Mortgage Meltdown: Blame the Victims?


The New York Times

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April 6, 2008

A Road Not Taken by Lenders

WE’VE all heard a great deal in recent months about the greedy borrowers who caused the subprime mortgage calamity. Hordes of them duped unsuspecting lenders, don’t you know, by falsifying their incomes on loan documents. Now those loans are in default and the rapacious borrowers have moved on with their riches.

People who make these claims, with a straight face no less, overlook a crucial fact. Almost all mortgage applicants had to sign a document allowing lenders to verify their incomes with the Internal Revenue Service. At least 90 percent of borrowers had to sign, seal and deliver this form, known as a 4506T, industry experts say. This includes the so-called stated income mortgages, affectionately known as “liar loans.”

So while borrowers may have misrepresented their incomes, either on their own or at the urging of their mortgage brokers, lenders had the tools to identify these fibs before making the loans. All they had to do was ask the I.R.S. The fact that in most cases they apparently didn’t do so puts the lie to the idea that cagey borrowers duped unsuspecting lenders to secure on loans that are now — surprise! — failing.

Instead, lenders appear to be complicit in the rampant fibbery that is one of the root causes of our continuing mortgage nightmare.

Mike Summers, vice president for sales and marketing at Veri-tax Inc., in Tustin, Calif., knows plenty about this. His company handles the filing of these verification forms with the I.R.S. on behalf of lenders and loan originators. He began selling the service to lenders in 1999 and said he was surprised at the reaction he received — like that of a skunk at a garden party.

“In 2001, I was going around the subprime world trying to get them to sign up,” Mr. Summers recalled. “Ameriquest, and others I don’t want to name, just didn’t want to know because it would kill the deals. The attitude was don’t ask, don’t tell.”

Ameriquest, just to jog your memory, is now defunct.

Mr. Summers said Ameriquest and other prospective clients used lame reasons for turning him down. Submitting the forms was too costly, they said ($20 per loan, on average), or too time-consuming (the information came back to the lender in about one business day).

“It was greed on a few different levels,” Mr. Summers said. “I don’t think $20 to protect your interest in a $500,000 loan and weed out things that aren’t going to work is that big an investment.”

In 2006, the I.R.S. made it even easier for lenders to verify borrowers’ incomes by automating its systems, Mr. Summers said. The turnaround time under the new system fell significantly.

Still, the tool remained unused. When a customer signed up for Veri-tax’s service, it was typically to spot-check the quality of loans after they were made, Mr. Summers said.

“My estimate was between 3 and 5 percent of all the loans that were funded in 2006 were executed with a 4506,” Mr. Summers said. “They just turned a blind eye, saying, ‘Everything is going to be fine.’ ”

We know how well that turned out. Lenders still do not routinely check borrowers’ incomes with the I.R.S., Mr. Summers said. This seems odd, given how easy it is to hop onto the Internet and create documents that look like authentic W-2s or Form 1040s.

Indeed, according to a report on mortgage fraud released Thursday by the Financial Crimes Enforcement Network, a unit of the Treasury Department, only 31 percent of suspected fraud was detected before loan disbursements in the 12 months ended March 31, 2007. On stated income loans, only 19 percent of the cases of suspected fraud were detected before the loans were financed, versus 33.5 percent on more fully documented loans.

Yet 43 percent of the cases sampled in the study involved misrepresentation of income, assets or debts. The next-largest category was forged documents, totaling 28 percent of the sampled loans.

Mortgage brokers initiated the loans on 64 percent of the reports involving misrepresentation of income, assets or debt, the study said.

The study’s findings on the institutions that file suspicious-activity reports related to mortgages are also revealing. Banks, of course, file a vast majority of these reports. Securities firms, which packaged and sold billions of dollars in mortgage loans to investors and were certainly in a position to identify problems in them, filed almost none. They seemed to have little appetite for the job.

During the 12 months ended March 31, 2007, banks filed 41,000 reports on suspected mortgage fraud. By comparison, during the more than four years that ended May 1 of last year, 18 securities firms filed just 36 reports of suspicious activity.

THE degree to which mortgage lenders and Wall Street looked the other way on borrowers’ incomes, a sin of commission given the ease with which they could have been checked, raises an intriguing question.

Can investors stuck with losses on these loans sue to recover their investments based on this due-diligence failure? After all, mortgage originators made representations and warranties to investors that the quality of these loans was good when it clearly was not. And they made these representations knowing that they had not bothered to conduct quick and easy borrower-income checks.

“Investors hoping to put back the loans for deficient underwriting under reps and warranties would end up going back to the originators,” said Josh Rosner, an analyst at Graham Fisher & Company and an authority on mortgage-backed securities. “Given that many of these lenders are out of business, ultimately this could come back to the bank or investment bank.”

“The general view is this should not be talked about out loud,” Mr. Rosner added.

Wall Street will certainly battle forcefully against such lawsuits, if investors bring them. But its role as one of the great enablers in this mortgage debacle is something that even Wall Street can’t deny.


