Report: Subprime, No-Doc Loans Represent $1 Billion Fraud

Cheating on mortgage applications is so widespread, and so seldom punished, that it’s fueling an increase in foreclosures that will prolong the housing slump, said Robert W. Russell, counsel to the director of the U.S. Office of Thrift Supervision, which oversees savings and loans.

The borrower and the mortgage broker each commit fraud when they exaggerate the home loan applicant’s income, qualifying him or her for a home that they otherwise couldn’t afford.

Such fraud robbed mortgage lenders of an estimated $1 billion last year, according to recent data from the Washington-based Mortgage Bankers Association and the Federal Bureau of Investigation.

“Misstatements about applicants’ employment and income are being made every day,” Russell said. “The [mortgage brokers] are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.”

Loans that require little or no documentation of one’s income (often called “no doc loans“) soared to $276 billion, or 46 percent, of all subprime home mortgages last year from $30 billion in 2001, according to estimates.

Home buyers with those types of home mortgage loans defaulted at a 12.6 percent rate in February, compared with 1.5 percent of fully documented prime mortgages, said San Francisco-based First American LoanPerformance consulting group.

A 2006 study cited by the Mortgage Asset Research Institute showed that almost 60 percent of stated income loans were exaggerated by at least 50 percent.

“Everyone calls these loans ‘liar loans’ because we know these people were lying,” said Jim Croft, a spokesman at the Reston, Virginia-based Mortgage Asset Research Institute.

Nancy Olland’s application for a mortgage said she made $6,900 a month. She needed that much income to qualify for her loan. The 48-year-old mental health therapist from Cleveland Heights, Ohio, actually makes $3,286.

She said she wasn’t asked to document her income, so she signed the home loan application without reviewing it and discovered a discrepancy months later.

“I don’t know where the information came from,” Olland said. “I didn’t give it to my mortgage broker. Was it literally fabricated out of thin air?”

New Century Financial Corp., the second-largest U.S. subprime (bad credit home loan) lender last year, was Olland’s mortgage lender.

Laura Oberhelman, a spokeswoman at New Century, said in an e-mail that the company only approves loan applications “that evidence a borrower’s ability to repay the loan.”

To stem mortgage fraud, she said New Century used electronic and manual systems “designed to detect red flags like inflated home appraisal values, unusual multiple borrower activity or rapid mortgage loan turnover.”

Continue reading this article by Bloomberg News …