More Home Buyers Stretch Truth

[PerryChase]

LA Times Article

As Southland housing cools off, reports of fraud grow, raising fears of a wave of foreclosures.

By David Streitfeld, Times Staff Writer
September 29, 2006

Mortgage fraud continues to escalate in Southern California, FBI figures show, raising concerns of increased defaults and foreclosures as the housing market cools down.

[powayseller]

The mortgage fraud news are now making the rounds. Countrywide is suing for a $80 mil loan fraud perpetrated by one group of investors, and the FBI is investigating many others. If you check the website of the attorney in that LA Times article, she has a lot of stories from all over the U.S. Some of the fraud seemed hard to prevent. They are stories like Casey Serin’s, where the borrower closed on more than one home at once, so the lender did not know about the other home.

Other times, the lender is completely to blame for not verifiying bank statements or income.

As others have said before, when the euphoria ends, we will see all the fraud. Even 5 years after the dot com bubble, we are just now getting wind of all the options backdating and the pension fund shortfalls. The fraud that has been going on will be spread wider and deeper than we can even imagine.

[PerryChase]

Interesting that the FBI is now involved. Will we see people go to jail for fraud?

You guys who are for moral clarity, do you think that mortgage fraud is as bad as shoplifting, or worse? What kind of time should someone who lies on his mortgage appplication and causes 100s of thousands in looses do? What about the independent mortgage brokers who were complicit in the schemes?

I’ve heard of mortgage brokers who walked borrowers through the lying process.

I remember posting here a while ago and someone chastised me for suggesting that people would commit fraud (like lie about owner occupied instead of investment). Well said, powayseller, when this unravels, we’ll see the extent of the fraud.

[PerryChase]

If borrowers can no longer lie, then a chuck of buyers will no longer qualify thus reducing demand. I see the credit standards tightening …

From Calculated Risk blog:
—————————

IRS introduces New Tool for Mortgage Income Verification
The Hartford Courant reports: Lenders Will Be Spotting Income Fibs Much Faster

Starting Monday, it’s going to get much riskier to fib about your income when you apply for a home mortgage. That’s because the Internal Revenue Service is overhauling a key income verification tool used by lenders – making it faster and easier to pull up electronically the confidential income tax information of borrowers.
…
Many lenders in recent years have offered “stated income” and other limited documentation mortgages aimed especially at self-employed applicants. Dubbed “liar loans” by industry critics, stated-income mortgage programs allow applicants to bypass standard underwriting requirements for W-2s or copies of personal and corporate income tax records.

Instead, applicants simply assure the loan officer or broker that, yes indeed, we earn enough to qualify for the mortgage, and the transaction proceeds to closing. Often lenders will ask borrowers to fill out what is known as an IRS Form 4506-T along with their other mortgage documents.

That form authorizes the lender or the investor providing the money for the mortgage to obtain transcripts from the IRS summarizing income and tax data for as many as four years. The form must be signed by the borrower and can be used only during the 60-day period after the date of signing.

Until now, the process of faxing in 4506-T requests to the IRS and obtaining transcripts has been paper-driven and non-electronic – making income verifications slow and difficult to fit into lenders’ highly automated loan underwriting systems. Most lenders have used 4506-T forms as a way to perform quality-control checks on pools of closed mortgages.

But now, with the IRS promising to provide electronic transcript tax data within one to two business days in an electronic format, more lenders are likely to run income checks before closing – even on loans to applicants who are not self-employed or using stated-income programs.

[powayseller]

Perry, you’ve been right about this. Even people in the industry call the stated income loan a “liar’s loan”, and a recent survey by an unnamed lender found that many of their loans had income overstated by about 60%. I can’t remember how many loans were fraudulent. I’ve also read that the brokers usually put in the false numbers, just to get that $10K commission check. They were very motivated to close the deal.

[sdcellar]

Anybody have any idea what percentage of stated income loans required the borrower to submit Form 4506-T? If the percentage is high, you have to wonder why they didn’t use them effectively. If the percentage was low, then why would this change anything?

I suspect the latter and if so, then why would brokers and lenders who have been complicit in seemingly fraudulent practices change their ways?

[LA_Renter]

I am so glad to see the LA Times run that story. I am speculating here but you are going to see this hit TV on a 20/20, 60 Minutes or something of the like. I know a Fox News reporter got attacked in California on an expose about mortgage fraud. A huge chunk if not all of this housing boom has been one big LIE. One thing has to happen to expose the extent of this and that is simply for home prices just to stop going up. And as we all know they are actually falling. There is alot of carnage out there.

[lendingbubblecontinues]

It is this “stretching of the truth” that I have been railing against for the last three years.

Lot’s of nice, good people are going to burned as a result of the housing bubble’s equivalent to laundered money.

There has not been a “fundamentals” based transaction on a cookie-cutter home or condo since at least 2003, probably earlier. This is why we will see home prices back below where they were in 2003. Argue all you want with me, but this is how it’s going to be. The whole country is heading back to 2001 prices if you ask me. How can anyone know the true value of their home in these conditions, with so many fraudulent players, “painting the tape”.

Prove your point, with a sound case, and I will change my mind. Otherwise, grit your teeth, and sell real-estate and loans to people at your own peril, as they will most likely all end up in financial ruin as a result of your efforts.

[zk]

Assuming that the 100 liar loans they looked at were representative (and that could easily not be the case):

One third of loans are liar loans, and sixty percent overstated their income by 50% or more. So that’s 20% of all loans involve an overstatement of income by 50% or more.

That’s crazy scary.

Not an in-depth analysis I’ve just provided, to be sure. But I think that sums it up.

[L_Thek_onomics]

The fastest way to clean up this mess, the IRS sends the tax bills to “stated income” borrowers for the difference between the “reported”
and “stated” incomes. We can save the cost of FBI’s involvement.
L Thek

[LookoutBelow]

As with all bubble deflations, the time for finger pointing and lawyers begins at some point when the reality comes home.

 

We are in THAT time for the (sur)real estate bubble. "Let the beatings continue" 

[Author]

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