The federal Home Affordable Modification Program (HAMP) is designed modify troubled homeowners’ mortgages, ideally preventing the foreclosure of four million properties nationally over the next three years. To qualify, homeowners had to prove their current income was insufficient to support their monthly mortgage payments. Previously, if a homeowner seeking a modification was caught substantially understating their income by more than 25% to improve their chances of receiving a trial modification or obtaining better terms, their application was denied. Once denied, the homeowner was required to restart the modification process based on their actual income. However, effective December 16th of 2009, the Treasury now allows homeowners who understate their income by no more than 25% to proceed with a trial modification without rejecting the application or requiring the homeowner to restart the modification process.
The irony is obvious. The same homeowners who overstated their incomes to obtain larger mortgages in the rush up to the Millennium Boom are now able to understate their incomes by up to a quarter and receive a more advantageous modification.
Industry insiders make the point that lying borrowers who intentionally misrepresented their income are at least partially to blame for the real estate market’s current distress. Between 2004 and 2007, 4.3 million mortgages (more than a third of all mortgages issued) were given to borrowers who provided little to no documentation for their incomes. These loans were aptly named “liar loans” by the real estate and lending industry. Some fear that allowing these same nefarious individuals to lie a second time about their income sets a terrible precedent.
first tuesday take: While some borrowers intentionally overstated their incomes when taking out a liar loan, let’s not forget that it was the lenders themselves (and the incremental and extensive federal and state de-regulation after 1980) that created this opportunity for deceit.
During the boom years, lenders were concerned only with the short-term, granting loans even if they had no idea whether the loan would be repaid. The repayment of loans was of little consequence to the lenders that issued them since the mortgages were sold to Wall Street Bankers who bundled them into pools, and then fractionalized the entire bundle through the sale of mortgage-backed bonds (MBBs) in the secondary mortgage market as the loans were originated. Thus, lenders weren’t financially concerned whether borrowers’ income were sufficient to repay the loans – the investors who repurchased the MBBs on the secondary mortgage market were the fools left holding the bag in this Ponzi scheme if the borrower defaulted, not the lenders.
Lying should never be condoned, but there will always be unscrupulous individuals who rabidly pursue any advantage they can twist out of lax rules. It is in the nature of comparative advantage to do so –unless restrained. And these unscrupulous people exist on both sides of the lending and borrowing aisle. From first tuesday’s point of view, liar loans and liar modifications create a systemic moral risk in the marketing of real estate by licensees when institutions with authority tell real estate brokers and agents, and their client buyers and property owners, that it is good practice to misrepresent the facts – “fudge” as the semantics would have it. This weakens resolve to be honest, a requisite to getting and maintaining a real estate license and representing members of the public.
This lying about loan qualifications is nothing less than a continued proliferation of the very dangerous environment that allowed colluding mortgage loan brokers and collaborating sales transaction brokers and their massive influx of agents (five times above normal levels for four years) to unlawfully participate in the Millennium Boom. The Department of Real Estate (DRE) should take notice and advise its licensees by setting the ethical tone now – for the sake of protecting the public from half-truths and distortions of facts in future transactions. [For more information regarding lending practices leading up to the boom, see the April 2009 first tuesday article, Lenders vs. owners in 2000-2010: the real estate interest of each.]
Re: “No consequences for lying borrowers,” from The Washington Post