The LA Times had a fascinating report today about new numbers from the FBI showing that the number of cases of “suspicious loan activity” in seven counties around Los Angeles, not including San Diego, had increased four times since 2003.
I wrote about this a bit last week when I talked with Casey Serin, the Sacramento-area blogger who’d started a website to chronicle his experiences with unwise real estate investments – a.k.a. the iamfacingforeclosure.com guy.
He’d used what are called “stated-income” loans to get into his properties – where, essentially, you just tell the bank or the mortgage broker how much you make annually and they take your word for it and give you a whole lot of money to go buy a house.
But in much less extreme cases, many first-time homebuyers who found themselves priced out of a heated market used the loans, banking on being able to take out equity from their home in a couple of years should they need bailing out.
Here’s a bit of a summary from the Times’ David Streitfeld:
When home prices in California began to throttle up in the early years of the decade, people needed bigger loans but sometimes couldn’t prove they could handle the debt. To accommodate them, lenders started to offer loans that required little or no documentation.
For example, in a so-called low-doc loan, also known as a stated-income loan, the lender doesn’t verify the borrower’s income. With a “no-doc” mortgage, the lender doesn’t check income, assets or employment.
Such loans, which carry higher interest rates than traditional loans do, were originally designed for people whose income swung widely, like the self-employed, or high-wage earners in unusual circumstances – a doctor who had just moved to a new community and hadn’t set up a practice yet, for instance.
And the same people who bring us the scary stats about exotic (interest-only and negative-amortization) mortgages – First American LoanPerformance – estimate that these no-doc and low-doc loans account for one-third of the new loans in California.