The Making Of A 'Liar's Loan,' With Help From The Loan Officer

Daily Finance:

Now that we're in the midst of the post-housing bubble foreclosure mess, it's easy to lose sight of part of how we got here: "liar's loans."

Liar's loans were mortgages that didn't require the wannabe borrower to prove she could repay the loan. They came in various flavors, allowing the borrower to state without proving her income, or assets, or both. These loans violated all the basic principles of underwriting, the process banks abandoned during the housing bubble. And it's no wonder most are ending in foreclosure.

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Comments

[Shapdiggety]

03:44 PM on 01/23/2011

Then rent. Ask yourself, did I take out equity. (then it's all your fault). Did I have an adequate emergency fund? No..... (then it's all your fault). Did I rent a little longer so I could get a bigger down payment? No (then it's all your fault). Did I roll student loan amount into mortgage amount? Yes ( then it's all your fault). Did I demand to see every document one month prior to closing? No (then it's all your fault. Did I hire a lawyer for 1k to go over every inch of these documents prior to signature? No (then it's all your fault.). Were you impressed by granite and stainless and paid more because of it. Yes (then it's all your fault). Did you buy a new car rather than drive an old paid off one until you could reasonably afford one after you had enough of an emergency fund to weather an economic hit? No (then it's all your fault. Were you the first to work and the last to leave so you wouldn't lose your job..no (then it's all your fault). Stop blaming everybody but yourself.

[feyangel]

12:10 PM on 01/21/2011

The fact is the banks created this sort of loan for a reason-- we should be asking: how did it benefit them? Cos, for sure, it did-- at the expense of the rest of us.

The LO in this was simply originating the loan within the loan guidelines. It is easy to point the finger at the LO-- but I think if we do that, we are missing the true origination point of the problems we have. The banks created this sort of loan program-- to what end?

ALSO-- Liar's Loans may be PART of the problem-- but they certainly are not all of it. Jobs going away and people getting laid off or having to take pay cuts, home values shrinking and etc are a huge part of the problem. It is a SYSTEMIC problem.

Even if a homeowner qualified using a regular loan program, it is hard to pay your mortgage if one or both of the borrowers was laid off or took a pay cut-- or if the rate fluctuated and by the time it jacked your rate and payment up, one's home value had decreased so that the borrower no longer met the ever-decreasing acceptable Loan-to-Value Ratios.

The perspective presented here, in my opinion, is very short-sighted and uninformed-- or you work for the Banks and want to keep that blame finger pointing ever downward at people at the bottom of the blame totem-pole-- LO's and Homeowners.

[Milstar]

01:35 AM on 01/21/2011

As an Account Manager in the Go Go days I say this is spot on, however this borrower actually noticed the income.

In most cases a borrower has 40+ pages of forms to leaf through and sign and their income only shows up on one page and one line in all of that. The other thing LO's would do is after a borrower signs the form is to pull that one page out and switch it with a page that has more income on it. This page does not require a signature so most borrowers probably thought they truely qualified when they didn't.

And when a LO has a 30-50% commission on a loan, say a of 200k loan size, they could be making an origination fee of 1% plus 1-2pts in yield spread giving that LO a income of 3,000 in take home pay which is really nice for closing only 1 loan.

[Its-All-Good]

08:36 PM on 01/20/2011

There are many more of these I saved from my clients and loan officer that is still in the business and nervous as S%^T.

[Its-All-Good]

08:40 PM on 01/20/2011

Oh.. and there's more.. title, home owners insurance, appraisers, agents on other side of deals.. I dare them to foreclose on my home. As per my lawyer

[ReesieKitty]

01:34 PM on 01/20/2011

Wow- that is almost IDENTICAL to the conversation my husband and I had with our real estate agent and with the mortgage provider!! The only difference was that we did have the actual monthly amount coming in that they put down- but it was our combined incomes. But our loan was set up exactly the same way, with the second adjustable portion for exactly $70,000, and it was explained to us in just the same way. We were not told this was a loophole or anything like that- rather that as savvy consumers, this was how we would get the best possible rate. We are both educated, but had never bought a house before and both the real estate agent and mortgage company representative we met with assured us that this was the best way to do it. Our mortgage was sold 3 times before we ever made our first payment, went to Countrywide and now BOA has it and it is $100,000 underwater and NO ONE will touch a refinance.

[dukeitout]

12:32 PM on 01/20/2011

I'm sure this was typical of thousands and thousands of home loans. It is basic misrepresentation and negatively impacted the whole home industry to the point where our country was almost ruined. It appears that to date the home loan bankers/raters and origination crooks have not really been identified or charged.

