William Black – Lenders Put the Lies in Liar’s Loans, Part 2

Lenders Put the Lies in Liar’s Loans, Part 2

This is the second installment in a two-part response to subprime lending architect Andrew Kahr’s American Banker column entitled “Spread the Word: Lying to Banks is Illegal.” Read Part 1 here.

Why would the fraudulent nonprime lenders and brokers rely on financially unsophisticated borrowers to not only lie — but lie astutely? Why would working class borrowers know the amount of income they would have to falsely claim so that the loan would appear to meet the magic debt-to-income ratios that would get the loan approved and allow it to be sold at a premium? Why would the borrowers know that they could rely on the brokers and lenders to not verify income and to wink at claims that hairdressers made $100,000 annually? It strains all credulity to think that millions of working class Americans managed to defraud financially sophisticated lenders.

It is even more absurd to believe that honest lenders, finding themselves the victims of an epidemic of mortgage fraud by these clever working class Americans, responded by (1) massively expanding the number of liar’s loans they made, (2) spreading them to subprime borrowers with severe credit defects, (3) made defaults on the loans, and the loss upon default, far greater by layering risk and inflating appraisals, and (4) slashed their allowances for losses (ALLL) to trivial levels to ensure that the inevitable fraud losses would cause catastrophic losses.

Investigations, to date, have confirmed this logic. The fraudulent nonprime lenders and brokers typically initiated, directed, and sometimes even directly created the lies on the liar’s loans. The testimony of Thomas J. Miller (Miller, 2007), Attorney General of Iowa, at a 2007 Federal Reserve Board hearing began by describing the Gresham’s dynamic that the interaction of accounting control fraud and modern executive compensation produces:


Over the last several years, the subprime market has created a race to the bottom in which unethical actors have been handsomely rewarded for their misdeeds and ethical actors have lost market share…. The market incentives rewarded irresponsible lending and made it more difficult for responsible lenders to compete. Strong regulations will create an even playing field in which ethical actors are no longer punished. (p. 3)
Despite the well documented performance struggles of 2006 vintage loans, originators continued to use products with the same characteristics in 2007. (note 2)

[Many originators invent] non-existent occupations or income sources, or simply inflat[e] income totals to support loan applications. A review of 100 stated income loans by one lender found that a shocking 90% of the applications overstated income by 5% or more and almost 60% overstated income by more than 50%. Importantly, our investigations have found that most stated income fraud occurs at the suggestion and direction of the loan originator, not the consumer. (p. 10)

A small sample review of nonprime loan files by Fitch, the smallest of the three large rating agencies, adds support for the view that fraud became endemic in nonprime mortgage lending. Fitch’s analysts conducted an independent analysis of these files with the benefit of the full origination and servicing files.


The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.[F]raud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding. Fitch believes that this targeted sampling of files was sufficient to determine that inadequate underwriting controls and, therefore, fraud is a factor in the defaults and losses on recent vintage pools. (Pendley, Costello, & Kelsch, 2007, p. 4)

Fitch did not investigate these loans. It simply reviewed the loan files and servicing files to identify frauds obvious on the face of the documents. They were able to identify likely frauds “in almost every file.” Any honest, mildly competent review of the loan files by the loan brokers and lenders would have prevented these loans from being closed. The logical conclusion is that the lenders and brokers encouraged fraudulent loans.

Michael W. Hudson’s new book, The Monster, reports on the results of numerous interviews with nonprime lenders. (He focused on Ameriquest.) Hudson reports that fraudulent nonprime lender personnel were compensated through perverse bonus programs that successfully encouraged them to do whatever it took to get liar’s loans approved. That included forging the borrower’s signature and changing information provided by the borrower to inflate income. He notes that:

One former loan officer and branch manager testified that inflating property appraisals served the “dual purpose of both making sure the loan was approved by the home office as well as making the loan more attractive to sell to investors” (p. 156).

Hudson also explains the tactics that loan officers use to intimidate borrowers to ensure that they did not read the false disclosures that the officers had fabricated (p. 157).

Recent studies by criminologists show the leading role that lenders and loan brokers took in creating fraudulent loan applications. Tomson H. Nguyen and Henry N. Pontell recently published an article reporting the results of their interviews with lender personnel and loan brokers. (I published the responsive policy essay on their article.)

The lender personnel overwhelmingly justified their actions by claiming that they were helping the borrower obtain the financing essential to permit them to become homeowners. They took the lead in creating the fraudulent values in the application because they knew the desired values. They perceived the lenders as not caring about the accuracy of the loan applications. There’s no real fraud from their perspective because everyone – the lender, the broker, and the borrower – knows that the numbers are fictions.

Mr. Kahr’s suggested remedy – to an epidemic of mortgage fraud numbering in the millions – is:

What is the best way to make defaulters aware of their potential criminal liability if they lie? Send all of them a brochure from a reputable, independent organization laying out the law and giving a few examples.

