When the Truth Goes Begging
By BOB TEDESCHI
Published: August 27, 2006
FOR those who have a hard time documenting enough of their earning history to qualify for conventional loans, a popular option has become the so-called “stated income” mortgage.
Graphic: Mortgage Rates Such mortgages are often sought by self-employed people or contract workers who typically do not receive W-2’s and thus lack the kinds of income documentation that underwriters rely on to process most conventional loans. The loans cost roughly one-half a percentage point to three-quarters of a percentage point more.
As you might guess, stated-income mortgages are also popular among borrowers who are committing fraud, knowingly or not. According to a recent study of 100 stated-income mortgages by the Mortgage Asset Research Institute Inc., an industry consulting company in Reston, Va., 90 percent of those who apply for stated-income loans exaggerate their income by 5 percent or more. Nearly 60 percent exaggerate their income by more than 50 percent.
“It’s stunning — not just the high percentage of those who misstate their income, but the high percentage who grossly overstate it,” said Nick Larson, an assistant vice president of the institute.
Stated-income loans are, Mr. Larson said, one of the primary ways people obtain loans for which they could otherwise not qualify.
In most of the abuse cases, he said, this involves a calculated effort among criminals who take out a big loan as part of a fraud scheme. For instance, a criminal could work with a seller and a crooked appraiser to inflate the price of a house. The criminal could then obtain a big stated-income loan, pay the seller an agreed-to amount, take a cut of the selling price for himself and then simply abandon the loan, letting the property go into foreclosure.
But stated-income loans also sometimes involve borrowers who know that if they told the truth about their finances, they could not get a mortgage. That, too, is fraudulent, of course, since buyers entering into mortgage settlement contracts must sign statements testifying to the accuracy of their financial information. It is also risky, mortgage professionals said, since not telling the truth could ruin a borrower’s credit in the long term.
Sometimes, brokers will push borrowers into stated-income loans so they can get their commissions, industry executives said, even though it is clear the borrowers cannot afford the mortgage payments. And the borrowers are not always aware of the risks they are taking in these situations.
“If you don’t agree with the numbers on the closing documents, you shouldn’t be signing them,” Mr. Larson said. “If they say they fudged the income a little bit and it’s 50 percent more, that’s more than just rounding.”
In the second half of last year, about 12 percent of all new loans were obtained with reduced or no financial documentation, according to the Mortgage Bankers Association.
Some mortgage brokers simply will not offer such loans. Marc Savitt, the vice president of the National Association of Mortgage Brokers, is one.
Mr. Savitt, who owns the Mortgage Center, a brokerage in Martinsburg, W.Va., said many state laws require brokers to verify a borrower’s ability to repay loans. “If I can’t verify their financial information,” he said, “how do I know they can repay?”
Mr. Savitt said that in certain circumstances he would consider a stated-income mortgage, like the one he arranged about 15 years ago for a client who was a part-owner of 84 different weight-loss businesses. “We saw 84 different tax returns, because each business was a separate corporation, so we knew his ability to repay,” Mr. Savitt said.
Otherwise, he said, stated-income mortgages are not for sale. “There’s not really a nice way to say it,” he said. “We have a nickname for them in the industry. They’re called ‘liar loans.’ ”
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