William Black | Lenders Put the Lies in Liar’s Loans and Bear the Principal Moral Culpability

Lenders Put the Lies in Liar’s Loans and Bear the Principal Moral Culpability

By William K. Black

A reader has asked several important questions about liar’s loans that are critical to understanding the causes of the ongoing U.S. crisis. By 2006, half of all loans called “subprime” were also liar’s loans. Roughly one-third of all home loans made in 2006 were liar’s loans. The crisis was originally called a “subprime” crisis, but it was always a liar’s loan crisis. The reader is correct to inquire about causation and moral culpability.

“Dr. Black, are liar’s loans the same as stated income loans? In either case, how do we know whether buyers or loaners put the income for the loan? If most of these reported incomes were entered by borrowers, I would think most of the blame falls on them.”

Yes, “liar’s” loans are what the industry called “stated income” and “alt-a” loans when they were talking among themselves. Income was the primary category that was “stated” – i.e., listed without any verification as to accuracy – in a liar’s loans. Some liar’s loans, however, also “stated” employment, assets, and liabilities. “Stated income” is a euphemism for a liar’s loans, but it is at least honest about its insanity. Readers get it right immediately – they understand that no honest mortgage lender would make loans on this basis. (I expand on this point below.)

“Alt-a” is a bright shining lie. “Alt” is short for “alternative,” where the lie is that the loans are “underwritten” through an “alternative” methodology. True, if not underwriting can be considered an “alternative” to underwriting. Relying on a credit score is not underwriting, particularly in the home lending context. The borrower’s credit score does not tell the lender whether the borrower has the capacity to repay a $600,000 home loan. “A” is an even more blatant lie, it claims that the loan is “A” quality, i.e., “prime.”

Two bright shining lies were used to support the ludicrous claim that liar’s loans were really high credit quality. One, “alt-a” loans were made to entrepreneurs who could not document their income. Nonsense, there is a standard IRS form (4506t) that such a borrower can sign that allows the lender to check the income that the borrower reported to the IRS. (Borrowers have strong incentives not to inflate the income they report to the IRS.) Two, “alt-a” apologists claimed that borrowers really had the income they “stated” but were unwilling to document that income because they were hiding their income from their former spouse and children and/or the IRS. Anyone who has done honest lending will recall that one of the “C’s” an honest lender would insist upon is “character.” A borrower who is fraudulently hiding income from his children and the government is an exceptionally bad credit risk even if his income is real. There was never any evidence that “alt-a” borrowers really had the incomes stated on the loan applications. Because the lenders carefully did not seek to verify the stated income they could not have known that the wealthy deadbeat dads of the U.S. really had hundreds of billions of dollars hidden from their children. As I show below, liar’s loans were so massive that wealthy deadbeat dads and tax evaders could not have been more than a tiny percentage of the recipients of liar’s loans.

The fraud “recipe” for lenders

The reason that accounting control frauds characteristically engage in lending behavior that no honest lender would exhibit was that these perverse practices maximized reported short-term income and the executives’ compensation. There is a four-ingredient fraud “recipe” for lenders.

  1. Extreme growth through making
  2. Exceptionally bad loans at a premium yield (very high interest rate) while
  3. Employing extreme leverage (the lender has vastly more debt than equity), and
  4. Providing grossly inadequate allowances for future losses inherent in making bad loans

Check out the rest here…

~

4closureFraud.org

Comments
18 Responses to “William Black | Lenders Put the Lies in Liar’s Loans and Bear the Principal Moral Culpability”
  1. antonio alejandro says:

    The banksters have the populace divided. Herein lies the problem. They appear to know the thresh hold which they can scam the population without causing an all out revolt. I believe we need for a moment to forget our politicians. This includes the four clowns: Clinton, Bush, Romney and Obama. They are, for the most part, working for the banks. We also need to forgo getting help from the media as they are clearly controlled by the finance industry. What we need here and now is to take over the courts thru precedence. We need case law in the form of a well executed legal offense. this should go like this:

    The case for an all out voidable contract (voidable promissory note)

