Step right up folks…state your income… get your home… step right up

That is exactly what it was like at the height of the frenzy a few years back. What was meant for good was turned into a system advancing fraud. The fall out is all around us. Many of the foreclosures happening today can be traced back to the pizza delivery guy making $8,000 a month. Brian Brady, America’s Most Opinionated Mortgage Broker, wrote about the young investor who bought multiple homes on stated income loans. Industry publications and the main stream media frequently have reports of loan originators going to jail for inflating income.

Stated income loansSo, what’s the deal with stated income loans? The stated income loan was meant to make things easier for a particular type of borrower. In a stated loan the borrower simply states the income on the loan application and the lender accepts it at face value. It sounds scary doesn’t it? Well, it is. However, for self employed individuals with many business expenses, business owners with multiple P/L’s in their tax returns a stated income loan can be a very useful tool towards obtaining a mortgage. Good solid credit and third party verification of business operation is then the only other requirement. Where things became risky is when the credit standards were lowered and wage earners were brought into the mix. The stated income loan was never meant for wage earners.

A feeding frenzy also developed once the availability of stated income loans reached the consumer. These days it’s not unusual to receive calls from a potential borrower requesting to be placed on a stated income loan. Now come again! I thought the lender determined the documentation level based on your overall picture. Since when did the consumer get to decide this on behalf of the lender? I guess ever since money got so cheap. That’s a story for a different time…

In early 2006 CTX Mortgage, the company I work for, slammed their brakes on stated income loans. They told us underwriters would be using to substantiate incomes stated on loan applications. We were reminded of the reasons for using stated income, and of course the dangers and pitfalls of misusing it.  CTX made us watch a video of a loan officer who ended up in jail because one of her clients went into foreclosure. The lawyers for the client ended up suing the loan officer on the grounds that loan officer manipulated the borrower’s income to arrange a loan they never could have afforded. Charges of mortgage fraud, wire fraud stuck and now she’s behind bars. The message was delivered in no uncertain terms that CTX would not tolerate a stated income feeding frenzy! In retrospect I respect this foresight.

Remember a stated income loan is really intended for a self employed borrower whose income stream is difficult to substantiate. It will still require good credit of the borrower and third party verification of business operation. What this documentation type is not for is a young college graduate on a steady job wanting a 4,000 square feet home with a built in PlayStation3 theater. It’s also not for wanna be investors with no business experience whose only talent is failure.

Arizona acts against mortgage fraud

House Bill 2040 is headed to the Governers desk. This bill makes mortgage fraud a felony. According to Inman News:

House Bill 2040 would make deliberate misrepresentations to lenders — such as inflated appraisals or falsified borrower incomes used to obtain loans that exceed a home’s true worth — class four felonies, punishable by up to three years in prison.

Authorized account users under fire…

Well, maybe the headline is a bit too harsh. However, the debate is real. There has been some lively discussion over at The Phoenix Real Estate Guy blog post titled “Buying a Higher FICO Score?!?“. This is the post with the thread.  I suggest reading through, there are some really insightful comments.

I commented on this as well, but in my own posting yesterday I didn’t make much of Fair Isaac changing their rules for authorized users. When I first discovered how people could become authorized users on a good credit account to increase their scores I likened it to all the different tax breaks and deductions the IRS offers and how some companies re-locate to offshore destinations to avoid paying taxes. Is this fraud? It’s a loophole. I put the onus on the rule maker to change the loophole. 

However, many disagree. Butterworth has some thing to say, and so does Blown Mortgage.

Our own local paper has as story on this from the AP.

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