We are finally seeing “wins” closer to home in this foreclosure process. It’s about time!
At least one of the members of Families Fighting Foreclousre has said repeatedly that “fraud is fraud” and that is grounds to go after your mortgage lender.
A bankruptcy judge stunned the mortgage industry this week by discharging a stated income HELOC mortgage deficiency, even though the borrowers lied about their income on the loan application.
A false loan application is fraud and usually grounds to deny a bankruptcy discharge, but this lender did not verify the income and did not rely on false application, according to an Oakland, CA, judge which called the case “a poster child for some of the practices that have led to the current crisis in our housing market.”
|
Caution: According to ABC News, Ashlyn Aiko Nelson, a public policy lecturer at Indiana University, studied the low-doc loan craze. She and two of her colleagues concluded that low-doc borrowers exaggerated their incomes by 15% to 19%. “Our sense was that investors knew that people were lying, but figured it was OK because house prices would keep going up and the homeowners could refinance,” says Nelson. The most outrageous types of no-doc lending disappeared entirely in 2009. Many mortgage pros say they’re unaware of banks making any low-doc loans in recent months. (A Forbes editor was, however, approached by a leading bank recently with an offer to refinance his home without documenting his income.) |
As reported in the Wall Street Journal, the judge blames the lender for failing to vet the loan applicant’s ability to pay the loan and for relying only on an appraisal of the property, which turned out to be false.
“If you make a “liar loan,” the Judge is saying here, then you cannot claim you were harmed by relying on lies. And if you rely on an inflated appraisal, that’s your lookout, not the borrower’s, ” said Tanta in her post on the Calculated RISK Finance and Economics blog.
What is a liar loan?
“Stated income loans are also called “liars loans”, because in some cases, the rules virtually invite the borrower to lie,” according to Jack M. Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, and founder of GHR Systems, Inc., a mortgage technology company.
A stated income loan qualifies a borrower using the income the borrower states on the application form – as opposed to the income the borrower can document. With a stated income loan, the lender agrees not to attempt to verify the income the borrower states on the application.
In re Hill (National City Bank v. Hill), United States Bankruptcy Court, Northern District of California, Case No. A.P. 07-4106 (Filed May 23, 2008)
