Say Anything Blog

I understand that these exaggerated incomes were often entered with the encouragement of the loan officer, whose responsibility it is to confirm that the applicant’s data are in fact accurate.  I saw a story about a mortgage company that was actually counseling its agents on how to “game” the applications, e.g. by exaggerating the applicants total income, so that the application would be more likely to get accepted.

Nonetheless if the income is verified via pay stubs, there’s not much room for cheating.  As I understand it, this sort of supporting documentation is not usually forwarded to the underwriter, sounds like maybe they need to change this process:  After all, it’s not an honest statement that the mortgage originator is an honest broker:  He earns his commission based on how many loans he originates, not based on whether they were good loans or bad loans.

I’m so glad that the Fed and others are bailing out the clowns that issued loans without verifying the ability to pay them back.  It’s SO NICE to know that those of us who are responsible are bailing them out.

)(*&(&(&&!!!

Most of these people lied about their incomes.  I found the same thing with the federal free lunch program when I was the officer in charge for three years.  The parents taught their children to lie.  I guess it is the federal government’s fault for making it so easy to lie.  The Democrats did this to them.

Communism is evil

The only “predatory lending” I know about is done by loan sharks.  People are resposible for applying for, and signing for, loans they can’t possibly repay.

Media uncovers more Palin stories in one weekend than Obama stories in two years. Still no bias detected

Obama: more experienced than Bristol Palin

robert108.  Do the loan sharks go out and attack unsuspecting people walking on the streets? /sarcasm/

Communism is evil

Well, it still doesn’t help things when the loan origination company is in collusion with the borrowing and is even encouraging dishonesty.  This doesn’t get the borrower off the hook, but it does suggest problems with the current system.

Ultimately its the originators responsibility to verify the ability of the borrower to pay back his loan.  If it weren’t, we wouldn’t need an application would we?  A simple “sure I’ll pay it” wink and nod would suffice…

Well, it still doesn’t help things when the loan origination company is in collusion with the borrowing and is even encouraging dishonesty.

Unless you’re under pressure to meet some sort of quota, it makes no sense to make a bad loan, does it?

Media uncovers more Palin stories in one weekend than Obama stories in two years. Still no bias detected

Obama: more experienced than Bristol Palin

Chief: Good point.  The lefties are trying to sell the idea that our loan companies are doing just that, though.

Media uncovers more Palin stories in one weekend than Obama stories in two years. Still no bias detected

Obama: more experienced than Bristol Palin

Nonetheless if the income is verified via pay stubs, there’s not much room for cheating.

You have to understand the purpose of a stated income loan.  They were originally designed for folks that do not have 9-5 jobs.  Let’s say that you run a business (as I do).  Let’s make the assumption that my business earns me $100,000 per year, but let’s say that I have a business vehicle that costs $10,000 a year.  I have a cell phone that costs $1,500 a year.  I have meals and entertainment that cost $5,000 a year.  I have business travel that includes an annual cruise with my partners and their families to discuss business.  I have baseball and football season tickets.  And so on.

What we realize is that business owners shift expenses that for most 9-5 wage earners would be considered personal expenses onto their business.  What this does is decrease the Adjusted Gross Income for business owners and diminish their tax liability.  It also makes it difficult for the businessman above to reconcile the fact that he actually has the same ability to repay as someone that makes $100,000 a year at a 9-5 job (possibly more because he pays less in taxes due to the deductions) without a detailed bank and lender audit.  This process would effectively require a CPA to determine whether a business owner would be or should be able to get a loan.

The loans were created for a very specific purpose.  It became a problem when smart lending officers (or crooked ones) started allowing folks to state incomes that they knew to be false or at very least should have expected were false.  Even at that, one can hardly expect a loan officer to call their client a liar.  It is only a problem if the loan officer actively solicits the client to lie or the client tells the loan officer they are lying.  Just like being a defense attorney, your job is to advocate for your client unless they are clearly lying in which case you are committing fraud.

Stated income loans have their place.  As a business owner, it is almost impossible to explain my tax and income situation to someone that has no familiarity with the business world or tax law.

The level of occupancy fraud is significant because it suggests that speculation accounts for a larger part of the troubled mortgage market than most people realize. For one thing, some of the country’s highest foreclosure rates are in states which until recently had a hot, investor-driven housing market, notably California, Nevada and Florida. In fact, among the five states with the highest rates of foreclosures, defaults by known speculators (that is, those who admitted they were buying investment properties) account for more than one-fifth of all mortgages going bad. We don’t know exactly how many additional defaults can be attributed to occupancy fraud, but some studies have suggested the misrepresentations were widespread. Fitch Ratings, for instance, looked at a portfolio of 45 subprime loans that defaulted within their first year and found that in two-thirds of the cases borrowers never occupied the property, though they said they intended to.

