Sunday, December 11, 2005

Underwriting...my first exposure to "liars loans"

It seems like forever ago, but it was really only a few short years. I took a job at a major nationwide "subprime" lender. Yeah, can you believe it....a mortgage company in Southern California?!?!?

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...

SoCalMtgGuy

35 Comments:

Blogger resheeple said...

SoCal -

Great post! These sheeple can afford it because they're using one of those "exotic" financing options. Can't wait til 2007 when lots of these loans get readjusted.

12/12/2005 3:01 AM  
Anonymous scrunchie said...

Speaking of massaging the numbers, I also question the appraisal process. Appraisals always seem to come in right at contract price. Appraisers are under the same pressure to "make it work" that underwriters are, no matter that the contract price may reflect absurd apreciation rates.

12/12/2005 3:32 AM  
Blogger David said...

How prevalent is it in California that someone lies and says that their income is 20% or more then it is in reality?

What percentage of loans are stated income?

12/12/2005 7:56 AM  
Blogger Karen said...

How many people do you see that are actually in good financial shape? I'm guessing not that many.

12/12/2005 8:02 AM  
Blogger SoCalMtgGuy said...

Scrunchie...

See my post a from a week or so ago under previous posts about appraisals...and pushing value.

That might help some.

12/12/2005 9:04 AM  
Blogger SoCalMtgGuy said...

David,

Some of these things are very hard to measure statistically. I don't have the actual lender numbers for percentage of loans that are stated or full doc.

I can only talk to my daily experience, and look through my notebooks where I wrote down the scenarios I quoted. I also talk to my counterparts and get their opinion on what they are seeing.

I used to have some offices that EVERY loan was a stated 80/20.

Since I don't "know" how much the people really make, it is hard to know how much more people are stating.

I can just tell you that I KNOW that a 21 year old "nurse assistant" does NOT make $8500 a month.

I know that brokers use fancy titles that suggest management or leadership positions so the income is more believable.

For the most part thought, the lenders WANT to make the loan. If they can find a reason how it might make sense, they will make the loan.

I hope this helps some...

SoCalMtgGuy

12/12/2005 9:10 AM  
Blogger SoCalMtgGuy said...

Karen,

Most of what I see are people who are not in the best financial shape. Very few people have much (any) savings or reserves.

If everything goes perfect...these people can keep making payments (at least until ARMs adjust).

There are a lot of people out there that are making (and have) a ton of money here in SoCal. BUT these people are not really competing for the "median" home.

Again, I wish it was possible to compile accurate financial stats about borrowers. I know that Ben's site, and others will post news articles that will deal with some data from a specific lender or area. The problem is that right now, they don't want everybody to know that xx% are using stated income.

I just know that it is few and far between when I see people that have 3-6 months of all their living expenses in reserves. That is the 1st step that most financial planners will have somebody do. It isn't glamorous, but it is the responsible thing to do.

Why do you think that most lenders don't verify reserves, use "stated" reserves, or on certain occasions only require 2 months reserves??

SoCalMtgGuy

12/12/2005 9:20 AM  
Blogger nobubblehere said...

"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."

I wonder how many mortgage people pay any attention to this threat or have the balls to tell their boss they won't do it cause they don't want to break the law?

Or is this "threat" about on par with the warning on videos promising 20 year prison terms, etc., for copying the video for resale?

12/12/2005 10:12 AM  
Blogger SoCalMtgGuy said...

nobubblehere...

that is part of the problem. sooo many people don't even "know" they are committing fraud.

Some were "trained" that way, others do it because "if they don't do it, some other broker will" and will get paid for it.

Lenders have the same mentality. If we don't make the loan, somebody else will. Might as well get paid now, and not lose market share to the competition.

SoCalMtgGuy

12/12/2005 10:26 AM  
Blogger resheeple said...

Don't you all see this? None of them will get in any kind of troubles because no matter what they do RE will "NEVER" go down. It's different this time guys.

12/12/2005 11:10 AM  
Blogger Sensible Lender said...

The 80/20 100% financing with stated income is the most dangerous thing in this housing cycle. In the early 90s, here in SoCalif, the big problems were with the 95-100% loans which at that time were FHA and VA loans.

At my bank, stated income needs a good credit score (average is well over 700), proof of 2 years in business (if self employed) and substantial reserves, and at least 10% down. This is the way its been done historically by almost all lenders except for the last few years.

No it doesnt take an MBA from Marshall or Anderson to figure out the current problem. I have an MBA from one of them, but my take is based on the way sensible lending has been done for the last 27 years I have been in this business.

12/12/2005 11:58 AM  
Blogger Lou Minatti said...

Holy crap, SoCal.

Have any financial writers contacted you yet? Or attorneys general? This is some BIG TIME fraud.

12/12/2005 12:18 PM  
Blogger SoCalMtgGuy said...