Been there, done that, the poster’s already on the bank’s wall. The FBI entered into what it terms a “partnership” with the Mortgage Bankers Association (MBA) to respond to the epidemic of mortgage fraud.

The MBA web page lists the accomplishment of this partnership: a poster warning borrowers that the FBI investigates mortgage fraud by borrowers.

The poster, of course, does not warn borrowers about mortgage fraud by…

Catch the rest here…



I sure could use some…

5 Responses to “William Black – Lenders Put the Lies in Liar’s Loans, Part 2”
  1. Pelucheven says:

    lawyers out there make sure you have a real estate agent, a Mortgage Broker and a Title agent in your expert witness list. It is going to be difficult to get the ones who will tell it like it was, but there some out there

  2. Pelucheven says:

    many people were told the loans they were getting were no income verification loans and at the table they were told to look at the info and to sign and initial the loan application, this was done without proper disclosure. I would ask for everyone in the country who has a mortgage to look at their loan docs, you will be amazed at the info you find there..
    I have reviewed files from Permanent residents that for no reason at all the loan officer, the processor put them on the loan application as US Citizens, jut to mention one issue that had nothing to do with money but everything having to do with manipulation of the information. Permanent residents are asked to provide copies of their Alien resident Card, the loan officer most of the times did not get that info because they were lazy and in a hurry to close more deals, in most instances most Mortgage Brokerage firms and lenders contracted people who acted a case runners, they sold the loan filled out the loan application at first and then turn it over to a processor, the processor would ask for documentation and sometimes in conjunction with the LO they would create the documentation. In some cases the LO was a high production person and they would bring their own processors, with whom they were 100% comfortable to to the dirty deed.

    The issue about the Permanent Resident is that they knew that most underwriting allowed permanent residents and US Citizens into the same loan programs, but the changed the status because by doing that they did not have to get a simple xerox copy, why bother the borrower if we just change your status regardless of the consequences this may bring to the borrowers.

    It is Immigration fraud with jail terms and deportation to impersonate a US Citizens, or to assume US Citizenship in a Federal Document. Remember the the loan applications are HUD generated and approved documents, hence Federal .

    This act of laziness and fraud by the banksters does in fact disqualify any one who is a permanent resident form obtaining their citizenship. Why would any one who can rightfully buy a home or refinance a home legally, without any fraud of this kind, change their status on the loan application? The answer is that they did not do that, the lenders did it.

    Why would some one fake their income if they were going to be checked by the bank, well the borrowers did not do that. The loan officers, the account reps and the underwriters knew the underwriting standards and they knew that although all borrowers were required to sign a 4506 Form on the table and at the time of loan application, the banksters were not going to get a copy of their tax returns. The 62,000,000 borrowers of the last ten years did not know that, that was inside info. So If I faked your income and made sure some one some where verified that you worked somewhere, it was sufficient to satisfy their underwriting criteria.

    You could seen the shifts in the Mortgage Broker offices sending cases here and there when they knew that the new lender in town did not verify income or deposits. They had a field day, pulling the loans from lender A and sending them to lender B.

    Yes we wanted to refi, yes we wanted the homes, but if we had been told for the most part the truth we would have chosen this path.


    I will share more underwriting tricks soon!!!

  3. Pelucheven says:

    I believe Mr. Kahr has forgotten about the felons that had loan officer licenses in Florida and that most states did not require even these people to take any courses or classes. If you were quick on your feet you were in. There was a couple of lenders, Pinnacle Financial and Cap First East West Mortgage in Virginia that placed ads trying to attract used car salesmen to their offices for loan officers posts.

    These firms did not even care if the person was lawfully permitted to work in the USA or not

    Millions of fraudulent applications, let us see, millions of people got together and decided to cheat at the same time, or thousands of loan officers, lenders account representatives, real estate agents, title agents, underwriters, appraisers, etc, all of whom would make money if we signed on the doted line did get together, had dinners, played golf, went in cruise ships, went to Vegas for corporate parties to discuss how to do business, how to fill the loan applications that were indeed manipulated by these crooks. The consumer only saw the loan application twice in most cases. First at the time of the original loan application and at the settlement table.

    What happened between those times in the hands of the loan officer, the processor, the account rep for the BANKSTERS, and the underwriter is of some debate. But they all knew you could not afford the home and they all knew what RATIOS were needed, they knew what was the underwriting criteria, they knew what rebates and yields they would get by giving you the worst loan possible. They knew all that. They had the knowledge, the access and the technology. The banksters, the lenders which had the enforcement platform chose to ignore it because if you signed they made more money.

    It was all about money, if you happen to lose the home at some point, they did not care.

    Dear Mr. Black you are 100000000% right

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