    1) Commercial Banks for the most part, are not inhibited by monetary expansion by reserve requirements. Basically the only control that the Federal Reserve central bank has is in the introduction of the money via the M0 money supply. That means that while the supreme court have agreed that congress could utilize an agent, such as the federal reserve central bank, it cannot, however, allow absolute control over the expansion and contraction of the money supply from decisions made in private conference rooms. The reason for this is more than mere constitutional requirements that congress “coin money and determine the value thereof”.
    The reason is mathematical. If banks, utilizing fractional reserve lending can expand the money supply via liars loan, easy credit, then you create the so-called “irrational exuberance”. This misnomer, irrational exuberance, is similar to taking a box full of twenty dollars bills and thrown it out the window on a busy workday in some downtown area. Similarly, the logic behind taking out credit on a stable economy, is to improve our lives, obviously. Additionally historically easy credit and the “irrational exuberance”, is a phenomena which has a long long history. No news here how the population responds to easy credit. So why would the banks do it, being informed of how history shows a long long list of samples of this phenomena? The answer is simple. The banks are trading real assets for paper, because in truth the money they create is just mere paper, paper by the actual bank and paper by the central bank. The promissory note lacks real consideration. The trade off is real wealth, real labor for some pieces of paper back by a government legal tender decree, and laws that only commercial banks are allowed to

    2) The reason is mathematical. If banks, utilizing fractional reserve lending can expand the money supply via liars loan, easy credit, then you create the so-called “irrational exuberance”. This misnomer, irrational exuberance, is similar to taking a box full of twenty dollars bills and thrown it out the window on a busy workday in some downtown area. What you will see is now called “irrational exuberance”. Similarly, in the mind of the borrower, i.e. the logic of the credit is to invest and improve his/her life. They think that the economy is going to either continue booming or positively stabilize. Additionally historically easy credit and the “irrational exuberance”, is a phenomena which has a long long history ending very bad for the borrower. No news here how the population responds to easy credit. So why would the banks do it, being informed of how history shows a long long list of samples of this phenomena? The answer is simple. The banks are trading real assets for paper, because in truth the money they create is just mere paper, (or mere entries in a book keeping ledger), paper by the private bank and paper by the central bank. Dont make the mistake of thinking that we were once on the gold standard. The gold standard simply means that bank loan paper money receipts (stipulating that the borrower paid back in precious metal) which were suppose to be back by gold. What the bank did was to give loan multiple receipts for the same amount of gold. The banksters had one pound of actual gold but 30 or 40 or 50 pounds of receipt for that one pound of gold circulating in the economy.. It is said that through experience the figure out that only 10% of the gold actually saw any depositor activity.

    3) The statistic showing the economic lost of the working class is approximately 40 trillion dollars. Some of that is due to the lost of equity of homeowners, but some of it is people that have lost their down payment, the money they paid when they took possession of their new home and they were fore closed on, Also bankruptcy, and lost of employment. Shrinking monetary units leads to an economic downturn which proves a bonanza for those cash heavy investors. This also has a long history: investor who pulled out of the market place just before crash and re-entered to buy controlling interest when the market was down.

    Moreover you have a mathematical fraud, coupled with motivation. whey can there be a lawsuit?
    where are the lawyers?
    incidently my email address is Joolyo@gmail.com for anyone interested in a class action lawsuit.

  2. Rob Harrington says:

    WAMU changed my full doc loan into THEIR LIAR’S loan. Have proof through discovery. Why are we still litigating 4 years later???

    • Fury says:

      well, that is the thing that is so disturbing. the fraud is so obvious
      and virtually nothing is being done to stop it.
      fraud has been committed not only upon the homeowners but upon the Court.

      it is a total mindscrew.
      everything we were taught to believe and respect has been turned upside-down.

  3. qny81 says:

    The banks also black listed conservative appraisers because they did not appraise high enough. That is another field that has been destroyed by the banks.

    • Rita Cheche says:

      What’s worse, they continue with even more control over the appraisers, having the appraisers “Under Appraise” now. First, the banks had appraisers “Over Appraise” our properies, so they could steal the “fake equity” they pretended we had in our homes. They stole our equity, and when the government decided to do something about it, (they call bailout, I call extorting taxpayers, forced to pay criminals to allow us to live in our earned homes!!!) Now, since the government did not enforce the stipulations in the bailout, again, we are f—-d! The appraisers are forced to write what the banks tell them to…which means, even though the government pretends they will give “new loans” regardless of credit, missed payments etc. ITS BULLSHIT!!! You CAN NOT QUALIFY for a HIGH ENOUGH LOAN BECA– USE THE PROPERTY IS SO UNDER APPRAISED. My property taxes have dropped less than 15%. How can my property drop 48% in the same time frame? IT’S BULLSHIT! I NEVER RECEIVED ANY OF THE EQUITY THAT WAS SUPPOSED TO PAY OFF MY FINANCIAL OBLIGATIONS, AND I DID NOT RECEIVE ANY CASH!!!

