Liar Loans

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Over the two-plus years I've been publicly rambling about the San Diego housing market, I've spilled very little ink on the topic of stated-income mortgages -- the so-called "liar loans" that require no proof of borrower income.

It's not that I find this particular spawn of the housing bubble uninteresting. Far from it. But the fact is that I try to concentrate my efforts in the realm of the measurable and verifiable, whereas most information about stated-income loan abuse is of the more anecdotal variety. There are plenty of anecdotes, to be sure -- I think we've probably all heard a version of the story wherein the landscaper or Starbucks barista is mysteriously pulling down six figures. But there has really been no way to measure how serious the problem really is.

It seems now that some more reliable information is beginning to surface. A recent Associated Press article tells us of one mortgage lender's attempt to get a handle on things:

The vulnerability of stated-income loans to fraud is illustrated in a recent report by the Mortgage Asset Research Institute to Mortgage Bankers Association: after reviewing a sample of 100 stated-income loans and the accompanying IRS forms, an undisclosed lender recently discovered that almost 60 percent of the stated incomes were inflated by more than 50 percent, while 90 percent of the stated amounts were exaggerated by 5 percent or more.

...almost 60 percent of the stated incomes were inflated by more than 50 percent...

Liar loans indeed.

The broad abuse of stated-income loans should come as no surprise: rampant fraud has characterized speculative bubbles throughout history. On the way up, people turn a blind eye to questionable practices. Everyone is getting rich, the euphoric market participants think, so what's the harm? The answer to their question becomes readily apparent after the bubble has burst.

The real estate and lending businesses are fertile ground for fraud, and I doubt very much that this bubble is different.

We'll know for sure soon enough. It's only when the tide goes out, as Warren Buffett famously quipped, that you learn who's been swimming naked. I'm sorry for using the words "Warren Buffett" and "naked" in the same sentence, but the man does have a point.

--RICH TOSCANO