| It starts out all so innocently, the loan application (1003) | | | | sent to the borrower with foreclosure action following |
| is filled out while gathering the income and debts | | | | when mortgage payments are not made. In a |
| verified through credit reports and mortgage payoffs. | | | | foreclosure process, the lender holding the bag goes |
| Then the Debt To Income Ratio (DTI) is calculated | | | | back through all the files looking to perform an autopsy |
| dividing the debts including the new housing expense | | | | on the loan to determine what happened. Every piece |
| by the income and wham, it happens. The DTI is over | | | | of paper is examined, verifications are double-checked |
| 60%. Conventional loan guidelines historically have been | | | | with a high powered microscope. All who committed a |
| around 28% for housing expenses including taxes, | | | | fraudulent lending practice are sought out and |
| insurance, private mortgage insurance and homeowner | | | | demands are made for redemption and loan buy back. |
| maintenance fees. The total debt ratios had been | | | | Some enterprising participants had provided false bank |
| around 36% for all monthly debts including the housing | | | | statements and other loan documents, which were in |
| expense. With computer modeling and automatic | | | | fact fraudulently created on a fine computer word |
| approvals some DTI ratios have been allowed to float | | | | processor. The fix had been in. |
| up in some cases to 50% to 60% if the borrower has | | | | Many of these stated loan products were all the rage |
| lots of assets and the loan is on a full doc basis. As | | | | then the fraud hit the fan. Borrowers could not afford |
| time passed, more and more hybrids began to show | | | | the payments and did not even come close to having |
| up. Mortgage Brokers were inundated with this new | | | | enough to even live on. Major changes are afoot. |
| loan product called Stated Income. Simply the | | | | Many mortgage brokers exercise much self-discipline |
| borrower would state their income on page two of the | | | | and will not even consider a Stated Loan with |
| 1003 loan application and ratios would fall within lender | | | | someone on fixed income. Where is the "real" money |
| acceptable limits. The original thinking by lenders were | | | | going to come from? Guidelines are tightening well |
| grounded in the premise that many busy well to do | | | | after the horse has escaped from the barn. There is a |
| borrowers didn't have time to compile tax returns and | | | | web page called that gives the high and low range of |
| a litany of proof of their assets. This especially applied | | | | income for various occupations. Lenders will |
| to borrowers who owned a multitude of income | | | | immediately check this to see if the Stated Income is |
| producing properties or had filed for extension on filing | | | | within this range. In the past, many times, these loans |
| a personal or corporate return for a self-employed | | | | were done with a wink. This is no longer the case. |
| borrower. This was a very popular plan and billions of | | | | Recently, Form 4506, which is an IRS form that a |
| new mortgage originations were sold using the Stated | | | | borrower signs allowing the lender to check with the |
| Income or other derivations of the basis plan. It was | | | | IRS and determine income from the borrowers tax |
| great for self-employed borrowers who found it | | | | returns and W-2s if any. Formally this verification |
| difficult to compile in a timely manner all the | | | | process with the IRS was a time consuming endeavor, |
| documentation for a fully documented loan which | | | | but this is not the case anymore. For like $4.00 per file, |
| would use tax returns and a year to date statement | | | | a lender can access, with the borrower's written |
| from a CPA. | | | | permission, an online web site and access the IRS site |
| Later on, due to the heavy volume of mortgage | | | | to verify income. Many lenders will not close the |
| business and a desire on part of lenders to expand | | | | Stated Income loan without an IRS Form 4506 being |
| this popular niche into other areas W-2 wage earners | | | | signed. Many of these loans are sold into the |
| were allowed to state their income as well as those | | | | secondary market that helps keep the mortgage |
| on fixed income such as social security, disability and | | | | money supply flowing. As more and more |
| pensions. For a few years this seemed to be ok. | | | | foreclosures ensue from the Stated Income Mortgage |
| However, as time went on, and the economy in | | | | Products there will be a major shake out with |
| various parts of the country began to slow down, | | | | tightening of regulations and a search for any player, |
| borrowers with stated income loans began to have an | | | | including the borrowers, who may have had a hand in |
| inordinate amount of foreclosures. At this time, Stated | | | | this "Liar Loan" product. The fallout is already |
| Income mortgage loans rival the Option ARM for | | | | underway. |
| frequency of foreclosures. Fraud reared its ugly head | | | | What is a borrower to do? For one, look for mortgage |
| as participating players in the loan process were | | | | products that do not require stating a phony income |
| structuring deals with phony baloney borrowers who | | | | number. A No Doc loan requires stating No Income on |
| didn't exist. These phony buyers are called "straw | | | | the 1003 loan application. A No Ratio does not require |
| buyers" by prosecuting attorneys. Many times the first | | | | income to be listed but verifies employment and term |
| payments were never made. Most mortgage brokers | | | | on the job. It has to make sense. The days of loose |
| and lenders have buy back agreements from the | | | | lending may be over for many. Bottom line, if it doesn't |
| secondary markets so when a loan goes bad the | | | | make sense, it probably is not a good loan. Think long |
| originator is on the hook to buy the loan back. If fraud | | | | and hard about using a Stated Income loan product. If it |
| was involved, that shop many times already closed up | | | | conforms with what it originally designed loan program |
| and had run away with any ill-gotten gains together | | | | for the busy borrower with lots of cash and assets |
| with the rest of the crew who were working the | | | | and no time to pull things together, great. If not, think |
| scam. Those players are prosecuted and serve prison | | | | about passing for some other loan product. It could |
| time for their sins. | | | | impact your walk around freedom. A negative loan |
| The other borrowers who were just trying to get a | | | | experience will certainly impact a borrower's credit and |
| loan to pay off debts and a few months down the | | | | help precipitate a long and painful recovery from this |
| road after the new mortgage was in place were not | | | | credit blemish resulting from a foreclosure. Find another |
| able to make their payments. A Notice of Default is | | | | mortgage product to achieve your financial goals. |