About Liar’s Loans
Posted by Frugal on September 30th, 2006
What exactly is a Liar’s Loan? A Liar’s Loan is another term for the low-doc or no-doc loan. It’s also called stated income loan. Here is the quote from LA Times:
Industry insiders have a nickname for low-doc and no-doc mortgages: liar’s loans. The phrase reflects the suspicion that many of the borrowers who get such loans don’t have the income or assets to qualify the old-fashioned way.
Who in their right minds will opt for paying higher interest rate instead of documenting their income? Unless they are like self-employed businessman who may have a hard time for documentation, they are probably unqualified liars.
What’s some statistics of lying on such loans? Only about 10% of people were telling truth in an example.
One lender recently compared 100 stated-income loans with the borrowers’ tax returns and found that only 10 of the borrowers were telling the truth about their wages, according to Mortgage Asset Research Institute, a division of data firm ChoicePoint Inc.
Sixty of the borrowers had exaggerated their incomes by more than 50%, according to the institute, which didn’t identify the lender.
I don’t know what’s the percentage of self-employed, but I bet that there cannot be one third of Californians all self-employed and need such kind of loans?
As the state’s boom went on, the mortgages became so popular that they now account for a third of new loans, according to data tracking firm First American LoanPerformance.
So it goes without saying that a significant percentage of these loans most likely will crumble down at the expenses of others, when the boom turns bust.
Our American values have sinked so low that not only lying on the loans is perfectly okay for many people, but getting free rides from loan applicants makes perfect business sense. I contacted a homebuilder designated lender once. The lender gave me a higher interest rate quote, and told me that they only do no-doc loans. But the lender asked me whether I can document the loan. I said yes. And then, the lender dared asking me whether I can document the loan for them, even though I don’t need to document it. And I said NO. I asked the lender, “why should I document my income for you while not getting a better interest rate?” Apparently, most newhome buyers have being taken advantages without knowing it.
For the poor renters who have been leap-frogged by such homebuying liars or “investors”, I can share with you a trick. This is just what I heard, and I did not verify this. In the state of California, the state laws favor tenants than landlords (this is a fact). I heard that someone was simply paying rent every other month, effectively cutting the rent price in half, and the landlord couldn’t get him out for a very long time because he was making partial payments.
Californians in the golden state? Liars against cheaters? Is this the state that we’re in? I guess if Californians can sell their FICO score of 680 for some fraud housing ATM money of half of a million dollar (or probably less), they will all flock to do it. Have you read this from Housing Panic blog? A 24-year old kid lied through all the loan doc and has over two millions in real estate, but his networth is negative $200K. Think hard about who is going to take up the tab, about what ramifications these incidents have on the society? Who will be the real losers when the housing bubble bursts?
Do you choose money or your values? You don’t need to let me know. I’m certain you know about it, and if you don’t know, don’t worry. God knows all about it.
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September 30th, 2006 at 11:18 am
I have thought about this a lot. There is simply no way to measure how many people lie. Lenders say that it’s good for the self-employed and the commission sales people or bonused people. But, I have no idea why. I was a commercial/business lender at three banks, including BofA and CalFed and we routinely were able to underwrite self employed individuals (including those using IRS Schedule C)
However, let’s take my case. On my most recent 2005 IRS Schedule E: I have 8 properties listed. Now, I have never had a vacancy in almost 20 years (I have bank statements to show the bank), but when they underwrite a full doc loan, they automatically slice off 25% of your income due to “vacancy” allowance. But, face it, that income is the major source of household income for me and should be counted. In my case, it never matters.
September 30th, 2006 at 8:05 pm
It should be measurable by taking a sample. A sample by itself is not accurate across the entire spectrum, but by theory of statistics, you can limit your standard deviation by using sufficient number of random samples.
Certainly, if they always underwrite the loans by using the same assumption of vacancy, it’s definitely not good enough. That I will always agree.
There are probably some loans that are hard to evaluate and underwrite. That’s the job of a good loan officer. But these days, the loan officers are just another accomplice or the director throughout the home buying process. If they do their jobs like they should, then things will probably be better.
In any case, I’m not in any position to criticize anyone, since this is really a capitalistic society. But I only hope that our society is really more than just money and capitalism, but more about integrity and honesty. Such degeneration is not good for all of us in the long term.
October 1st, 2006 at 6:56 am
Our society stands for so much more than money……but, that all comes AFTER the money. lol
October 2nd, 2006 at 2:40 pm
Yes, ironic indeed. Sometimes, I’m wary of myself becoming another hypocrite.
October 3rd, 2006 at 8:35 am
Look at the show Deal or No Deal. It strikes directly at this type of mentality where people are apt to gamble “other people’s money” or OPM much easier. How many times have you seen someone on that show with a guaranteed $100,000 bank offer and has a 20 percent chance of winning $500,000 only to give up the $100,000 to end up with $20,000 or less. These liar loans demonstrate how easily people will spend other folk’s money to make a quick buck; think of the recent fall of the Amaranth Hedge Fund.
Nothing wrong with stated-income if they are used for their purpose (i.e., a doctor starting a new practice in a new area). But in reality how many people fall in this category? Recent stats show that in California alone 70 percent of loans are either ARMs, interest only, or no-doc negative amortization loans. Many are called option-ARMs with a fixed term. But again, out of this group how many meet the criteria for the stated income loan? Looking at the Los Angeles Times article it seems that many are truly lying to make it into a home.
October 3rd, 2006 at 11:35 am
Dr. Housing Bubble,
I agree with you. What’s in the media and what’s happening in CA is not healthy. When enough people abuse Other People’s money, it will all eventually come back and bite everyone of us.
October 15th, 2006 at 7:08 pm
I’m a 12 year mortgage banking veteran and 19 year financial services professional. I hope to clarify what is, and what is not a “liar’s loan”.
A stated income loan is where a borrower can “state” the current income and not be subject to the traditional 2-year “look back” for income verification. It is extremely effective for self-employed or commissioned borrowers who have “broken through” and started earning more income today then thay did last year. e.g.-if you owned a janitorial services company and received a big contract from the Navy this year, your last two years income wouldn’t reflect your newfound largesse. This loan would be appropriate for you. If you are simply overstating your income, you’d be misrepresenting your income (or lying). Hence, the term “liar’s loans”.
No Doc loans or for borrowers who do not want their income considered at all. Income is not a determinination in the underwriting decision. It is impossible to term these as “liar’s loans” because no statement can not be a misstatement. They are the appropriate loan program for borrowers who truly can not provide any documentation whatsoever.
I think a good litmus teset for me is this questin I ask borrowers who want to use stated income loan programs: If I gather your last 3-4 monthly bank statements, will I be able to legitimately extrapolate your income to equal what you stated?
October 15th, 2006 at 7:39 pm
Thanks Brian for your detailed comment. When no doc on income is provided, sometimes it could be quite easy to fake the asset value, right?
October 22nd, 2006 at 12:47 am
The thing with stated income loans is that it asks for a monthly income, not a yearly. A salesperson could have made 10 more sales than normal last month thereby getting a nice $20,000 commission check instead of the normal $5,000. He can then state he makes $20,000 a month because he did.
A no doc loan is basically based on credit score, down payment and reserve funds only.
October 23rd, 2006 at 10:39 pm
Thanks for your good summary, Ken. I can perfectly understand that some people have a legitimate need for such loans.