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Behind the meltdown: No-proof loans fed mortgage bubble: Bloated income claims hit the vulnerable
[November 18, 2007]

Behind the meltdown: No-proof loans fed mortgage bubble: Bloated income claims hit the vulnerable


(Sacramento Bee, The (CA) (KRT) Via Thomson Dialog NewsEdge) Nov. 18--If you bought a house in the Sacramento area last year, chances are your annual income came to about $80,000. But your loan application said you earned a good deal more.



A Bee computer analysis of more than 61,000 Sacramento-area mortgages over two years reveals striking discrepancies -- gaps as high as 25 percent -- between what homebuyers earned and what was listed on their loan applications.

Behind the discrepancies was a cascade of "stated income" loans that didn't require proof of borrowers' incomes or assets. Although statistics aren't available on the volume of stated income loans, experts say these mortgages pumped a considerable amount of air into the area's housing bubble -- and helped bring about its collapse. By putting people into homes they couldn't afford, stated income loans contributed mightily to a culture of loose lending and a wave of foreclosures that's washing over the Sacramento region.


"It was a huge part of the problem," said Scott Thompson, a partner in Mortgage Resolution Services, a Carmichael firm that negotiates sales of troubled properties.

The Bee's analysis of census data shows that the region's homebuyers earned a median income of $84,000 last year, but the area's mortgage applications listed a median income of $102,000. Statistics for investment purchases and refinances weren't available, although stated income loans were used for those purposes, too.

The gap between stated and actual incomes varied from county to county and was widest in some of the region's poorest neighborhoods. The gap actually grew in 2006 as lenders, trying to breathe new life into a dying market, used stated income products more aggressively, the analysis shows.

Countrywide Financial Corp., one of the region's largest lenders, said it ramped up making stated income loans in the waning months of the boom under pressure from the investors who were funding Countrywide's loans.

"Wall Street was looking for (stated income loans) and all of us were working very hard to be competitive in the marketplace," said Mark Kemp, executive vice president for Northern California, Nevada and Hawaii. Kemp said Countrywide has stopped making such loans.

Consumer advocates blame lenders for stated income loans -- also known as "no-docs," for no documentation -- saying they talked borrowers into exaggerating their incomes or even went behind their backs to inflate the numbers. Lenders, however, say borrowers made the ridiculous claims about their salaries.

Few no-doc loans are made anymore, lenders say. But when they were made, they were often adjustable-rate "subprime" mortgages given to people with a history of credit problems. The loans cost more, and when they "reset" to higher interest rates after the two-year introductory period, the monthly payments turned monstrously high -- leaving Sacramento on the leading edge of a meltdown. Economists say housing troubles are threatening to tip the nation into recession.

As the area's home prices have dropped 20 percent in two years, construction has stalled and unemployment has risen above 5 percent.

'Foreclosure refugee' flood

Neighborhoods around the area are affected. The region has the nation's fifth highest foreclosure rate, with 6,500 homes lost since January. The housing slump has spawned a new breed of Sacramentan -- the foreclosure refugee -- and thousands more will be born next year, when another round of mortgages reset and the crisis deepens.

"I don't want pity," said Natomas resident Rose Marie Reyes, a state worker who's losing her home after getting a no-doc refinance loan. "I want people to know ... they really should watch what they're getting themselves into."

Reyes, 41, said she didn't realize until later, while meeting with a credit counselor, that her lender had "poofed" up her income -- a complaint echoed by consumer advocates.

"I'd bet more brokers were responsible for inflating borrowers' incomes than borrowers explicitly lying about how much money they had," said Paul Leonard, California director of the Center for Responsible Lending.

Leonard finds the mere existence of no-doc loans astounding. "I find it quite striking that you have to produce a pay stub to get a 'payday loan,' but you can get a $500,000 mortgage without even that," he said.

The California Association of Mortgage Brokers defends the industry's conduct and says borrowers took the lead on pumping up their reported incomes.

"I have turned down many clients who have told me they make 'this' amount of money," said Jon Kaempfer of Vitek Mortgage Group in Sacramento, a member of the association's board. "Well, I don't believe them and I turn them down -- I don't believe you're making $12,000 a month raking leaves."

No-doc loans figure in a major fraud case in the area. In September, a federal grand jury accused four men, including a mortgage broker, of luring investors into buying $8 million worth of homes in Elk Grove by telling them they could resell them to "prequalified" purchasers waiting in the wings. Prosecutors said the prequalified buyers didn't exist.

To keep the plan going, the four men pumped up investors' incomes on loan applications, the grand jury said. The four have pleaded not guilty.

"It was always a 'hurry up' thing," one investor, self-employed Elk Grove landscaper Tim McDaniel, said in an interview. "'Don't worry about it, don't worry about it, just go sign the papers.'"