[NHGranite]

09:04 AM on 01/20/2011

Another bad mortgage bank: WaMu. And who bought them? JPM CHASE

[noob1]

12:03 AM on 01/20/2011

There is no such thing as a liar loan, the term is a joke in itself. There is an individual with a finance degree ignoring their fiduciary responsibility and knowingly writing a loan based on the planned transference of the loan's responsibility to another party, which conveniently removes the traditional incentive to use the correct loan practices they were taught in school by their teachers, eh?

[Intolerantcentrist]

12:59 AM on 01/20/2011

The point in this is that “fiduciary responsibi¬lity” IS the “joke in itself”. Why? Because this arrangement pays far better in the short term. What you are seeing are parties (banks/ mortgage brokers) intentionally forgoing underwriting standards because such standards limit the opportunity for greater short term profits. Keep in mind, this lack of fiduciary responsibi¬lities is systemic; from the loan originator, to the mortgage assigner; to the securitization into MBS’s, CDO’s; to the rating agencies; and finally the purveyors’ of these highly rated, yet toxic instruments (Lehman, Goldman, ect. …).

[Amalek]

04:57 AM on 01/20/2011

The fact is the person who got the loan still lied. They signed a mortgage application that included false statements. The fact that the mortgage broker helped speaks poorly of him - and he should also be held accountable, but it does not justify the behavior of the liars who destroyed our housing markets.

[TWOMANY]

08:01 AM on 01/20/2011

WRONG - you are ASSUMING the person lied and that is exactly what these banks want people to believe. Most folks had no idea what a NINA or SISA loan was let alone how to calculate amortizations based upon multi-point equations. I have yet to find an attorney that can produce the correct payment for these loans. These loans were DESIGNED to FAIL to PAYMENT SHOCK and FORCE borrower's to REFINANCE - REPEATEDLY and that is exactly what they did!

The issue is these NINA & SISA loans were CHANGED by LENDERS and in many (most) cases, without borrower's knowledge. These are FACTS based upon sworn testimony & depositions already accepted in the courts.

EXAMPLE - New Century Mortgage - an audit exposed that 60% of their loan apps used INFLATED INCOMES of 50% or HIGHER. Those incomes were changed INTERNALLY.

EXAMPLE - Countrywide used a SPECIAL Underwriting Program that changed REJECTED LOANS to NINA and/or SISA LOANS - returned the loan app (electronically) to the originator APPROVED - ALL without borrower's knowledge.

The borrowers were shown a payment they could afford then told their payments would go up a few 100-bucks in 3-5 yrs. Countrywide admitted to 142-BILLION DOLLARS worth = approx 965,000 families that do NOT even know it. Those LOANS are NOW BEING FORECLOSED.

These folks didn't lie - the BANKS DID. Yes, some folks knew it but EVERY BANK KNEW DID KNOW IT.

IMHO this will eventually lead to RIOTS!

[ReesieKitty]

01:38 PM on 01/20/2011

Not so- most people, when they have something explained to them by a government licensed PROFESSIONAL who tells them- "This is how we do this and I will explain why" at some point, will believe that the LICENSE, REGULATED PROFESSIONAL is just that and knows what they are doing and is advising them to act within the law. In fact, these banks and their representatives were running circles around consumers and willfully lying to them. When you have a professional manipulating the numbers, it is not surprising that someone not specifically trained in these regulations can't follow all of them at some point and decides to trust the professional.

[jmad]

09:50 PM on 01/19/2011

Why are the liars who sold lier loans being brought to charge for their deceit.

[Intolerantcentrist]

01:03 AM on 01/20/2011

Well, we’re not prosecuted those guilty of creating our economic collapse because the Federal government isn’t looking.

And because deregulation is also decriminalization, there probably isn’t a good reason for them to start looking.

[Amalek]

04:59 AM on 01/20/2011

We don't have enough jails for all the lying homeowners and all their lying mortgage bankers, unless, perhaps, we use those FEMA camps we were going to use for the teabaggers.

[ReesieKitty]

01:39 PM on 01/20/2011

Why is it so much easier to believe that honest, working class americans just trying to buy a home lied than it is to believe that giant multi-billion dollar companies who have already been found to have acted illegally LIED?? It sounds like you would rather blame your neighbors than a corporation. Why do you think one would lie and cheat, but not the other?

[TWOMANY]

07:29 PM on 01/19/2011

SNIP from Bank of America - Internal Documets

RMBS Trading Desk Strategy
Banc of America Securities LLC --- >> April 7, 2006 (notice date)

Introduction
Within the plethora of alternative mortgage types that have been introduced over the past few years, one product that has attracted a fair amount of attention in recent months is a fixed-rate interest-only (IO) mortgage. Borrowers make only interest payments over the IO term of the loan, after which the loan switches to being fully amortizing for the remainder of the mortgage term. For example, one of the most popular types of IO mortgages is a 10/20 mortgage: these are 30-year fixed-rate loans with an IO term of 10 years followed by a fully amortizing term of 20 years. Note that the lack of principal amortization over the IO term results in a spike in scheduled payments at the end of the IO term thus subjecting borrowers to a payment shock.

