Well-written piece by Mark Gimein in Slate this morning asks an interesting and important question:
In ordinary circumstances, the people and institutions you deal with reinforce social norms. They say it’s not OK to lie. But what happens when the structures and institutions break down and start telling you the opposite?
The answers it portends are unsettling.
Brian Brady says:
The answer is scary. It’s a little tough to lean on people for being “dishonorable” when you’ve encouraged them to act tat way from the beginning of your relationship.
I like how you pulled both stories together.
April 28, 2008 — 6:56 am
Bob Wilson says:
Walking away is a business decision for some and the only option for many others. It comes down to doing what you have to do.
Not everyone lied.
April 28, 2008 — 7:31 am
Dave Shafer says:
Hmmm… if what he says is true we should see foreclosures rates for prime loans much higher than than are. Maybe they will skyrocket??? Or maybe it is something else that is driving the foreclosures, like no down payments? Fannie and Freddie stopped accepting stated income loans. However, some major lenders are back into the Alt-A business. The difference, much lower loan-to-values required. So what these lenders are telling us is that it wasn’t documentation but the high LTV’s that was at issue.
Also would like to have someone parse out the option-arms from the rest of the loans and see what effect that would have on the foreclosure rates. I mean if you have folks looking at the actual payment whether amortizing or interest only instead of the “payment rate” which was half as large you might get a different reaction to signing those papers!
Also the SIVA’s (stated income,verified assets) seem to be coming back fairly strongly. This makes sense as having significant reserves demonstrates financial responsibility as well as the ability to overcome job losses, sickness, etc.
April 28, 2008 — 11:51 am
Sean Purcell says:
Wow,
Where do you begin with an article like that written by Mr. Gimein. “What a load of nonsense” is a good start. “Inside the Liar’s Article” would be another good reaction. Let’s take a quick look at what the author has to say:
– He starts out by telling us that “liar’s loans” were done without checking tax returns, employment history or pretty much anything else. Uh… he’s not talking about stated income, he’s talking about a NoDoc loan, as in no documentation of any kind. These were few and far between. Just for the record: stated income loans passed all the same U/W guidelines as a standard loan except the actual income was not checked. The stated income was checked, however, against industry norms for the persons verified position and industry.
– He decries the fact that in some areas of the country stated income loans made up half of all loans. Why? Some areas (certainly southern California) are made up of people not working “standard” jobs that fit a very old U/W system. Unmarried couples wherein at least one borrower has income that does not fit within the standard box. Lots of commission income. Lots of self-employed.
– Mr. Gimein points out that “most of the liar’s loans… will go bad.” based on what?! Most? Utter nonsense.
– Turns out many of the borrowers overstated their income. Well yeah… that’s the point. These borrowers have income that they do not report or cannot report so the income they stated does not match that which they do report.
– Some people’s payments are half their income. That’s true. Some people are willing to pay more than the old fashioned U/W standards allow for the privelege of living in Amercia’s perfect weather, or Boston’s great history, or Floridas tremendous beaches and so on. People in New York give up their car in order to live there. None of this is foreshadowing of a foreclosure.
– His most shocking report reflects a great many people who are behind in their payments within less than a year of taking out the loan. This is a high number to be sure. But the poll was based on the last people to buy. The people who bought at the top. The people who are almost always the one’s to get hurt in any market because they come in when the ride is over.
What is missing throughout this entire recitation of “the sky is falling” is one simple factor: adjustable rate mortgages. People lose their homes because they were put into (or agreed to) poor loans with terrible rate adjustments. This is a separate issue and there is plenty of blame to go around. But the problem does not lie primarily at the feet of stated income loans.
April 28, 2008 — 3:25 pm
Mary Beras says:
Absolutely agree with the article. Fortunately its not much of a problem here on Longboat Key where most of the real estate transactions are done for cash. Nonethelss, your point is right on.
April 28, 2008 — 3:40 pm
James Boyer says:
This article is spot on, and reminds me of the application process for a liar loan that I went though.
Mortgage broker says to me, here is the income you need to state, & and you need to state that this will be your primary income. This for a investment home that I was fixing up in order to flip. The home was not even livable and would not be for 3 more months at a minimum. In the end the home was completed and successfully sold, loan paid off and all, but still imagine if I had not had 12 months of mortgage payments or more in reserve. The mortgage broker did not even know or ask about that.
