Wednesday, September 27, 2006

liar loans / statet income

lest euch das ganz genau durch. so funktioniert zu großen teilen das spiel. immer neue wege der "kreativen" finanzierungsformen müssen herhalten um die immopreise hochzuhalten bzw. weiter aufzupumpen. die käufer dieser kredite/mbs werden sich in den nächsten jahren noch wundern was in den letzten jahren alles verzapft worden ist.

liar loans

What if you could get into Stanford by simply telling the admissions office you are an A-plus student -- without any proof? Or how about driving a brand new Mercedes off the lot after promising the salesman you'll send him a check next week? Fat chance, right? So you might be surprised how easy it is for people buying a new house to borrow hundreds of thousands of dollars by simply telling the bank how much money they make -- without any proof. It's called a "stated income" loan, but many people inside the housing industry call it something else: a "liar loan."

Brian is a Bay Area mortgage broker. "Michael" is his client -- a 23-year-old auto mechanic. The payment on Michael�s new home is $4,200 a month, but he only earns about $4,000 a month -- leaving him $200 in the red. He was only able to get the loan because his broker used "stated income" to inflate his paycheck. Brian (the broker) said, "I put on the application that he made $13,000 a month, which was unverified � That's the definition of a stated income loan. You state the income. Most definitely it was a fraudulent loan. The income was literally made up from thin air."

Now you might think getting a loan still works like an old Hollywood movie, where buyers have to fully document that they make enough money to pay back the bank. But over the last decade, Bay Area home prices have gone up 300 percent -- far outpacing people's incomes -- which is why nine out of 10 households can no longer afford the median home price of $630,000. So to keep the clients and cash rolling in, banks and other mortgage companies began offering easier terms like no money down, adjustable rates, interest-only, and stated income.

One broker, "Dennis," works for a mortgage company where he says a whopping 85 percent of loans are stated income. He says out of that 85 percent, they all have inflated numbers.

"All of them, because that's why you're going stated." Dennis added. "We've seen the banking industry keep getting more creative, and more creative, and more creative to keep putting fuel on this fire of home appreciation."

Consider, for example, what would happen in a Monopoly game if every player claimed to make more than $200 each time they pass "Go" -- maybe $400, $600, even $1,000 with each pass. Pretty soon: a bidding war, with players paying Boardwalk prices, even for a fixer-upper like Baltic Avenue, based on money they don't really have.

But the buyers may not even know their incomes are being inflated.

Dennis said, "Some may know. But for the most part I would say the consumer is pretty much left out of the loop."

Out of the loop because the broker often prepares the loan papers without ever telling the buyer their income has been inflated. And buyers may then unknowingly sign a fraudulent income number on their loan.

But if it leads to getting their piece of the American dream, homebuyers must be happy, right?

Not according to Beverly and Dwayne, two Bay Area homeowners.

"Right now I'm living from paycheck to paycheck. I'm struggling with putting gas in my car just to get to work," Beverly said.

Last May, Beverly and Dwayne bought their first home. Their broker assured them they could afford the half-a-million-dollar price tag based on Beverly's income as a social worker. She makes $2,750 a month.

But what they didn't know? To make the deal work, the broker boosted Dwayne's salary to an impressive $8,000 a month.

"I wish I did make $8,000 a month," Dwayne said.

In truth, Dwayne is out of work and only gets a small disability check. Nevertheless, based on their inflated income, they qualified for a mortgage of $3,700 a month. That's almost $1,000 more than Beverly's entire paycheck.

"I didn't find out until the signing," Beverly said. "And I said 'I can't afford to pay that,' and the realtor said, 'Don't worry about it, we're gonna immediately refinance it.' "

Refinancing is what keeps many new buyers in the game, but only if interest rates stay low and housing prices go up. Instead, interest rates are rising. And though Bay Area prices are still going up, the market is weakening.

Beverly and Dwayne have spent the last five months trying to refinance. Their life savings are gone. They sleep on an air mattress. They've already been late on one loan payment.

"This has turned into a complete nightmare," Beverly said.

Now you might think mortgage lenders would be more careful giving out hundreds of thousands of dollars without proof of income. But in fact there's almost no risk to the bank. That's because most banks turn right around and sell their loans to real estate investors on Wall Street -- to mutual funds, pension funds -- even foreign countries.

Raphael Bostic teaches real estate at the University of Southern California. He said in the old days, if a family didn't repay its loan, the bank took the hit.

"In today's environment, if a family does not repay, some nameless, faceless guy in Wall Street in New York, or the investors take the hit. The bank is not put at risk at all, and so they're not that concerned."

He added, "What it does is it reduces to some degree a bank's concern and a bank's diligence in making sure that the loans they originate are actually going to pay in the long run."

And banks and brokers aren't concerned about getting caught cheating, said Brian, which is why stated income fraud remains a dirty little secret from most buyers.

And the reason why nobody in the loan industry is talking about it? According to Brian, "When you have a $10,000 commission check dangling in front of you, it's kind of hard to want to give that up."

Beverly said, "You know they say you make sacrifices to keep what you have, but they didn't tell me I would totally have to stop living and just exist because of somebody else's deceit."



Blogger Duplex said...

Hi Jan

I don't think that liar loans are unique to the US market. With house prices reaching 10-12 average annual incomes in Ireland, interest only and 'self-certified' (stated income) loans are common.

You may be interested to hear that the Irish housing market has seen a sudden drop in activity, auction clearance rates have fallen to 15% and asking prices are starting to fall. The media are now reporting that the housing boom has come to an end.


6:45 AM  
Blogger jmf said...

hi duplex,

i really feel that the irish bubble is the leader by a wide margin in front of spain and the uk.

i´ve read and blogged some really scary stories from ireland. amazing!

9:03 AM  
Anonymous John Fleming said...

If Ireland's bubble starts to deflate, the rest of Europe will follow even quicker. European economists often give Ireland as the perfect example to follow.
But how much 'easy money' was inflated there. When housing goes, the rest will follow.

11:00 PM  

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