Liar, Liar, Pants On Fire"Liar Loans" Lead To A Spike In Mortgage Foreclosures

It starts out all so innocently, the loan application (1003) is filled out while gathering the income and debts verified through credit reports and mortgage payoffs. Then the Debt To Income Ratio (DTI) is calculated dividing the debts including the new housing expense by the income and wham, it happens. The DTI is over 60%. Conventional loan guidelines historically have been around 28% for housing expenses including taxes, insurance, private mortgage insurance and homeowner maintenance fees. The total debt ratios had been around 36% for all monthly debts including the housing expense. With computer modeling and automatic approvals some DTI ratios have been allowed to float up in some cases to 50% to 60% if the borrower has lots of assets and the loan is on a full doc basis. As time passed, more and more hybrids began to show up. Mortgage Brokers were inundated with this new loan product called Stated Income. Simply the borrower would state their income on page two of the 1003 loan application and ratios would fall within lender acceptable limits. The original thinking by lenders were grounded in the premise that many busy well to do borrowers didnt have time to compile tax returns and a litany of proof of their assets. This especially applied to borrowers who owned a multitude of income producing properties or had filed for extension on filing a personal or corporate return for a self-employed borrower. This was a very popular plan and billions of new mortgage originations were sold using the Stated Income or other derivations of the basis plan. It was great for self-employed borrowers who found it difficult to compile in a timely manner all the documentation for a fully documented loan which would use tax returns and a year to date statement from a CPA.

Later on, due to the heavy volume of mortgage business and a desire on part of lenders to expand this popular niche into other areas W-2 wage earners were allowed to state their income as well as those on fixed income such as social security, disability and pensions. For a few years this seemed to be ok. However, as time went on, and the economy in various parts of the country began to slow down, borrowers with stated income loans began to have an inordinate amount of foreclosures. At this time, Stated Income mortgage loans rival the Option ARM for frequency of foreclosures. Fraud reared its ugly head as participating players in the loan process were structuring deals with phony baloney borrowers who didnt exist. These phony buyers are called straw buyers by prosecuting attorneys. Many times the first payments were never made. Most mortgage brokers and lenders have buy back agreements from the secondary markets so when a loan goes bad the originator is on the hook to buy the loan back. If fraud was involved, that shop many times already closed up and had run away with any ill-gotten gains together with the rest of the crew who were working the scam. Those players are prosecuted and serve prison time for their sins.

The other borrowers who were just trying to get a loan to pay off debts and a few months down the road after the new mortgage was in place were not able to make their payments. A Notice of Default is sent to the borrower with foreclosure action following when mortgage payments are not made. In a foreclosure process, the lender holding the bag goes back through all the files looking to perform an autopsy on the loan to determine what happened. Every piece of paper is examined, verifications are double-checked with a high powered microscope. All who committed a fraudulent lending practice are sought out and demands are made for redemption and loan buy back. Some enterprising participants had provided false bank statements and other loan documents, which were in fact fraudulently created on a fine computer word processor. The fix had been in.

Many of these stated loan products were all the rage then the fraud hit the fan. Borrowers could not afford the payments and did not even come close to having enough to even live on. Major changes are afoot. Many mortgage brokers exercise much self-discipline and will not even consider a Stated Loan with someone on fixed income. Where is the real money going to come from? Guidelines are tightening well after the horse has escaped from the barn. There is a web page called www.salary.com that gives the high and low range of income for various occupations. Lenders will immediately check this to see if the Stated Income is within this range. In the past, many times, these loans were done with a wink. This is no longer the case. Recently, Form 4506, which is an IRS form that a borrower signs allowing the lender to check with the IRS and determine income from the borrowers tax returns and W-2s if any. Formally this verification process with the IRS was a time consuming endeavor, but this is not the case anymore. For like $4.00 per file, a lender can access, with the borrowers written permission, an online web site and access the IRS site to verify income. Many lenders will not close the Stated Income loan without an IRS Form 4506 being signed. Many of these loans are sold into the secondary market that helps keep the mortgage money supply flowing. As more and more foreclosures ensue from the Stated Income Mortgage Products there will be a major shake out with tightening of regulations and a search for any player, including the borrowers, who may have had a hand in this Liar Loan product. The fallout is already underway.

What is a borrower to do? For one, look for mortgage products that do not require stating a phony income number. A No Doc loan requires stating No Income on the 1003 loan application. A No Ratio does not require income to be listed but verifies employment and term on the job. It has to make sense. The days of loose lending may be over for many. Bottom line, if it doesnt make sense, it probably is not a good loan. Think long and hard about using a Stated Income loan product. If it conforms with what it originally designed loan program for the busy borrower with lots of cash and assets and no time to pull things together, great. If not, think about passing for some other loan product. It could impact your walk around freedom. A negative loan experience will certainly impact a borrowers credit and help precipitate a long and painful recovery from this credit blemish resulting from a foreclosure. Find another mortgage product to achieve your financial goals.