Lou,

nobody cares right now. I think more people would be a little more outraged if they knew they were competing against people who are "stating" thier income.

I could go on and on about the fraud that is present.

Hopefully word will get out about my blog. Getting the word out there is all I can do right now.

Thanks to you and readers like you who keep checking back and giving me feedback. It helps keep me going...and lets me know that people are getting value from my efforts.

SoCalMtgGuy

12/12/2005 12:24 PM  
Blogger SoCalMtgGuy said...

Sensible Lender..

You have been in the business a long time...

Does/is anything I'm saying sound foreign to you??

Does it sound like I'm making it up??

12/12/2005 12:25 PM  
Blogger Karen said...

SoCal

Please tell me you are exaggerating with the nurse assistant at $8500/month! You can't possibly be serious. Who in their right mind would believe that?

12/12/2005 12:57 PM  
Blogger Mo Money said...

I have a question about PMI. Say you use the 80/20 to avoid paying PMI and go under sometime down the road. By not having PMI who gets hurt the most ?

12/12/2005 1:13 PM  
Blogger Out at the peak said...

I started feeling pinched after a few years with a 50% DTI. I don't even have a family to support. The last thing I wanted to do was to take out a HELOC, and that was one of the reasons why I needed out. So magnify that pinch many times, and I smell trouble.

12/12/2005 2:32 PM  
Anonymous Anonymous said...

While I can see the conflict of interest with a broker (and agree about this play that is happening is not good as written here), isn't still the lender's liability for default to protect and the borrower's interest in not defaulting still something to consider?

Assuming they are informed and are READING the docs before they sign it, isn't the borrower who should be liable for what they are borrowing and why?

Just playing devils-advocate here a little since it seems that maybe we are not considering that borrowers are looking for money, and are signing what they want to sign.

12/12/2005 2:58 PM  
Blogger SoCalMtgGuy said...

Karen,

That nurse assistant loan was actually denied by my company, but was approved by another lender.

My point is that people are having to state some hefty incomes to qualify at these rates and prices.

Yes, some loans, like that one, and the 10K fast food managers, are starting to get denied. But don't think for a moment that those loans were getting declined the past 2-3 years when things were appreciating.

12/12/2005 3:00 PM  
Anonymous nnvmtgbrkr said...

It's not just the "exotic" type financing that carries the blame here. What we've seen in the way of loose lending standards sweeps right across the board, and no one was left untouched. I'm sure the other originators on this site can relate to running files thru "automated" with FNMA and getting approved loans with DTI's over 55%. My personal record was an approved file with a 61% DTI.(for those of you that do not understand the lingo here, that's 61% before tax income going toward debt, and getting approved by the conventional standard, Fannie Mae.) Now, granted, the deal how a very low LTV, but still, c'mon!

Hold on to your hats. What were going to see in the next few years will be historic. Cut out the clippings and save 'em for the grand kids, because they'll talk about this mess for generations.

12/12/2005 3:23 PM  
Blogger Former LA Homeowner said...

SoCal,

I post on WSJ's housing bubble blog as Another Former So Cal Homeowner and I just mentioned your blog there. There was a poster asking for advise whether he should buy a home or wait a little bit so I referred him to your blog. Posters on that site should see that as well. Good job.

12/12/2005 4:17 PM  
Blogger SoCalMtgGuy said...

Former LA homeowner...

Thanks for helping to get the word out!

I want to get people here so they can see another perspective of what is going on in the industry.

I am getting more and more e-mail as well as comments to posts. Keep it coming. That is what I am here for...

I really appreciate you passing my blog on to others.

SoCalMtgGuy

12/12/2005 4:38 PM  
Anonymous punchbowl said...

SoCal -- been lurking on Ben's since he started, and been lurking here since you started. Your posts have all been great, but this one deserves the friggin' Nobel Prize in Bubbleology; nicely done. When all of this busts, I hope you and Ben and co. become cultural icons. Sadly, I think that there will be so much blood in the streets that there won't be much time for accolades...

As long as I'm de-lurking: are the 2/28s always tied to LIBOR, or can they be tied to (e.g.) COFI instead? If all/many of the 2/28s are tied to LIBOR, it seems that they are in for some seriously nasty weather: in the last eighteen months, LIBOR seems to have adjusted upwards more than many indices, and certainly more than COFI. And another question on the 2/28s: they obviously start a full amortization schedule after two years, but for how long is the rate usually fixed? Can I have a 2/28 that is a 3/1 ARM? Or do they also start adjusting after two years? And is anyone strange (wise?) enough to get a fixed 2/28?

Okay, enough blathering. Thanks again for the blog -- you always make my day.

12/12/2005 5:22 PM  
Blogger loonofficer said...

Punchbowl-

2/28 is usually tied to the LIBOR as iy affords the best margins. It has always been one of the most volatile indexes(greater swings of highs and lows over time)historically.

