An epidemic of lying
Meet WMALT 2007-OC1. W, for short, is a pool of mortgages collected by Washington Mutual and sold to investors in May, 2007. These were not subprime mortgages. The average credit score was 705. But something has gone very wrong. At the end of April, less than a year after the pool was created, 29 percent of the borrowers were badly delinquent. Six percent already have lost their homes to foreclosure.
The story of W has been carefully tracked by a blogger named Mike Shedlock, of Mish's Global Economic Trend Analysis. Shedlock writes that W has one determining feature: 88 percent of the borrowers were allowed to state their income. That is, instead of asking the borrower to bring in a paystub, or a W-2, or any proof of income, the lender simply allowed the borrower to write down a number.
The industry has a nickname for such stated-income loans. They are called "liar's loans," because most people lie.
In a recent piece on Slate relating the history of the liar's loan, Mark Gimein recounts that an examination of 100 "liar's loans" in 2006 found that 90 borrowers had overstated their actual income. About 60 borrowers inflated the actual number by at least 50 percent.
People who made $3,000 a month were getting loans based on a supposed income of at least $4,500 a month.
Gimein calls this epidemic of lying "an astounding breakdown of social norms."
I tend to agree. It is the part of the mortgage crisis that I least understand.
The reason is that the American economy generally has little tolerance for lying. In economic terms, lying is inefficient, which means it is expensive. Lying increases costs. One hallmark difference between first-world and third-world economies is the relative absence of lying.
"The evolution of capitalism has been in the direction of more trust and transparency, and less self-serving behavior," then-Forbes columnist James Surowiecki wrote in 2002."Not coincidentally, this evolution has brought with it greater productivity and economic growth."That evolution, of course, has not taken place because capitalists are naturally good people. Instead, it's taken place because the benefits of trust--that is, of being trusting and of being trustworthy--are potentially immense and because a successful market system teaches people to recognize those benefits."
And then there's the liar's loan: In places such as San Diego, at the peak of the boom, more than half of all mortgage loans were based on a stated income. In Massachusetts, the numbers were slightly more modest. Federal Reserve data shows that 46 percent of outstanding non-prime loans were based on a stated income.
As Gimein notes, one result of income inflation is that prices got so high that many people couldn't buy a home unless they lied, too.
That point is important. A great deal of social science research shows that people are only honest so long as they believe other people are behaving honestly. Our tax collection system, for example, depends on this principle. If people become convinced that their neighbors are successfully withholding money from the government, they will start underpaying, too.
Or in this case, if people become convinced that others are lying about income to buy homes, they will start lying too.
Which returns me to my original question: How did we get to that critical mass? How did lying become so acceptable?
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You write as if borrowers came up with this idea all on their own. I was offered several stated income mortgages in 2005, despite the fact that I had already sent in my proof of income. I was told "we needn't bother" with all that paperwork. I wasn't, of course, told that the rep was getting a fat YSP to sell me the stated income loan.
And while some borrowers certainly did overstate their income, we have already uncovered large numbers of original applications never seen, much less signed, by the borrower. Brokers wrote in whatever numbers they needed to make the deal "work."
The lying has probably always existed; I doubt that this is anything new. It only came to light because the house of cards tumbled and people were caught. It is said that the only difference between a crooked politician and all the others is that the crooked politician get caught. People overstate their incomes for the same reasons that they embelish their CVs (resumes) when job hunting. Our society lives for the present without thought to the future. Why worry about an ARM that will not readjust for another 2 or 3 years........ Everyone wants what they perceive others to have and everyone wants it right away. This includes housing. This image of the ideal home is created by TV and the media.
It happened due to lack of oversight and regulation. It will happen again unless the rules change and the perpetrators are held accountable (as happened, unfortunately for only a short time, with Enron et al). The only questions should be by whom? to what extent?
Educators see the same principle in action regarding student cheating. Students cheat and plagiarize when they believe that others are cheating and reaping rewards for it. Many college students see nothing wrong with cheating to succeed and are angry when they are caught and punished for it. They often take their denials of cheating to absurd levels, such as claiming that they didn't copy from an article even when confronted with a copy of the original source.
The lying has probably always existed; I doubt that this is anything new.
Who was getting a stated-income loan in 1996? No one, except some of the self-employed and a few other narrow classes of borrowers.
I see persistent attempts to pin the blame for shortsighted, greedy, reckless practices by financial institutions on some wondrous, unexpected, amazing change in social mores. This enables lenders to exclaim, in wide-eyed surprise, "Hoocoodanode?" Same thing is happening with the urban myth of the ruthless borrower, as bank CEOs complain that underwater homeowners who could pay their mortgages are simply deciding not to--despite the lack of a shred of data to prove this is occurring on a wide scale.
It's all an effort to escape accountability. See? It wasn't our shoddy underwriting standards! Hoocoodanode they were lying?
at the end of the day, when the borrower went to sign for the loan, they saw that their income was elevated, payment higher than they could and/or SHOULD pay but their desire for the American Dream surpassed their reality. everyone is to blame. By the Way, broker sgot YSP on Full Documented Loans as well.
By the Way, broker sgot YSP on Full Documented Loans as well.
Do you know what a YSP is?