...have the lowest monthly payment, although they have the highest interest cost. On the other hand, 10/1 ARM IO borrowers face the largest payment shock at reset.

PAYMENT SHOCK - was designed to force borrowers into repeated REFINANCING SCHEMES thus subjecting them to costly upfront fees stripping chunks of equity from borrowers with every refi...

The LOANS were designed to FAIL - therefore trigger the refi into another SUBPRIME loan paying HIGHER FEES everytime around... That is why borrowers are upside down today.

[TWOMANY]

07:13 PM on 01/19/2011

Snips from a lawsuit filed by CEO against a Lender for their deceptive & fraudulent loans...

• …Another of such issues involved Countrywide’s practice of flipping a loan application from a “full doc” loan program to a “stated income” or “no income, no asset” loan program. He learned that loans were being canceled at the prime regional operations center as full documentation loans and transferred to the sub-prime operations center in Plano, Texas as stated loans or No Income No Assets (“NINA”) loans. Countrywide’s representatives were aware that the applicant would not be eligible for any loan program based on their current income level and/or job status.

• …loan officers would go so far as to actually assist the loan applicant with the application to submit to the prime or nonprime unit with false income amounts, so that the applicant would get the loan under false pretenses.

• …potential buyer known to Zachary continued to complain because the loan officer filled in an income amount that the buyer did not even meet.

• …the green light could be given to KB Home to start building the homes under contract. …was instructed by the highest levels to approve such percentage with an unconditional final approval.

Yet the courts and our gov have NOT prosecuted these LIARS and these borrowers will be BURNED for every penny PLUS FEES and destroyed credit.

[Sundialsvc4]

05:04 PM on 01/19/2011

That is called "securities fraud," and by the way it's a felony.

[Amalek]

05:00 AM on 01/20/2011

It is actually not securities fraud, because home loans are not securities. 

Sometimes they get packaged into securities, but that is another matter. 

This is fraud though, and possibly perjury,  and both the lying homeowner and the enabling broker ought to be held to account.

[TWOMANY]

08:09 AM on 01/20/2011

Practically EVERY mortgage LOAN - especially these loans are CLAIMED to be cessPooled for MBS.

Home Loans ARE = Mortgage Backed Securities = and it is Securities Fraud because the BANKS LIED to the Investors, Borrowers, and the SEC because they NEVER transferred the Notes to the Trust. That means legally the LOANS are not SECURED by the property because the BANK violated the law.

The Banks failed to Transfer the Notes to EVADE Taxes. However, these specific Investment Trusts are REMIC Trusts meaning they are TAX EXEMPT "AFTER" proper recordation - per UCC, Real Property Laws, & PSA contract. That MEANS they also violated the IRS REMIC Provision automatically REMOVING their TAX EXEMPTION STATUS.

There are several states filing lawsuits for the UNPAID TAXES. The SEC is being investigated for BRIBERY because this is Securities Fraud.

[Box500]

04:39 PM on 01/19/2011

Trust me. Mortgage bankers, brokers, orginators are bottom feeding vermin

[Amalek]

05:01 AM on 01/20/2011

It was a low barrier profession.  You didn't need an education, you just had to be willing to lie and take the consequences.  So far, there haven't been any.

[caad4]

04:13 PM on 01/19/2011

I'd also like stats on the "most are going into foreclosure" line. Most?

[camanokat]

04:08 PM on 01/19/2011

The author doesn't know what she's talking about. First, "Liar loans" didn't cause the housing implosion. It was engineered by the banks. We all know this.

Second, what on earth does this mean, "The maximum cap is 5 years over the life of the loan."?? It's nonsense. What's the cap? Should say 1% each adjustment period typically annually and 5% over life of loan or something like that.

I was a loan officer for over 20 years and whoever wrote this has no clue.

[chrysb52]

04:29 PM on 01/19/2011

I am too and I agree with you. I certainly hope no senior loan officer made the comment attributed because it would mean he had no idea what he was doing. I wish writers about the very real problems in the financial industry would do their homework and show some factual understanding about the business they are writing about.

[camanokat]

04:39 PM on 01/19/2011

I had to leave the industry. Last year was the absolute worst year ever. Even borrowers with good credit had a hard time getting loans and a lot of the problem lies with the appraisal management companies who seem he//bent on hiring the most incompetent appraisers ever. One appraiser stated in the report that she had no access to prior sales of the comp. Took me 3 minutes to go online with the county and pull up prior sales for the last 20 years. Sheesh.

Thanks, Congress for new laws that hurt, not help consumers. I won't even comment on the new GFE that borrowers are not allowed to sign!

[deanna1970]

05:13 PM on 01/19/2011

The author of the post didn't "write" the fax/email exchange.
That is directly from the loan officer and borrower.