4 Responses

  1. MR. NEIL – HELP!!!

    I cannot find a single TILA, HOEPA, RESPA, or any other Fed law to file our case in Fed court. Can anyone help me figure out which might applicable? Here’s the picture…

    Obtained a construction loan Nov 2005 – Promised Completion

    Date end of Feb 2006 (106-days)

    Builder receives 1st draw – starts building same month

    Foundation & poured walls for crawlspace completed

    Builder receives (partial) 2nd draw – end of Nov 2005 (2-wks later)

    Builder receives (partial) 3rd draw – First Wk Dec 2005 (1-wk later)

    Remind Builder to order specific materials – Builder complain about finances (flag)

    Work stops from Dec thru to mid Jan 2006 (supposedly for holidays, etc)

    Remind Builder about the materials still needing to order – (6wks for delivery) – he says no problem

    Builder frames up exterior & most of interior by 3wk Jan 2006

    Roofer can only install part of the roof because framers made mistakes

    Builder Request 4th draw Jan 25, 2006

    Feb 2-3 2006 – I find out materials were not order

    Mid-Feb 2006 – no work happening – haven’t heard from builder – call lender tell them I think we have a problem.

    Last week of Feb 2006 – Builder finally orders materials – complains of finances – refuses my request to see invoices – I notify lender – I think we have a serious problem

    March 2006 – no work happening – Talk with lender about terminating their “approved” builder and I was told that my result in a foreclosure process…?

    April 2006 – house sits exposed to the elements and constantly flooded

    May 2006 – house sits

    June 2006 – finally install some windows – house sits – I send pictures to lender and they weren’t too happy…

    July 2006 – I send more pictures and ask them if they would like to buy this house

    Aug 2006 – I send 40-50 MORE pictures telling them THEY ARE GOING TO BUY THIS HOUSE and by this time have warned them countless times that 70-90k was embezzled by their APPROVED builder which is why he is not working on our house because already spent our money elsewhere

    Sept 2006 – send more pictures – house is constantly flooded – TYVEK is torn off the house – no siding – no anything to protect the house – I remind lender that I have NOT seen ONE lien waiver to date

    Oct 2006 – I warned the lender these delays were going to bankrupt me and our company

    Nov 2006 – warned lender I am filing bankruptcy – they can have the dump

    Nov 2006 – construction loan expires – lender explains they spoke with builder and arranged a deal – they will permit settlement of the construction as long as the builder agrees to complete the house within 30-days “after” settlement – I respond with little faith he will even try – but I don’t have a choice

    Settlement set for Dec 28, 2006

    Dec 2006 – builder installs sheetrock, plumbing & electrical not finished, I tell the lender – lender claims they spoke with builder and everything will be taken care of… I remind lender I still have NOT seen ONE lien waiver at all – NONE!

    Dec 2006 – 3rd week of Dec – I call for final inspection – the builder NEVER had ANYTHING inspected – NOTHING – footings, framing, rough-in, NOTHING… I call lender – lender calls builder – builder tells lender everything is under control. Lender calls me and says everything is under control…?

    Dec 2006 – the infamous settlement day – settlement – however the delays by then had cost us so much money – the loan goes from 716k to 1-million. I’m shaking my head – the only thing I know is get the idiot to finish and sell. I remind the lender I have NOT seen one lien waiver, or the U&O permit from the county – isn’t that required to settle?

    Jan 2007 – received notice that our loan was sold to CountryWide, hmm gee that was quick we hadn’t even made our first mortgage payment and they sold the loan…

    Jan 2007 – call lender – where is the builder?

    Feb 2007 – call lender – where is the builder?

    March – April – May – June – July – AUGUST 1, 2007 – the hell with this – we moved into an unfinished house – no heat in the foyer, kitchen, family rm, pantry, etc, and as you could imagine – countless other issues… we have an estimate to FIX not finish – FIX some of the mistakes and it’s 91k…

    Fast forward – we learned that they lender fraudulently stated our income 257% MORE than we actually earn – in fact, I didn’t even remember signing any income statements because it was a NO DOC loan. However, I did tell them we earned 100k per yr which was accurate – and we signed the 4506 so they could verify it.

    NOW – our business is bankrupt because of these people – we have an attorney but thus far because it is a construction loan and it is June 2009 – we cannot find a SINGLE FED Statute to take our case into Fed court. Oh and btw – the builder was able to get the manager of inspections to SIGN OFF on everything… however, the house will NOT pass code even TODAY!

    Does ANYONE know of what fed statute we can use to NAIL these idiots? I had no idea they lied about our income until the docs were audited. I want these people put away and I want to OWN THAT FREAKING BANK… I have ALL of the emails – exposing them that they KNEW the consequences – all of the pictures I sent – and replied emails… I need a FED STATUTE to get into FED COURT to bust them wide open…

    Sorry for the long winded explanation…

    Desperately Seeking TILA, HOEPA, RESPA,

  2. I agree with Mr. Keeler to some extent, although I have first hand experience in doing closings and the american public at large and the people we refer to as “victims” are sorely undereducated when it comes to the signing of the mound of documents they are asked to review and understand. On the other hand I agree, it is not fair to the folks that do things right and for that reason, if we are going to change our legislature to try to assist the masses it has harmed, it should also benefit those responsible folks in some way as well.

  3. […] mortgageccnHSecurities firms, which packaged and oversubscribed zillions of dollars in mortgage loans to investors and were trusty in a duty to intend problems in them, filed nearly none. They seemed to impact small craving for the job. … […]

  4. No one forced people to sign papers to purchase houses they couldnt make payments on. It isnt fair to the people who actually saved their money and did things the right way that those who didnt would just get bailed out.

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