Housing Fraud Housing Fraud: Stated Income Fraud
by Mike "Mish" Shedlock
Whiskey & Gunpowder
Illinois, U.S.A.
December 5, 2005 Mike Shedlock discusses Housing Fraud and other forms of real estate fraud -- how it's happening and its extent. Greg's note: In the following article, Mish attacks his favorite subject: housing. How much fraud is there and what does it mean? What about stated income loans? Mish has some good sources, so don't just take his word for it -- read what a national mortgage broker has to say about fraud in the industry. Please e-mail any responses to your stimulated managing editor: greg@whiskeyandgunpowder.com Stated Income Fraud INMAN NEWS ASKS: "Is Real Estate Fraud Getting the Green Light?" "The mortgage industry is getting used to all the Chicken Little warnings about fraud, but few have heard quite the proclamation of virtual surrender recently offered by two high-level individuals involved in the business. "Bruce Morris, executive vice president, quality control, Saxon Mortgage Services, Glen Allen, Va., said deception has advanced so far so quickly that 'every portfolio in the country has fraudulent loans in it.'
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Housing Fraud: Fraud Invited I have a friend in the industry, Dave Donhoff, a national mortgage banker/broker, and he e-mailed me his response to that article. Following are his comments: "Fraud is actually INVITED (by default) with stated income loan guidelines, and the lender's account executives (who are being managed and coached, as the article discloses, by their company's principles) seeking to drive volume. There was a time... a 'heyday' when stated income loan programs filled a real need for the self-employed entrepreneur who had more bill-paying revenue at his disposal than his personal taxable revenue reflected. Way back then (what...25 years ago maybe?), this was an evolution in income documentation methods, following what was then a 'make sense' path of reasoning. We're now past that period of time. "TODAY, 'stated income' is completely unnecessary, because either income can be verified by a variety of alternative means (bank statement deposits, for example,) OR...if someone truly lives 'cash & carry,' there are now a multitude of fraud-resistant no-income-claimed document types (no ratio, no doc (both with or without asset verification). These programs are available at lower credit scores and higher loan-to-value levels than old-fashioned stated income loans were 'way back in the day' when stated loans arrived...AND even though the interest rates on the nonfraudulent loan methods are priced to the relative risks, they are STILL lower than a full Doc 30 FRM just 20 years ago, so there's really no excuse to commit fraud. "We are at a point in our industry where it is appropriate to ABOLISH all stated income programs entirely...make them regulatorily illegal entirely (or better yet, exempt lenders from any fraud recourse in law if they fund a stated income loan...) as an avoidance of such a fertile ground for larceny. "Today, documentation fraud is ALMOST PURELY driven by desperate loan officers seeking a commission (hired en masse by greed-blinded newbie principals/owners allowed to drop to the lowest denominator of ethics). The overhiring of unqualified sales hacks (often young first-time employees without basic math skills, let alone financial advisory skills) has been driven by a unique combination of unprecedented factors: A) An environment of fire-sale interest rates driven down by market forces. B) A technological breakthrough in automation allowing credit and risk analysis to micro-price loans to a borrower's personal specifics...making it possible to price loans for the riskiest of borrowers without forcing the cleaner borrowers to pay the same rate and fees as their riskier neighbors (thus, EVERYONE had a gift dropped in their laps). C) Origination technology has superficially eliminated much of the manual/mental process of origination, such that loan officers no longer have to sit face to face with a borrower and establish their financial credibility...so the normal consumer demand for that credibility has been relaxed dramatically...thereby opening the door for yesterday's gas station clerk to become today's so-called 'loan consultant.' "Taken individually, each of these factors is WONDERFUL...However, combined, they've created an environment of degraded ethics in a field where the consumer is very easily led astray.
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Dave Donhoff
National Mortgage Banker/Broker"
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Housing Fraud: The Bottom Line From Mish
Here is my take on the matter: Fraud is always rampant at the peak of every market cycle. Stated income loans are fueled by greed and the ability for originators to take the loan, collateralize it and sell it to pension plans and mortgage "investors" willing to accept paltry returns over Treasury yields for enormous extra risk. Those investors or pension plans buying the lower tranches (highest-risk slices) of CDOs and CMOs (collateralized debt and mortgage obligations) "backed" (using the word loosely) by poor credit risks who are buying houses on nonexistent income at the peak of the market are going to have their heads handed to them by the market. The ripple effects will be felt in real estate prices and in pension plans across the country. Regards,
Mike Shedlock ~ "Mish" Greg's lacuna: It's 9:45 and I got kicked out of the fancypants free-wireless coffee shop by a nice, tall Chinese gal. So I hurled myself out into the snow-flicked city air. I love it when it snows here in Baltimore - the entire city shuts down, morphing into a lonely building-bedecked desert. So I amble over to the socialist/anarchist free-wireless coffee shop, wistfully leaving the purty snow behind me. I stumble into an anarcho-folk concert. "What's anarchist folk music, Greg?" Well, it's exactly what you'd expect, a young angsty dude with floppy hair madly strumming an out-of-tune guitar and wailing in a mid-volume false vibrato-voce. Wailing about various ills that fail to interest your dense managing editor. Dreadlocks and posters that scream "An Injury to One Is an Injury to All" surround us, somehow melding with the wails into a surreal anarchic-opera. A slight feeling of guilt passes over me as I titillate myself with my capitalist Whiskey endeavors in their midst...seditious capitalism at its best. Greg's final note: Now that the Holiday Season grins upon us, it's time for the team at Agora Financial to give you your gift. So here you are: a huge discount on every newsletter and options service we publish...but wait, I'm getting ahead of myself. You may have heard of the Agora Financial Reserve. It's the highest level of service and research that Agora Financial offers. And if you accept your private invitation, you're entitled to all of our best research for life - including every service we launch in the future. You also get free admission to all of our conferences...and we'll immediately send you complimentary copies of our world-class research reports. Add that to our outstanding newsletters and options services, free copies of each book our team publishes...that's a darn big slew of benefits! And the best part is, you get all of those benefits - for life - for a heckuva lot less than it costs for just one year of those services combined. That's one sweet deal...so please read here if you're interested in saving huge money while making some huge gains... http://www.isecureonline.com/Reports/AFR/EAFRFC15/ | 