McDaniel, who said he learned later that his income was tripled on the loan applications, lost two houses to foreclosure, is in default on a third and is suing the men.

Legitimate use distorted

Industry officials said no-doc loans have a legitimate purpose: to help self-employed entrepreneurs and others who have the means to buy a home but can't easily prove their incomes.

They've led to problems before. A slew of no-doc loans in the late 1980s led to major losses for several aggressive lenders, said Keith Gumbinger, vice president of HSH Associates mortgage research firm in New Jersey.

Things are worse this time, he said. In the 1980s, no-doc loans at least required substantial down payments. In the latest boom, borrowers could obtain no-doc loans with zero down payments, "teaser rates" and other come-ons, Gumbinger said.

"The layering of those individual risks, one on top of the other, has created a complicated mess," he said.

No-docs were used more aggressively as the boom began to fizzle.

In 2005, while the market was still relatively healthy, the median household income of Sacramento County homebuyers was $78,650, according to U.S. census data. The median income reported on loan applications was $90,000, a difference of 14 percent, according to records available under the Federal Home Mortgage Disclosure Act.

In 2006, as the market went cold, incomes were pumped up even more. Homebuyers in Sacramento County earned median household income of $79,735, but the median income reported on mortgage applications was $97,000, a 22 percent difference.

"You had to expand the buyer pool (as the market slowed), and the only way to expand the buyer pools, considering the high home prices, was to inflate the incomes," said Thompson, a critic of the practice.

Some in Congress want to outlaw it. A bill introduced last spring by Sen. Charles Schumer, D-N.Y., would force lenders to examine tax returns, payroll receipts and other records before approving a borrower.

Income gap stretches wide

Income discrepancies pop up throughout the region. The median income on mortgage applications in Yolo County last year was $104,000; the median income of Yolo homebuyers was $83,400. El Dorado County homebuyers earned $100,000 but their loan applications said they earned $126,000. Placer County homebuyers earned $90,115, but loan applications said they earned $116,000.

The disconnect between stated and actual incomes appears to be greatest in lower-income areas. Census figures for the medium incomes of homebuyers were unavailable for individual neighborhoods, but figures for medium household incomes strongly suggest similar gaps.

In northern Sacramento, including Del Paso Heights and North Highlands, the median income reported on mortgage applications last year was $95,000. But the median income for all northern Sacramento households was $36,000, according to research firm Claritas.

In south Sacramento, including Meadowview, Fruitridge and Florin, the median income reported on mortgage applications was $84,000. But the median income among all south Sacramento households was only $36,000 in 2006. Only 12 percent of all households in those neighborhoods earned as much as $84,000, Claritas said.

South Sacramentan O'Lester Williams, who refinanced his Valley Hi home this year, said Caliber Lending inflated his $3,600 monthly income to $6,475 without him realizing it.

"They boosted up my income, and I didn't catch it until later," said Williams, 79. "I had been looking at five dozen papers and you can miss one line. That's what I did -- I missed that line."

A person answering the phone at Caliber's Orange County headquarters told a Bee reporter he couldn't provide any information and then hung up.

Williams is struggling to keep up with his pay-option loan, which lets him choose his monthly payment in a range from $1,486 to $3,724.

His credit counselor, Mike Himes of Neighborworks Homeownership Center, said loans of this type typically mean a profit of at least $15,000 for a company.

"There was a lot of money made on that one," Himes said.

Subprime refinance shock

Reyes' Natomas nightmare began in late 2004, when her sister moved out of their three-bedroom home. Needing to refinance, Reyes searched on the Internet and found an ad for Flexpoint Funding Corp., a subprime lender in Irvine.

After an initial inquiry, she faxed Flexpoint tax and pay records showing she earned $35,000 a year at the state. The company said the documents weren't necessary. Flexpoint could put together a $370,000 refi without proof of income, her loan representative told her.

"I left everything in his hands, in his care," she said.

Reyes said she never saw a loan document saying how much she earned. Himes, who is counseling her, says a $370,000 refi would have required an income approaching $100,000.

Flexpoint has gone out of business and company officials couldn't be reached for comment. Reyes' debt is now held by GMAC Mortgage and Wilshire Credit Corp.

Supplementing her income by selling tamales and burritos to friends, Reyes stayed afloat the first two years. She even survived six months of unemployment by tapping into savings and getting help from family.

But when her loan reset in January and the monthly payments shot up from $2,381 to $3,161, Reyes was sunk. Hit with a default notice and the threat of foreclosure, she started packing.

"It's a sad thing to say," she said, standing in a living room filled with cardboard boxes, "but walking away from this home will be a relief."

To see more of The Sacramento Bee, or to subscribe to the newspaper, go to http://www.sacbee.com/.
Copyright (c) 2007, The Sacramento Bee, Calif.
Distributed by McClatchy-Tribune Information Services.
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