This is what the problem is.  These speculators not only are the ones defaulting causing the market to tank, but they were the ones inflating demand causing the rapid rise in home prices.

Justin,

As expected, that is an admirable explanation of stated income loans.  I would simply add two small points.

First, the underwriting guidelines for both stated and no-income loans are set by the institution ultimately buying the closed loan.  This is true whether that institution is Fannie Mae, FHA, or a company buying and securitizing so-called “sub-prime” loans, such as Merrill Lynch.  And in any case, one of the forms required authorizes the lender to request a copy of the borrower’s tax return from the IRS for verification.

The second point is this: the vast majority of sub-prime mortgage loans are either 1 or two year ARMs.  Certainly 30 year fixed-rate loans are available, but obviously the rate and payment are both substantially higher for such a loan.  Most people prefer the ARM product, assuming that 2 years is enough time to “clean up” any bad credit and then refinance.  However, when housing prices start to decline, there is not sufficient equity for even a diligent borrower to refinance back to a conventional or FHA loan.  Meanwhile, the 2 year anniversary hits, and the borrower is faced with a substantially escalating monthly payment on a house that cannot be refinanced, and is likely not going to appraise out at the original sales price.

And as I said, all this assumes that the borrowers was properly advised how to repair the income/credit deficiency that made him a “sub-prime” only candidate in the first place.  In my experience, few actually do so.

“Poverty of goods is easily cured; poverty of the mind is irreparable.”

We all know how and why this problem come about, but in case you forgot, it was Jimmy Carter and the Democrats.

Communism is evil

Housing advocates, some politicians and journalists have tried to portray borrowers with misrepresentations on their loans as victims rather than cheaters, people put into mortgages they couldn’t afford by dishonest mortgage brokers. But many of these borrowers were irresponsible at best, and complicit at worse. Many apparently sought ‘guidance’ from brokers in to how to tailor their personal details to qualify for mortgages they were seeking, and some merely turned over their applications to brokers and allowed them to fill in the details. In one illustrative case described by an Associated Press story, for instance, a woman who understood that she couldn’t afford a loan for a house was told by a broker that she could rent the property to make ends meet. She went ahead on that basis but couldn’t find a renter and defaulted because her income wasn’t sufficient to pay off the loan. She now claims she was victimized by the broker’s bad advice and by inaccuracies on her application that someone, not her, filled out. How did the inaccuracies get there? She merely signed a blank application and gave it to her broker to fill out, she says, with little concern for the accuracy of the data to be added to the documents she signed.

The article was enlightening to me.  It makes the case that these loans were not made to poor and naive folks that were country bumpkins.

The situation starts because person X wants to buy a specific home that costs $yyy.

One makes the assumption that person X may or may not be qualified for any home at all, let alone a home that costs $yyy.  Let’s assume that the mortgage officer gets person X to inflate their income so that they can qualify for a home that costs $yyy, when in actuality, they would only qualify for a home that costs 75% as much.  That is clearly one case of what we are talking about with subprime.  We make assumptions that person X is too ignorant to know that they will not be able to afford the home, but I do not believe that even the most ignorant of people are unaware that they cannot afford the H2 or the boat or the quads.  They simply make bad buying decisions.  It is no more the mortgage officer’s job to say “buy a less expensive house” than it is the loan officer at the car dealership’s job to nix your purchase of an H2.  They are not your financial adviser or budget officer.  In these cases, it is really tough to not assign most of the blame to the purchaser for wanting a house above their means.  Ultimately, they did not come to the loan officer (in most cases) without already selecting a house or having an idea of what they wanted to buy.

Let’s take this situation further.  Assume for a moment that the person would easily qualify for a home that costs $300,000 but not for the home they want at $400,000.  Assuming that the mortgage officer makes a 1 point commission off of the deal, their financial motivation is only $1,000.  They are not doing it in this case to “get rich off of the poor naive home buyer.” This situation accounts for almost all of the stated income loans.

But let’s look at the other situations.  Investors claiming occupancy and not planning to live there.  In these cases, it is the investor committing the fraud, not the lender. 