  4. qny81 says:

    As a mortgage broker, the public does not seem to understand that there were many aspects to the lending industry. EVERYONE has to sign the application at closing or the closing does not happen. If you did not read it, that is your fault. Ignorance is no defense in a court of law and there are plenty of people in prison because they did not know they broke a law. I agree that the lenders need to pay because they committed fraud by not really lending money, illegally assigning mortgages. They illegally lent their credit under the manual Modern Money Mechanics by the Federal Reserve. If you were purchasing a property with this loan, then a legitimate question would be “is that your signature on the contract that was too expensive for you under your normal income?” or is that fake too? People, take responsibility for your actions.
    Now, nobody has looked at the realtors’ position in all of this mess. They have gotten off without blame. The realtor is the first person someone reaches out to purchase a property. What people don’t know is that the REALTORS STEERED EXCELLENT BUYERS TO STATED INCOME PROGRAMS BECA– USE THEY COULD CLOSE IN 7 DAYS!!!!! FHA insured and conventional loans normally close in 30-45 days. This was not fast enough for the realtors. They would give the loan to a mortgage broker and then take it from them and give it to another one if the first one did not close fast enough! Why should a loan to purchase a property close in less than 30 days? It is not a five dollar loan, it is thousands of dollars. The mortgage broker industry has been decimated and we were the pawns to destroy everyone else. The mortgage broker was told by every lender to provide buyers with this type of credit score and the lenders created the programs for these buyers. The lenders funded these loans knowingly. They caused the artificial increases in home prices because instead of having 1 buyer per home, there were 10, which causes prices to rise. Now there are few mortgage brokers to compete with the banks. You will now see higher costs to close loans because they have destroyed their competition.
    The title companies were very aggressive at this time. They may or may not have allotted sufficient time at closing to read paperwork because there was a lot of it. In my experience, people have not wanted to read their paperwork. In the boom time, when I took an application, I would give my clients the disclosures to read at their leisure. None of them would, they would just sign without reading and I would make them take the disclosures home so that they could review it and answer any question they had. I am one of the few brokers that told people not to buy at the boom because I could see the disconnect in home prices to the median income of the public. It was unsustainable.
    Stated income loans were originally for the self-employed borrower. Most of them would not disclose their true income but you could tell by their assets that their income was much higher. The problem began when the subprime lenders started allowing wage earners to state their income. The buyers may not have known that their initial teaser rate would increase, but normal math would tell you that you were buying too much house. If you make $50k, you cannot buy a $250k house and this is something you knew. If you were betting on the market, it was a mistake, but don’t lie and say that someone else forced you to buy a house you knew you could not afford. There are mortgage brokers going to prison for 30 years and if they caused harm, they should. But don’t make false charges because if you don’t get caught in this round, you will be caught in the future and that will be three times worse what is happening now. The banks could rot in hell for all I care. End the Fed – Dr. Ron Paul, 2012.

    • Bobbi Swann says:

      @ qny81 – You did a great job detailing the role of mortgage brokers in this mess. I am one myself but as of now I am fed up with the Dodd-Frank Act and it’s bullshit. What I have seen is NOT pro consumer and to protect the rights of consumers – it is a back door (paid) act to assert the Banks to an even higher position, weeding out the mortgage brokerage business and promoting the retail end of bankers. Their goal: to eliminate the competition against the banks where the average consumer will not have ANY choice at all. It is the BANKS or nothing! Everything went sky high – appraisals with the AMC’s, which are owned and run by the lenders); surveys, lender underwriting fees and now regulating the amount of income on brokers. I am 35+ years in the business and when the boom came with those NINA (No Income No Asset), SISA (Stated Income Stated Asset) and the ALT A products I knew we were in big trouble. I refused to do those and as you said the Realtors just packed their borrowers up and sent them to the next one. I lost a lot of Realtor business (i.e. income) but funny most of those Realtors aren’t even in the business now. The ones that are still around are the ones with ethics but they are suffering as well along with the remaining mortgage brokers who have survived the ‘fallout’.

