You are correct. It is fraud. I have used this type of loan because the loan and property were in my name but my wife had the majority of income, and the easily verified part. They would require I add her to Title and the Loan for a full doc. And we still haven’t filed the 2006 returns. So I took the number from the appropriate line on the draft return. My own rule of thumb is never write down on an app what there is no backup docs for.
You apparently didn’t like the answer, or didn’t recognize it as such. Here it is again…
“Many lenders who have loan problems, (default rate too high, excessive over stating on stated income loans, etc.), are under the scrutiny of regulators. They will force a Lender to increase their reserves in order to cover the exposure in these risky loans. This is a big negative for their business model, and will be costly by restricting the amount of new business the Lender can book.”
In other words, a train wreck is highly likely due to known conditions, and the regulators are going to manage the occurrence of events up until the time the accident occurs. (How much worse can that be…?) Their very involvement may be the tipping point of that which causes the wreck to occur. So it may be construed by those involved that it be better to force the situation that is most feared than to live under the restraints forced upon them by the regulators.
In the process of threatening action against what you refer to as a “performing loan”, some of them may do the obvious, refi and payoff the loan to the current lender. The result of this action to the Lender is that it reduces scrutiny by the regulators, or shareholders, or financiers, and allows the operation to continue with less financial trauma than was perceived. That is why they would call a perfectly good (that is causing them all sorts of problems) performing loan. Like it or not, that is why they would consider doing so.
Whats happening is that NOW, home values are dropping. And thats the problem. the lenders gotta blame someone except themselves.
Lenders knew there was fraud going on, BUT, looked the other way since property values were going up. They figured they’d be alright.
Now that the property values are dropping and people can’t afford the loans, they think have their ace-in-the-hole, the fraudulent loan app. Unethical but very legal.
The whole situation kinda parallels the illegal immigrant situation. The law says one thing, but then we don’t care if they come in illegally. Hey its cheap labor. Until problems arises, like exorbitant healthcare costs and high crime. The chickens have come home to roost. Oh now they’re here illegally, we gotta do something.
I’ve seen a few cases where the lender has filed civil suits claiming fraud but has lost AND had to pay the defendant’s legal fees. Some judges have been convinced that these lenders didnt RELY on the representations on these loan apps, based on their constructive notice and lax underwriting.
“The bottomline is they put these borrowers in a default position from the moment they signed the loan docs. I wonder if a good, sharp attorney could build a case of this type?”
And that to me would just represent how awful our legal system is. If someone can lie about their income, get a loan they couldn’t afford (of their own doing), pay a lawyer to represent their own lie and win would be a huge injustice to the Mortgage Industry. I don’t agree with the way they do a lot of things or the way things always are but that is one where the blame only has one way to go and that is on the Borrower.
““Many lenders who have loan problems, (default rate too high, excessive over stating on stated income loans, etc.), are under the scrutiny of regulators. They will force a Lender to increase their reserves in order to cover the exposure in these risky loans. This is a big negative for their business model, and will be costly by restricting the amount of new business the Lender can book.””
Thanks for the answer. I did not recognize it in your original post.
It may well be possible that the regulators have required an increase in reserves for situations where the income stated varies from the tax return. I have not read that anywhere but I’ll take your word for it.
Hard to imagine that the increase in reserves for this situation is as high as for that where the loan is called. But I don’t know that either…I’m no expert on the way banks handle their reserves, or what regulators may or may not require.
An educated guess though would be that the intended market for the stated income loan…the self-employed…are unlikely to have their income match their tax return. So there may well be reserve increases in large numbers.
to me it actually appears similar to the attractive nuisance. You have a rickety ladder set up against your house and an item that a child would like at the top of house for all to see. A child climbs the ladder and slips on a broken rung. Who is at fault? The child that climbed the ladder while trespassing, or you for having an attractive nuisance that a reasonable person could have foreseen would draw irresponsible or naive children like flies? Is only one party at fault, or are both parties culpable?