The only case that I actually have any level of sympathy for is the person with the 550 credit score and not enough income that has absolutely no business buying a home.  But this person comes to the real estate agent and the loan officer, not the other way around.  And both do their best to fulfill the customer/buyer’s wishes to own a home.  No one forced the buyer to want to own a home.  There were loan companies that made loans to these buyers and in my mind, the lenders deserve to go under and the buyers deserve to lose their homes.  No amount of government intervention can save investors from making bad investments or consumers from spending more than they can afford, especially consumers that already have demonstrated that they have a poor track record of paying their bills as evidenced by the bad credit scores.

Bad credit scores are indicative of a pattern by the individuals, a pattern that is not new when they default on their subprime mortgage.  If they did not have a pattern of not paying their bills, they would be in an A Paper loan in the first place.  Why is the damned government so anxious to bail out investors that lied, people that overstated their income, and people that have a history of not paying their bills?

This is what the problem is.  These speculators not only are the ones defaulting causing the market to tank, but they were the ones inflating demand causing the rapid rise in home prices.

Justin,

Here too, you are correct.  But the defaults, among homeowners or speculators, is only part of the story and only part of real problem, which is determining the value of the securities associated with these loans.  A portfolio of 30 year fixed-rate conventional loans is fairly easy assess.  But the sub-prime loans underlying many of the troubled portfolios and derivatives today are adjustable rate loans, many, if not most of which are past their first anniversary/adjustment date.  Assigning a realistic value to those loans, and the securities and derivatives associated with them is quite nearly impossible.

Its not that they are worthless, so much as that their value simply is not determinable.

“Poverty of goods is easily cured; poverty of the mind is irreparable.”

Sorry to get all long winded, but so much of the talk is about the predatory lenders.  It is just plain false.  These people knew what they were buying and many went lender shopping until they found someone that would lend to them.

It isn’t like these people were never told no by some lender that realized the situation.  Surely they had to shop around to find a mortgage officer to lend to them.

Assigning a realistic value to those loans, and the securities and derivatives associated with them is quite nearly impossible.

Absolutely.  And what this means is that there are massive opportunities for companies to purchase whole portfolios from bankrupt lenders.  It isn’t like the loans go away because the value of the portfolio goes down.  So one company writes down the asset or sells it for pennies on the dollar and takes a huge loss, while another company buys it for a lower valuation.  But let’s imagine that these “risky investments” suddenly become far more secure.  The government intervenes and pays lenders a huge amount of money to fix the interest rate or comes in and bails out the borrowers in default.

The government’s intervention immediately increases the value of the portfolio of loans.  While this may indeed help consumers that are over their heads, the situation of banks and lenders writing down and revaluing their portfolios is more or less resolved.  That part of things is almost done.  The government bailout is going to make the investors that bought these mortgage backed securities wealthy because it increases the value of their assets that they bought for pennies on the dollar due to the difficulties you describe.

Government intervention has an often unintended consequence and that consequence is making investors rich off of our tax dollars.

Justin B.  Correct.  These are the world owes me a living, free lunch crowd.
They have been doing this for decades, and just in the last decade has this come to a head.

Communism is evil

These are not unintended consequences.

These sharp operators, men with influence, ripping off the public with the help of their friends in gov’t.

These sharp operators, men with influence…

WOOF,

What!?  No women?  Shame on you, Sexist Pig!

So, having been justly chastised for your politically incorrect mysogeny, how about you give us some names of those “men with influence” who are “ripping off the public with the help of their friends in government.” Who exactly are these vile creatures you speak of, and who are their “friends in government”?  If you’re gonna throw accusations like that around, how about you back it up with something more than your four paws and floppy ears.

“Poverty of goods is easily cured; poverty of the mind is irreparable.”

...what this means is that there are massive opportunities for companies to purchase whole portfolios from bankrupt lenders.  It isn’t like the loans go away because the value of the portfolio goes down.  So one company writes down the asset or sells it for pennies on the dollar and takes a huge loss, while another company buys it for a lower valuation.

Absolutely!  The shiny side of that rhetorical plugged nickle.  And I believe that a very close examination will show that a number of companies taking these very substantial write-downs are actually overstating their “losses” figuring that since they are taking a write-down anyway, why not ensure that their profits are maximized on the other side.

Its not the defaults, or the write-downs that are the real problem here.  Its the uncertainty!

“Poverty of goods is easily cured; poverty of the mind is irreparable.”

Paulson , Bernanke.
Such a deal, taxpayers guaranteeing the paper no one else will touch.

Treasury Secretary Henry Paulson said on Sunday that talks about how to rescue Bear had continued throughout the weekend. He defended the Fed’s bailout on Friday as “the right decision” and said the Bush administration was ready to take other actions to bring stability to the financial markets.