      Another program that you did not mention was the one where there was no income at all on the 1003 (application) – it was left blank! And I cannot begin to tell you how many of my past customers called me asking about “cashing out” using these programs on a refinance. Smart, educated buyers who thought the boom was a sure bet. Despite all my means to promote a Fannie/Freddie or FHA refi some of them actually bought the bridge! Dare I say that maybe some of them are on this website facing the same foreclosure problems as most of us. I even had one client that I saw in a pizza parlor who saw me and (reading his lips) said to his companion, “that’s the mortgage broker who swindled me out of my equity” when in reality, he was one of the borrowers that I REF– USED to refinance to those programs. Obviously he got burned but forgot who was the one who burned him and it was not me! You know how borrowers have ‘selective’ memory.

      I wish you luck in the business especially if you are in the wholesale channel. If you are retail then you must be working for the banks, and in which case, your job is as much on slippery ground as the rest. I’m trying to secure a future in the legal field using my knowledge to help those who have suffered at the hands of Wall Street.

    • Rita Cheche says:

      SHUT THE HELL UP!!! IF YOU DID YOUR JOB, LIKE LOOK AT A BANK STATEMENT, OR A PAY STUB, REGARDLESS IF IT WAS YA’LLS’ NO DOC. LOAN, YOU STILL HAVE A FIDUCIARY DUTY TO YOUR OATH TO MAKE SURE YOU PROTECTED US… YOU CAN BLAME US, THE REAL WORKERS OF THE UNITED STATES. THE PEOPLE THAT PUT IN A 15 HR. DAY, BECA– USE YOU CAN’T LIVE ON AN 8 HR. DAY, REGARDLESS HOW MANY, LIVING IN THE HOME, HAVE TO WORK TO PAY FOR A ROOF OVER OUR HEADS AND OUTRAGOUS POWER & LIGHT BILLS!!! I’m from an unbroken home. My father gave 25 yrs. of our lives to the military and another 18 yrs. to civil service, working on the boat biulding docks after giving the best years of all of us, to the government! I can’t believe as many real fighters as there are in the U.S. that we are letting THE FEW RULE OVER THE MANY… WE SHOULD NOT BE AFRAID OF THE GOVERNMENT, THEY WORK FOR US!!! AND IT SEEMS THEY NEED A REMINDER OF WHO THE HELL RUNS OUR COUNTRY!!! WHEN WE JOIN TOGETHER, WE RULE THE WORLD…

    • Fury says:

      you lost any credibility when you started your post “as a mortgage broker…”

      • Fury says:

        that was meant for
        qny81

        what don’t you get?

        do you not understand that at the closing, when people signed, they were signing
        to terms that were later changed and photoshopped?

        they were signing docs that were not what was presented in the TILA?

        shame on you. there is no defense.
        don’t attack the victims of fraud.

      • Fury says:

        qny81,

        did you get a bonus or kickback for steering people who had perfect credit scores into
        “subprime” loans?

        yeah, thought so.

        people who were self-emplyed were kettled into subprime loans.
        it was all a racket.
        the securitization ponzi scheme — the slicing and dicing of our loans that were sold many times.

        our notes and mortgages don’t exist. they were destroyed in order to obliterate a paper trail of fraud committed by the banks and wall street to enrich themselves.

        the minute our loans were signed, our signatures were sold on the open market. we did NOT agree to this.

        we want the ill-gotten gains.

    • lvent says:

      Qny81….don’ be spreading the Fabian Socialist agenda crap around here….You sound like the rest of the FORECLOSUREGATE GANG…..YOU SIGNED A MORTGAGE!!! NO I DID NOT SIGN A CONTRACT FOR A PRETENDER LENDER TO COMMIT HUNDREDS OF TRILLION OF DOLLARS OF FRAUD IN MY NAME….AND EITHER DID ANYBODY ELSE….NOR DID I GIVE THEM PERMISSION TO ALTER THE CLOSING DOCUMENTS AFTER THE CLOSING…OR FORGE MY INITIALS on THE MORTGAGE NEXT TO THE TYPOS……..AS FOR RON PAUL…..HE IS A MEMBER OF THE JOHN BIRCH SOCIETY, FOUNDED BY THE ROCKEFELLERS AND THE FREEMASONS…..HE WAS PUT HERE TO REIGN IN THE NEW WORLD ORDER DISSENTERS…..WE THE PEOPLE ARENOT DRINKING THE COMMIE KOOL-AID ANYMORE…….
      http://www.thebirdman.org/Index/NetLoss/NetLoss-Oliver.html

