No-Proof Mortgages Contributed to Foreclosure Crisis

Posted on November 30th, 2007 by saman

Although lenders deny it, there is plenty of evidence that in many cases, they inflated the incomes of applicants so that they could qualify for no-proof or “No-Doc” sub prime mortgages. And there is no doubt whatsoever that this was one factor that contributed heavily to our current mortgage foreclosure crisis and housing slump. For example, a recent poll of 61,000 mortgages in the Sacramento, California area performed by the Sacramento Bee newspaper, indicated that there were claims in mortgage application income statements that were as much as 25% higher than the actual income of the applicants.

No-Proof loans, also called No-Document loans, didn’t require actual proof of the applicant’s income in the form of federal income tax returns or payroll records. Most of these sub prime, adjustable rate mortgages were made in 2005 and 2006 and began to have interest rate ‘resets’ in early 2007 after the initial ‘teaser’ rates expired. This, in turn, hiked monthly house payments by between 25% and 100% and led to the mass foreclosures now happening in America.

Large lenders, like Countrywide Financial Corporation increased making these stated income or no-documentation loans heavily toward the end of the housing boom under pressure from investors who were funding the company’s loans.

Consumer advocates say that lenders should shoulder the blame for most stated-income loans because they ‘coerced’ borrowers into exaggerating their incomes or even changed them without letting them know about it. Lenders, of course, say the borrowers inflated their incomes themselves.

In the late 1980’s, no-documentation loans resulted in major losses for a few very-aggressive lenders. Apparently no lessons were learned in that earlier fiasco. In 2006, as the housing boom quickly cooled, incomes were even more exaggerated in an attempt to expand the buyer pool. Now, in response to the latest happenings, some members of Congress are talking about outlawing the practice. Last spring, Senator Charles Schumer D-NY, introduced a bill that would force lenders to examine actual tax returns, payroll records and other records to be certain of a buyer’s income prior to approving him for a loan.

Many homeowners who lost their homes to foreclosure this year have told bankruptcy courts that they were completely ignorant of the fact that their lenders inflated their stated incomes on the loan applications. In some areas, incomes were inflated by nearly 100% in order to qualify mortgage applicants for their loans. In many cases, people who had refinanced their sub prime ARMs into more affordable loans also had their incomes badly inflated.

The fallout from all this has substantially lowered home value nationwide. Just today, the government announced statistics that showed the drop in house prices dropped more in the past two months than it had in 13 years. Moreover, car dealers, builders and others are feeling the pain as it spreads through the US economy and portends a coming recession. The news each day is anything but upbeat.