The COFI is less volatile BUT doesn't allow for attractive margins. Therefeore, even though a COFI-indexed loan would be less "jumpy" in the long run the rate at which you would start would almost always be higher than that of its LIBOR counterpart.

2/28 loans come in both I/O and fully amortized. Based on a 30-year term the "2" denotes the period of time for which the initial rate would be fixed and the "28" signifies the number of years the rate would be subject to adjusting.
A 3-year fixed, 27-year adjustable is known as a 3/1. It typically has a higher rate of interest than the 2/28.

12/12/2005 6:14 PM  
Blogger JR_in_NoCal said...

SoCal,

I have been following your posts since I discovered Ben's blog - you are one of my favorite posters. I recently turned on my brother and my parents to your blog. They, as well as I, are completely blown away by the things we learn here.

Keep up the great work.

12/12/2005 6:40 PM  
Blogger SoCalMtgGuy said...

A 3/27 is the "subprime" notation...and 3/1 is the A-paper notation for a loan that is fixed for 3 years before it adjusts.

The 2/28 and 3/27 are sometimes priced the same, but usually the 3/27 is 10 basis points higher.

SoCalMtgGuy

12/12/2005 7:25 PM  
Blogger Lou Minatti said...

I just posted about this on my blog and I hope other bloggers do as well. Get the word out!

12/12/2005 7:56 PM  
Anonymous Anonymous said...

I don't have much to say now, just that this is a great site and is wonderful account of the bubble and lending from the trenches. An excellent complement to the more established sites. Keep up the good work!!!

PS There are many more lurkers then you could imagine (or your counter can track)!!!

12/12/2005 9:53 PM  
Blogger SoCalMtgGuy said...

Lou,

THanks for the post about my blog.



Anon 9:53

Thanks for stopping by. I hope you are right about a lot of lurkers out there. Thanks for the comments...it helps to know that people are reading my blog.

SoCalMtgGuy

12/12/2005 10:09 PM  
Blogger Subsonic22 said...

I have a question about PMI. Say you use the 80/20 to avoid paying PMI and go under sometime down the road. By not having PMI who gets hurt the most ?

The lender gets hurt when an 80/20 loan goes into foreclosure. If the borrower had PMI on a 100% loan, the loss would be covered by the PMI company. Lenders can make more money on the 80/20 loans because they can charge higher rates on the 2nd mortgages and also the money charged on a PMI loan ultimately goes to the PMI company.

12/13/2005 2:02 PM  
Blogger SoCalMtgGuy said...

PMI is only needed for conforming loans and A-paper loans. Subprime loans do not have PMI.

A-paper loans get around PMI by doing 80/20 or 80/10/10 (10%down).

The reason the rates are higher on 2nds is because they are in 2nd lein position. If the loan is an 80/20 for 500k, and the bwr defaults, odds are the bank will NOT be able to sell the house for 500k. If they sell it for 420k, then the first got repayed, but only 20% of the second got repaid. Therefore, the 2nd has higher rates to compensate for the added risk of default.

PMI is private mortgage insurance, so the lender doesn't get that money anyway.

Lenders don't necessairly make more money on 2nds. Lots of variables there. The rates are higher, but so is the risk premium.

12/13/2005 4:58 PM  
Blogger mtnrunner2 said...

I would love to hear your comments on the way the NAR calculates affordability. How many borrowers actually get a loan based on the NAR scenario?

"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.

Doesn't the NAR assume 20% down, 30 yr fixed rate loan? With exotic products, you're paying much less. If your Option ARM payment is half of the 30yr fixed payment, then you would need only half of $124K to buy the median priced home, or $62K. If you buy a house less than the median priced home, you could make even less money and still qualify to make the payments. The problem will crop up only when the interest rates rise or the initial low interest rate term expires.

12/13/2005 10:27 PM  
Blogger SoCalMtgGuy said...

mtnrunner2

That is the whole point I am trying to make.

I don't know WHEN exactly it is going to happen, I have my guesses, but EVENTUALLY people are going to have their payments go up dramatically.

What is going to happen when this happens?

12/13/2005 11:13 PM  
Anonymous Anonymous said...

SoCal,

No one mentioned the big picture as to why the lenders have gone crazy.
It is because it is not their money.

The Banks re-sell the loans regardless of how bad they are to Freddy Mack and Fannie Mae. The loans are repackaged together and end up as bonds. All hell will break loose when the Chinese stop buying these bonds. There will be no more easy cheap money to lend...

rational guy.

12/26/2005 8:38 PM  
Anonymous Paperless Payday Loans said...

It is during such emergencies that you must consider taking advance loans. A cash advance can be procured from two sources- either from a retail outlet or through online money lending sites. for more information about Paperless Payday Loans

visit
http://www.paperlesspaydayloans.us/

3/10/2010 2:07 AM  

Post a Comment

<< Home

Google
 
Web www.anotherf@ckedborrower.com