Dale Rogers
http://www.brokencredit.com
http://www.sellerhelpsbuyer.com

Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.

Kids And Energy

Im not sure why, maybe because its summer, Im getting a lot of questions and stories about kids and energy. Ill put them all under that broad category but there have been several different subcategories discussed: kids and ADHD, kids and anger management, and kids and computers.

Kids and ADHD

Lets start with kids and ADHD. There seems to be a big trend here in the US of drugging our children so they can control their behavior in school. I am NOT in favor of this practice.

Why is there such an epidemic of ADHD diagnoses in our children? I dont want to oversimplify but I believe one reason is that our children dont have the opportunities they had in previous generations to run around and expend their energy.

In years past, kids got to play in the parks, in the streets and in their own yards. Today, that happens less and less. Parents are too afraid to allow their children to be outside unsupervised, and rightly so! There are predators out there who would do your children harm. However, kids still need to expend their energy, somehow.

So, many times the activities available to them at home are sedentary, such as playing video games, watching television, talking on their cell phones or using the home computer. None of this provides opportunity to release energy, unless your children are like my niece who paces vigorously while talking on the phone.

Then we send them to school and expect them to sit down and be quiet. In addition, many schools are reducing the amount of physical education time for our kids and Ive even seen recently that some schools forbid children to run at recess or use certain playground equipment because they fear of physical injury lawsuit. Is it any wonder our children are having difficulty?

Now I know there are parents and teachers out there who have stories of children who have been helped immensely by the addition of Ritalin, Adderall, Concerta or Dexedrine to their daily diet. If you know a child who is being helped by his or her medication, Im not saying to discontinue it but for every child who is being helped, I believe there are at least three others who are still exhibiting all the ADHD behavior the medication was designed to reduce.

There have been studies done on placebo medications that show that in double blind studies, when neither the patient nor the doctor knew whether the patient was getting the actual drug or the placebo, the ones getting the placebo actually did better. Is it possible there is a placebo effect with some children?

If your child displays what you or the teachers believe is an excessive amount of energy, do your best to create situations where that child can expend energy. I have two boys who could both have been diagnosed with ADHD as children. They were very physical. Luckily, I lived in the country during a time when parents sent their kids out the door to simply play. I also spent a lot of my spare time running them around to different athletic eventsYMCA soccer, wrestling, flag football, T-ball, basketball, you get the idea. This definitely helps.

Kids and Anger Management

I spoke with a woman over the weekend whose son is 10 years-old and she says has anger management issues. We didnt really get into his specific behaviors but it caused me to reflect on some inherent differences between males and females.

I think that from very early on, boys and girls deal with their anger differently. As a general rule, girls need to talk about it to feel better, while boys need to work it out physically.

So if you have daughters, you want to teach them verbal skills to be able to work out their frustrations but with boys, you will need to provide opportunities for them to work out their anger physicallymaybe with a punching bag, racquetball, running, or martial arts. The list of possibilities is truly endless but dont expect your boys to talk about it, at least not until theyve had the opportunity to release the anger in a safe physical manner.

Kids and Computers

This week, a mother contacted me about her child disobeying her limits with the home computer and sneaking time beyond her allowed limit.

In this situation, the mother had a need to protect and nurture her child. She wants to be able to loosely supervise her daughters time on the computer to possibly prevent her from falling prey to adults who victimize children by finding their victims on the Internet. She also wants to support her childs need for physical activity so she restricts her computer usage and encourage outside physical activities instead. Is this mother wrong? Absolutely not.

Her daughter, on the other hand, has a desire to be on the computer. All her friends are on there and want to know why she isnt. They dont have limits while this girl does. This girl is quite accomplished on the computer and can build website pages for her friends. She also has a high need for freedom and doesnt like being restricted and the computer is plain fun to her. She gets her love & belonging, power, freedom and fun needs met with the computer. Is she wrong? Absolutely not.

How does it get resolved? I think the way to resolve this issue is for the mother and daughter to sit down and talk about what each other needs and wants in the situation. If the child can convince her mother that she has the skills and knowledge necessary to protect herself from predators and she agrees to engage in other healthy activities each day, then her mother could relax her restriction on the amount of time she has on the computer.

In this case, and many others like it, the daughter wouldnt be able to meet her freedom need with the computer if there wasnt a rule to break. Sometimes we create the very behavior we are trying to stop with the rules we make. When a person has a high need for freedom, they will inevitably break the rules, particularly the ones they dont like or that dont make sense.

Parenting is one of the hardest jobs youll ever do and the stakes are incredibly high. We all do the best we can and hope for good results. Fortunately, when we have good intentions are kids generally survive in even thrive.

Kim Olver has a graduate degree in counseling and works with parents and children helping them with their communication skills ultimately leading to an improvement in their relationships. Sign up for her free teleclass Empowerment Parenting at http://www.therelationshipcenter.biz/EmpowerParenting.htm.