Or are we going to ignore that in the urgent rush to protect lender CEOs?
what else is new? I've noticed in the last ten years that younger college grads
in the work force tend to lie and take credit for others work. I think it points to the
education system which lets people get away with lying and cheating to get ahead
There was a break down at every level and massive flows of liquidity and greed was finally pummeled by a complete reversal in all fronts. Brokers are paid more YSP by reducing risk factors on a loan..therefore providing income documentation will always result in more back end. The relaxed standards were perpetuated by lenders/banks who could reduce YSP to a broker and in turn sell the loan for an extra couple grand...if the loan was taken stated...as opposed to full doc. But the brokers definately have blood on their hands...there is no doubt about it. The facts are that brokers need more regulation and a fiduciary duty to the clients and to the investors who buy the loans. The author of the article is correct it became normal to lye on an application after a while. It was always thought that the risk factors were included in pricing. The particular Pool (WMALT) or Washington Mutual Alt A in question appears to have come when WAMU was the only guy on the block still offering competitive pricing for stated loans....therefore they wound up with some real beauties -I'm sure. As long as we live in a market where the ISSUER pays the RATING AGENCY to grade a security, which the ISSUER intends to sell to others...this will always happen. There are no checks and balances in that system and that is the crux of the issue. Wall Street had a vision to keep churning sub prime 2 yr fixed loans at high rates forever liek a credit card. When the wind changed the stench blew right back in their face.
Hi Marcus....I hope you are not going down the "YSP is a kickback" route...are you?
And the ad at the top of this page says;
What's your net worth - 4K or 184 K - Call a Realtor today.
Cui bono - that means - who profits? As true today as ever.
I worked at a bank and not as broker and we did not have to disclose YSP got it but did not have to disclose it
Lying is becoming more prevalent in society because in general we do not hold people responsible for their actions. Everyone is a winner all the time, if a child doesn't want to do the school work lets pass him or her to the next grade level anyway. If you want a bigger tv, house, car, use credit and don't worry about it. So what if you get it repossessed you had it for a while and it isn't your fault you can't make the payments. People need to start remembering that they are accountable for their actions, they also need to learn you can't always get what you want, and for other things you need to wait for them and that means saving for things.
And finally as much as I hate governmental intrusion some serious looking into stated income loans need some type of oversight, or check to it. If the mortgage companies are not going to bother confirming that the person wanting the loan can afford it then why should we bail out the mortage company?
Brett, almost everyone who participated in this financial fiasco has blood on his hands. Lenders. Hedge funds. Brokers. Regulators. Rating agencies. Realtors. Borrowers. The list goes on and on. And all of them lied. All of them.
The point I'm making: singling out borrowers as "liars" is simply an attempt to absolve everybody else of responsibility. Hoocoodanode? In fact, even accepting stated income applications in the first place was an attempt to pass responsibility for underwriting from lenders to borrowers. See, we don't have to verify anything or correctly price risk--we get to take the borrower's word as fact. Made it easy to make a lot of money.
Sure, I'm willing to believe honesty and trust have been breaking down in American society. But when you read something in a newspaper, chances are a subprime borrower with a '93 Chevy truck isn't the one who wrote the press release.
In any contract you must take the counterparty's word as fact to a degree. If everyone had to independently verify every term in a contract commerce would grind to a halt. Yes, the lenders failed to do proper due diligence in this instance, but the greater blame lies with those who actively lied. We should not make excuses for them and above all we should not bail them out now that their scheme to borrow beyond their means has backfired. I still can't believe such bailouts are being discussed; it is an insult to every responsible citizen.
Those who lied are the guilty ones. They knew exactly what they were doing. they get absolutely no sympathy from me.
Unfortunately, society accepts fudging the numbers almost everywhere from anybody; see Kevin Phillips current Harper's article, "Numbers Racket: Why the economy is worse than we know"
http://www.mindfully.org/Reform/2008/Pollyanna-Creep-Economy1may08.htm
In any contract you must take the counterparty's word as fact to a degree. If everyone had to independently verify every term in a contract commerce would grind to a halt.
Bull.
I am absolutely amazed at the absurdities people will mouth to prove that borrowers are to blame for everything, and CEOs are angels. Amazed.
Nobody with a brain buys a stock from a company that doesn't provide a 10K, hires an employee without references, purchases an appliance without checking Consumer Reports, or invests in a mortgage-backed security without a rating from a (supposedly) independent agency.
It is your business to know whom you're doing business with.
And you're saying that verifying income would make the mortgage business "grind to a halt?" Funny, it did just fine for the entire twentieth century, before stated income loans became popular.
Some things are easy to verify and some aren't. Stated income loans were created for a reason-- not everyone gets a paycheck every week. There are self employed people, people who work on commission or get most of their comp in the form of bonuses.
Sure as a loan officer you could spend hrs and hrs trying to investigate each case, but many times in these instances I suspect you would basically have to go by the person's word or not do the deal at all.
Obviously loan officers were a bit too trusting and extended these loans to many people who didn't deserve them, but the easiest way that this could have been avoided was if borrowers simply told the truth. Claiming otherwise is like saying I crash my car because the bartender poured me too many drinks. It's true, but it's still more your fault than his
As much abuse as there was from borrowers, brokers and lender the real problem was generated by Wall Street. Wall Street investors determined the pricing they needed to tolerate the risk associated with these types of loans. They certainly loved seeing loan rates of 7-8% when the market rate was below 6, but when the additional risk associated with those types of loans came back around they wanted no part of it. How many of those 27% who are defaulting are doing so because of crashing home prices or the fact that the loan they got two years ago isn't available anymore?
Problems with stated incomes? Require W-2s or tax returns. I've had to provide them in the past for a mortgage app.
Sure there are people whose income has jumped substantially from the previous year, but they're likely a higher risk for a loan. Lenders beware.
I'd love to see a comparison of stated incomes and their corresponding tax returns. IRS would love to see it too :-)
I know this comment is late to the party, but I think you guys are missing the point of what liar's loans were named for. It's the IRS they are lying to when they were named. My guess that if your paid in CASH the avg person reports about
15%-35% of the total income.
This blogger might want to review your comment before posting it.
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