Stated Income Loans…I told you so

I’ve read several stories today in the news of “victims” of foreclosure as a result of taking on mortgage loans that could not be paid for. As a longtime expert in this residential industry, I’d like to pull back the curtain on part of the problem so that you can better understand what goes on behind the scenes. How do these loans get originated in the first place? Who’s to blame?

First of all, allow me to say that there are at least 3 guilty parties in the origination of such loans. The ones that are the most common are known as “stated income loans.” Mind you that such loans are very, very difficult to come by now, but prior to the meltdown an individual who had a high enough score was able to merely “state” their income instead of providing tax returns, bank statements etc, and be approved for financing.

The initial problem was with the lenders themselves though. For example, the stated income program was originally created to be less burdensome to self-employed income earners. However, in their greed, lenders began to make such programs available to wage earners who could easily manifest pay stubs instead of stating their income, as well as fixed income earners, who could easily manifest their awards letters. Should either of these income groups also be self-employed, I see this stated program as an asset. However, if the borrower was merely a wage earner or living on fixed income, the approval of such borrowers on a stated income program was ripe for fraud.

As a wholesale account representative and as the owner of a retail loan origination business, I took a lot of flack from my clients (other residential mortgage brokers) and my own employees (licensed mortgage brokers) when I took the hard line stance that I would not approve or accept any stated income loans in which I knew the income stated was to be fraudulent, unreasonable, or just plain wrong. Too many times I heard the so-called professionals in my business call these “liar loans.” I would always retort that stated income loans were for one purpose and one purpose only—to eliminate the hassle of manifesting all of the documentation that would support the claimed income. Too often I had submissions from residential loan officers without any income stated whatsoever. Their plan being that as the wholesale account rep, I would join them in their fraudulent actions and tell them what the stated income amount needed to be in order to get their loan approved. Instead I would turn down the loan or approve it as a “No Documentation” loan which would carry with it a higher interest rate due to the higher risk. I would often tell the brokers “it’s called a stated income loan because the income is supposed to be STATED…not made up, not fabricated, not estimated." It’s to be a statement of fact.

In most cases I either lost the deals in my wholesale days because of this stance, or the broker would get wise and never send me a blank loan application again, ensuring that the income was “properly stated.” On one deal in particular with a broker...we'll call him Brian, who now owns a commercial loan origination company out of TX, swore up and down to me that his client really made the income she stated on the loan application. Unfortunately, not only did this woman not make the money stated on the application, but she missed her very first mortgage payment to our company and claimed that she had never stated any such income on her loan application. (Ironically, this same "Brian" spent time in jail shortly after this incidence for manslaughter (in MO) as he killed someone while driving drunk—in spite of the fact that his license was suspended due to other DUI violations. Guess when you break one law without the consideration of consequences, it’s easy to break others).

I lost many residential loan officers at my retail operation as well because of this. When the loan officer couldn’t get a “stated” loan approved in my shop because I turned it down from being submitted due to overinflated income, inevitably some wholesale account reps would tell my loan officers where they could work elsewhere for a less “unreasonable” person and get the deal through with no problem. Individuals who worked for me saw no problem finding the right people to work for who would look the other way and provide such perilous funding in spite of the facts. The deception was they were such nice and enjoyable people to work with otherwise. They simply saw no problem in falsifying the income in order to obtain the largest amount of financing their borrower would ever be responsible for.

While this blog may sound unintentionally bitter, it is as a result of the headlines and news stories I read today. The domino effect of so many of these “liar loans” being put into market is so huge today that there’s no longer any refuge for these individuals who would commit the crime in the first place of lying about income. Plus, there’s no respite for those homeowners who would take on a loan for a mortgage that they could not pay. Fortunately for the homeowners, it looks as if there is enough dirt on the hands of the lenders that many may end up getting out of foreclosure proceedings in spite of their illegal applications. Unfortunately, the big picture is as a result of the nefarious actions of many an entire nation now suffers an economic collapse of historical proportions.

The little acts of deception do add up folks. And in this instance it’s crumbling our entire nation financially. I believe in “opposition in all things.” If the little bits of deception add up, then certainly can’t the minor acts of honesty, heroism, and proactive efforts for good? I certainly hope so. In fact, I’m banking on it.

Copyright 2009 Kellene Bishop. All rights reserved. You are welcome to repost this information so long as it is credited to Kellene Bishop.