Paulson , Bernanke.
Such a deal, taxpayers guaranteeing the paper no one else will touch.

As demanded by every liberal in government. And all those “bail me out” types. Instead of some massive fraud being pushed by “wealthy bankers”, it is stupid beaurocrats encouraged by thousands of irresponsible people. It is ONCE MORE, the welfare class screwing over those who are responsible and careful.

Obama/Biden is not change. It’s more of the same.

Investment bankers are the welfare class?

Investment bankers are the welfare class?

Wrong; they fund the welfare class(the proletariat, to you lefties).

Media uncovers more Palin stories in one weekend than Obama stories in two years. Still no bias detected

Obama: more experienced than Bristol Palin

Notice how Woof changes the subject when the original claim of “predatory lending” is debunked; he then just goes into his tired litany of Marxist class-envy talking points.  Yawn.

Media uncovers more Palin stories in one weekend than Obama stories in two years. Still no bias detected

Obama: more experienced than Bristol Palin

So again, we have two possible problems to solve:

A few poor downtrodden folks that lost their homes because they bought too large of house with an ARM due to their poor credit.  In this situation, and in the situation with speculators losing money and with Bear, all of the parties affected lost money based on their own actions and on the performance of the market forces.  This sucks.  This, however, happens in a capitalistic system.  There are winners and losers.

The second problem is of the government’s intervention which causes more problems and a ripple effect.  First, they send a message to borrowers that the government will subsidize their bad buying decisions.  The government is going to make sure that I can make the payments on my McMansion that I bought on an ARM.  Second, they send a message to the market that they will use the power of government to radically change the value of certain types of securities.  The banks that sold these loans lose money.  The taxpayers lose money, and the buyers that bought these loans at a sharp discount get rich in this scenario. 

The government’s involvement after the fact (*and some might argue even prior to the fact) make the situation far worse and prolong the pain.  Most Conservatives do not support the government bailout.  Liberals and Moderates believe it is the role of the government to protect the losers in the marketplace, despite that realistically, when a market goes up 100% and then drops 25%, there are no real losers.  Real Estate is still worth more than prior to the runup.  The vast majority of homeowners are able to pay their mortgages.  And most banks did not go bankrupt.

I have a feeling that the government will be no more effective at solving the mortgage crisis than they have been at “rebuilding New Orleans” or the War on Poverty.  And this is not because of Republican mismanagement.  It is because these sort of bailouts do not work.  EVER.  The problem is that Republicans in an effort to pander, have let these Liberal ideas of “compassion” sink in and make bad decisions worse.

108, I’d ordinarily agree that investment bankers fund the welfare class, but after the Bear Stearns bailout, I’m hard pressed to say that investment bankers aren’t on welfare in a manner of speaking.

Even apart from the massive subsidy and help they get from the Fed.

...I’m hard pressed to say that investment bankers aren’t on welfare in a manner of speaking.

To me, “welfare” is money given to non-productive people; so that’s not an appropriate term for bailouts.
I know you don’t like the Fed, but it’s a rigged market in the first place, for a good reason, so trying to apply market reasoning is also inaccurate.
I don’t agree with the bailout, btw, but I don’t confuse it with either welfare or subsidy.

Media uncovers more Palin stories in one weekend than Obama stories in two years. Still no bias detected

Obama: more experienced than Bristol Palin

So welfare is given to unproductive people, and corporate bailouts are given to people whose actions cost billions and billions of dollars.

On the other hand, those on welfare also cost us billions and billions....

....sorry, 108, we can quibble over strict, narrow definitions all day, and be “lexicographially correct,” but reality is that in any sane definition, the bailouts of Bear Stearns and so on qualify as welfare.

BB: You’re certainly welcome to your opinion, and you can define words any way you want, to try to win an argument, but it doesn’t change the truth.
I repeat: I don’t support the govt bailing out anyone, but that doesn’t make it “welfare”, except when the entity is, and always has been, unproductive.
There is a difference, which is why words have specific meanings.

Media uncovers more Palin stories in one weekend than Obama stories in two years. Still no bias detected

Obama: more experienced than Bristol Palin

I prefer to call the Bear Stearns affair FRAUD and an insider bilking of OUR Treasury, myself.

WHO set the price of $2.00 a share initially?
WHO set the total amount?
HOW did JP Morgan Chase get the nod?

These are questions I want answers to, and I doubt we’ll ever know for sure.

Who’s next is another one.

It’s fishy as a 3 day old carp…

http://www.realclearpolitics.com/articles/2008/04/wall_street_in_dc.html