Underwriting...my first exposure to "liars loans"
I didn't know that much about the inner workings of the loan business. I knew the financial side of things, but I had no idea how the whole loan process worked. I started out as an underwriter. Underwriting is the step of the loan process where the lender assesses a borrowers ability to repay a loan.
As an underwriter, I would take an incoming file, rip open the invelope, and start plugging away. I would input the data into the computer and underwrite the file. Nothing new or special was going on...underwriting was underwriting. I had people help me along the way, and from what I was told, I was a very "quick" learner.
As I got into underwriting, and leaning the various guidelines for various programs, I started to see some problems. I had underwritten a fair amount of files for the few weeks I had been working. I had underwritten full doc, stated, and bank statement deals. We would get full doc deals, and if the income wasn't enough, we would "flip" the deal to stated income so the bwr would DTI (debt to income ratio). Of course, we would have to get the brokers approval when doing this...but somehow, they always approved. At first I didn't really have a problem with this. On lots of the deals the bwr was only 100 bucks or so from meeting the 45 or 50% DTI we required. I didn't really see too much wrong (at first) stating $4200 a month for a bwr who had W2's showing $3950 or $4000 a month. After having been in a similar situation a few years before where I did not get a loan because my DTI was in the low 40's, I didn't feel that 200 bucks a month was going to put anybody in a bad position.
BUT, I will never forget the day it "hit me" like a "stack of t-boxes". I had a file where the borrowers DTI was off the charts. There was no way they could or should be buying a house with their income. My manager told me to just state the income needed to DTI so that we could get the approval out. The broker and the bwr could decide if they wanted the loan the way it was conditioned. I had to state $2000 a month MORE than what was sent in with the file. I remember asking, how can we do this deal? The bwr only makes "x" per month, and we are having to state $2000 a month more than that for them to qualify. "How are they going to make that payment?" ....I asked. Just do it, if they want the loan, and will find a way to make the payment. Ok, I said.
I talked to other people about that situation and others like it, and apparently it wasn't isolated...it was just accepted. Stated income wasn't "illegal", just part of "doing business". Everybody has numbers to hit, everybody wants a bonus, and nobody wants to give market share to another company.
I completely understand the INTENDED purpose of stated income. It was for people with hard to document income and the self-employed that don't have "regular" income. I can understand doing stated income at lower LTV's when the borrower has some "skin" in the game. What I don't understand is why lenders (and the investors who are financing this whole deal through MBS) would lend 100% or MORE of the value of a property to a borrower who is "stating" their income?!?!?
On the 1003 (the standard loan form) on the bottom of page 4 it says:
"I/We fully understand that it is a Federal crime punishable by fine or imprisonment, or both, to knowingly make false statements concerning any of the above facts as applicable under the provisions of Title 18, United State Code, Section 1001, et seq."
So, if you only make $4000 a month, but you tell the broker you make $8000 a month, you are LYING! If the broker tells you, "you need to state more income", they are telling you to lie!! Now, I'm not an attoney, and I'm sure somebody could tell me with 'legalese' how that isn't lying, but it sure sounds a LOT like "making false statements" to me. But what do I know...
Look at the income figures from this California Association of Realtors Report. It says:
"California households, with a median household income of $53,840, are $70,480 short of the $124,320 qualifying income needed to purchase a median-priced home at $530,430 in California, according to the California Association of REALTORS® (C.A.R.)"
Now, it doesn't take an MBA from Marshall or Anderson to see that this situation isn't sustainable for the long term. Heck, I bet even most 2nd graders in public school could answer this question:
T or F If you need to make $124,000 a year to afford a house, and you only make $54,000 a year, will you be able to afford the house??
This is NOT rocket science...just basic math. Since very few people make the money needed to buy most of these houses, how do you think they are going about it??
Many of you reading this, probably have an education, a pretty decent job, and work hard for your 40-70k (range where most are making their money). Would you believe me if I told you that almost every landscaper and housekeeper in SoCal is making 6-figures?!?!? No, you don't believe that?!?!? Well, they do. They all have CPA letters that "verify" the income stated for their loans.
My question is, how can there be a big crackdown on "mortgage fraud" when the industry has completely sanctioned "liars loans" in the form of stated income?!?!? There won't be a crackdown until tons of people get burned and lose money. Then we will get to hear all the "genius" analysts, execs, governemnt officials and the like try to rationalize "why" this happened.
I look forward to the comments...