify me, not at the maximum 18% that the loan could rise to, but at the 3-year teaser of 5%.
They used the same arguments that people in the late '90s-mid '00s were subjected to.
“House prices are rising so fast that you can’t buy just a ‘starter home’ now and expect to upgrade later. That nicer house is going to be inflated so far out of your reach by then that you’ll be stuck in the cracker box forever.” AND
“Interest rates have been pretty stable for a long time. You’ll never see that variable rate go to double digits. In fact, it’s more likely drop over the next 3 years.” In fact, interest rates DID go into double digits by 1980 and stayed there for most of the '80s. AND
“Everybody stretches the truth a little on these requirements.”
I’m with zenith: when I applied for my home loan 4 years ago, I was in a sales job at the time, which meant I had a fairly variable pay scale: 60% salary, 40% comission against quota, paid out based on monthly sales. While somewhat predictable, this sometimes meant that I had lean months, especially toward the beginning of our fiscal year.
When it came time to provide the details of my income, I was completely upfront about this fact. My mortgage broker (who specialized in VA Loans and a pretty standup guy) told me I should just enter my target earnings, but the paperwork clearly asked for salary and commission separate, and that’s exactly how I entered it, because to do otherwise would be dishonest.
So you can imagine how I feel about this douchebag. To sign a mortgage that grossly overstates your income, clears you $150k on top of the refi, and then to not even make a single payment on it - this isn’t some poor victim being led by the nose through a confusing process, this is someone who acted with deliberate criminal intent to defraud. So what if he did it in collusion with the broker - I’m not saying the broker shouldn’t be charged, but this guy should be first in line.