April 28, 2008 — 5:01 pm
Dave Shafer says:
Sean, great points, but the data was for loans that if they weren’t traditional option arm loans would not have reset. That is why I wonder if the majority of these loans were option arms? Anyway thanks for pointing out that stated income loans have the same underwriting as any other loans only without income verification.
James you participated in mortgage fraud along with the mortgage broker!
April 28, 2008 — 5:51 pm
Bob Wilson says:
Many stated option arms did not require tax returns. They were not all underwritten the same.
April 28, 2008 — 7:13 pm
Sean Purcell says:
James,
I agree with your point and I think there are two different things going on here. The over-all problem stems to a large degree from resetting arms, be they standard or option. The study wherein a lot of people were late in less than one year are just problem loans that should not have been written. Even neg-ams don’t reset in the first year (actually they are resetting every month but the payment does not reset so soon). IMHO, that study reflects the people who were stretching way too far to come into the residential market way too late.
Bob,
Stated income loans do not require tax returns, whether they are fixed, arms or neg-ams. The only difference with a neg-am is what payment the U/W used to evaluate debt-to-income ratios. If they were using the min. payment then the client was getting insult added to injury.
April 28, 2008 — 9:54 pm
Dave Shafer says:
To clarify, folks who got loans for property in the data base used for this analysis, did so at the height of the market. Any analysis needs to 1) tell us what the CLTV (total loan to value using all loans on the property) were. 2) what kind of loans they were.
This information will tell us if this data base can be generalized to the population of loans. For example, if these loans were mostly 100% LTV loans then a possible explanation is that owners are intentionally walking away from the now devalued houses. If these were option arms, then we can look and see if the borrowers were qualifying under the “payment rate” or a fully amortized amount. The author made a series of assumptions without full analysis of the data. As I stated in my original post if he is to be believed then the conforming foreclosure rate should be much higher than 1% as there is considerable amount of stated income loans in that pool.
I reiterate my theory that it is the high loan to value loans that is the determining factor for high foreclosure rates not the amount of documentation.
April 29, 2008 — 6:21 am
Dave Shafer says:
Sean, if folks are making the minimum payment on option arm’s there loan value is increasing. Comparing how much they owe with the current value of the property would cause many to consider walking away especially if the payment is high compared to their income. Why continue to struggle to make payments on a home where you are $50,000 or more underwater and that is rising every month? Do you know of any study that has a data driven foreclosure rate that parses out option arms and high CLTV’s?
April 29, 2008 — 6:26 am
Sean Purcell says:
Dave,
I don’t know of any such studies (which is not to say they are not out there). 🙂
I agree with you completely on this. From the results we can only assume that most of the loans were neg-ams and in any case they were poorly written. We see this at the end of every cycle: the last people in are getting loans that no lender would have written 6 months previous. The lenders are trying to soak up any last profits by stretching too far and the borrowers are trying to get into a market that is already over bought by stretching too far.
The one salient point here is that stated income loans probably had very little or nothing to do with the problem. This is typical media propaganda: Bad news headlines, poor data and no effort to actually understand the subject matter.
April 29, 2008 — 10:50 am
Robert Kerr says:
Not everyone lied.
My non-scientific observation from 05/06 is that 80% of all SI applicants lied by overstating their income. Another 10% are tax cheats who were lying to Uncle Sam.
Maybe 10% were honest. Maybe closer to 5%.
And everyone, from the borrowers to the originators, just winked and nodded, “Let’s see…you’re driving a 15-year-old Chevy, your 3 kids don’t have shoes, and you say you make $150K/yr but can’t show tax returns or pay stubs…Ok, I believe you, let’s file your application!”
April 29, 2008 — 3:37 pm
Phyllis Harb says:
Great article -thanks for posting about it.
May 1, 2008 — 3:23 pm
Rick Belben says:
If the mortgage broker turned down the loan there was another one around the corner who would gladly take it. Banks did not lend to lose money and everything was rosy while the market was rising.
June 16, 2008 — 4:37 pm