  5. Beth A. says:

    Well, as I have shared previously with my friends here on this site…I found some very interesting data after somebody no doubt erred and put “too many” copies of documents in the bank’s QWR response. The copies I received showed some pretty wild fraudulent documents including:

    * An income verification report filled out by the bank and signed in all Xs. So, apparently some employee at the bank didn’t want to sign off on his or her name to this piece of fiction.

    * In the income verification form states that I was making a wild sum of around $30,000/month. Sadly, as a business owner, I’ve hit some good monthly income records in the past, but nothing near that amount. I certainly would never say that I had. I’m a compliance “geek” for a living – I am not as stupid as I may look.

    * The income verification further stated that I had other properties and received rental income from those properties. I have never rented out a property in my life…never owned rental property. Imagine that.

    In the paperwork package supposedly compiled with the loan closing – the typed form version that shows the income and rental propery data bears a signature that is clearly not mine. Not a bad copy – but it isn’t mine. I would never sign off on this data.

    Also, I have to add that in my QWR when I asked if the mortgage was ever assigned to another entity, say in the securitization process – their response was, “For assignment information, check with your county registrar.” Hmmm, guess this GIANT bank can’t figure it out…but that response was laughable.

    I was born at night…but it wasn’t LAST night. For the record, there are no assignments filed with the county’s registrar….but I know it was supposedly securitized and HSBC was the trustee (and we know about their huge problems, right?). Performed my own audit.

    What a mess!! There is no way to unwind this – it’s time to write off these loans. No person can be held to a contract that is based upon fraud.

    Then, each and every officer of these companies charged with the day-to-day operations of these firms should be prosecuted.

    • lies is all they tell says:

      we are all seeing the same thing yet president obama is acting like bush when hurricane katrina was getting ready to hit new orleans, absolutley nothing. this is sad for years we were told that morthage application fraud was blamed on us because we alloud it. we filled out the application an signed it. i never filled out the application the mortgage broker did this like i said my 700 buck is nothing compared to 30k but we have to remember we all aplly fo rdiffernt homes. they could falsify application for a 500k home as wells as a 260k home. but what occured at title level, appraiser level. it there is just to much stressed out

    • Readdocs says:

      It could be you have an anonymous friend who sent you those
      additional copies. 😉

  6. Lies all of it says:

    what he forgot was there alot of out of town buying. People were relocating. The mortage applications were filled out by the mortgage brokers. I have emails stating i sent my paycheck stubs yet my income was way over stated by 700bucks nith compared to other people yes my credit score was high but my husband was un employed. I was approved for a mortgage i could never afford. Food, clothes and everything went sky high leaving me no room. It was never expressed to me i had a stated income loan it was just done. If under writing had done their job and not relied on a credit score to buy our homes we would not be in this position. They all need to go jail for what they have done hurting families like this.

    • Bobbi Swann says:

      @ Lies of it all – you are right about those car-salesman mortgage brokers. While we did need some sort of regulation on who could originate mortgages the end result of this crisis has all but shut the doors on the ones that have prevailed and were performing their jobs according to guidelines. But please don’t criticize the entire basket for a few bad apples. Most of those brokers are gone now who couldn’t make the cut with the new regulations. It makes it very difficult to become a mortgage broker now and it is expensive to do so. In the long run, however, the regulations imposed have only added to the costs to the consumers, like you, and at the same time regulating the income of the brokers. Free enterprise has gone out the window. If you were self-employed how would you like the government telling you how much money you can make with your business? If you’re selling a product how would you like the government telling you the price of that product you are selling? Does not the consumer determine where and what price they want to pay for an item? That goes for cars, clothes, and houses. If you didn’t like the price on something you went somewhere else or at least shopped the price, correct? Well, for those bad apples we all pay the price now. I am a struggling mortgage broker, still around, and yet obviously did not make the huge profits during the boom or else I would not be here. I managed to prevail but those who preyed on consumers like yourself are sittin’ pretty. I hope that in due course they will get their due.

  7. Maggie May says:

    Well theres enough true things to laff at the lies eh?

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