It’s another example of people in the mortgage and real estate world who took advantage of someone who didn’t understand the system. And they aren’t the ones who paid the price, the borrower is…..
We’ll be better off when all of those types who are motivated soley by profit have been run out of the business.
Tom Vanderwell
Calculated Risk: WaPo: A Liar Loan Example
From Donna St. George at the WaPo: The $698,000 mistake
[A]ll of this began in the heady days of the mortgage boom … [Ms. White] only knew that there seemed to be possibilities, even to those with little means such as herself, which is how a woman who had never paid more than $700 a month in rent and who had relied in recent years on Section 8 housing vouchers suddenly owned a house.
A four-bedroom house.
With 3 1/2 bathrooms. And walk-in closets, black granite countertops and a fireplace.
You can already tell how this story will end.
On settlement day, reality bore down.
…
Papers were read and presented, most of which White did not try to decipher. … White’s papers cited income of $163,320 a year, even though she says her 2005 income-tax earnings were less than $15,000 and she relied at times on food stamps.
…
White signed papers while waiting for the one she cared most about: her monthly payment. … “Please let this be something I can afford,” she said to herself. She was pretty sure she could afford $2,000. She told herself that if her day-care business did well, perhaps she could afford $2,500. If it was $2,800, she would struggle. Here, now, came reality: $5,635 a month.To get White to sign, the sellers – who were real estate agents – agreed to make the first two mortgage payments for Ms. White. According to the article, White received $40,000 in cash out at closing – and the seller made over $200,000 on the house. Naturally it went into foreclosure and Ms. White is back living in an apartment.
Technorati Tags: Bad Ethics, Liar Loans
Robert Worthington says:
Tom, in Dubia if citizens bounce a check they go to jail. If the United States would chop off heads for crimes this size, I’m sure white collar crimes would be nill.
December 2, 2009 — 6:32 pm
Bob Rutledge says:
Really? Only the ‘professionals’ involved are to blame? Yes, there was certainly fraud present through misrepresentation of the borrowers income.
But…..the borrower had an income of $15,000 and she thought she could swing a $2,000 per month house payment. What she wanted in a house payment exceeded her annual income by $9,000.00!
Then she finds out that her real house payment exceeded what she could ‘possibly’ swing by nearly double and she stilled signed. Just 3 months of house payments exceeded her most recent annual income, she had to know she could never make these payments.
Everyone involved was at fault in this transaction, everyone!
December 2, 2009 — 7:19 pm
Ashlee says:
I am with Bob. The buyer has just as much fault in this transaction as she agreed to the payment!
December 2, 2009 — 9:10 pm
Tom Vanderwell says:
Bob and Ashlee – did I say that ONLY the professionals were the ones to blame?
Not a chance – and frankly that’s going to be one of the few good things that are going to come out of this mess. Consumers have been way to trusting in the past and they are starting to realize that they need to read their documents, ask questions, and analyze things more. That’s a good thing.
Plenty of blame to go around but as professionals, I think that the Bloodhound gang rises (or at least should) to a higher standard than just, “She agreed to the payment.” We need to raise the bar so high that without a doubt, we’re the ones standing up and saying, “Wait, this doesn’t make sense – think about what you’re doing.” Then if they still proceed, that’s their problem.
I’ve got a past client who is “circling the drain” because he speculated on two condos down in Florida. Did I finance the condos for him? Yes I did. Do I feel bad for him and his family? Yes I do. Do I feel that I could have done anything differently when we did the mortgages? Nope, I was completely honest, disclosed everything, discussed what he’d be looking at in terms of payments and he flat out said, “I’ve got $50,000 tied up in an earnest money deposit that I’ll lose on each condo ($100K total) if I don’t do it, so I’ll buy them and carry them until they sell.”
While the trajectory of the condo market in Florida was certainly a surprise for them, there was nothing in the mortgage that was a surprise. Oh, and in case you’re wondering, combined debt service between house, 2 condos and a cottage was just over 40% of his income. We did them as full doc deals. No liar loans on this deal.
That’s the way it should be, in my opinion……
Tom
December 2, 2009 — 9:34 pm
Dan Connolly says:
If you go back and read the original Washington Post article its pretty sad. Maybe the buyer had some responsibility but the blame really falls on the sellers/realtors. I hope they reap as they sowed!
What amazes me is that they thought they could get away with it!
December 2, 2009 — 10:39 pm
Rhonda Porter says:
Tom, I’m sorry…but are you assuming that the borrower never saw her proposed mortgage payment? It would have been disclosed upfront on the good faith estimate and the loan application for starters…so would her over-stated income.
Yes, it’s sick that the LO and RE agents helped put her in this situation, however she did not have a gun to her head. People need to be more accountable for their finances. It’s one thing to lose your job, reduced income or health and have financial woes…it’s something else to buy a home and “hope you can afford it”.
It looks to me like she committed fraud by overstating her income.
December 3, 2009 — 10:44 am
Brian Brady says:
She got $40,000 at closing. I’d say Ms White made out pretty well
December 3, 2009 — 11:36 am
Tom Vanderwell says:
Rhonda,
I am in no way saying that she is innocent in this endeavor. You’re absolutely right that people need to be more accountable and I think that’s one of the good things that’s coming out of all of this.
But the part that I’m paying attention to and that I believe is more important is the fact that we have people who say that they are real estate and mortgage professionals and they are in essence either incredibly poor at what they do or they are crooks. That’s the portion of this story that needs to be held to a higher standard.
Brian – she might have gotten $40K at closing, but she ended up with totally trashed credit and living in a Motel 6 (or the equivalent). I’m not sure I’d call that making out pretty well.
Yes, she should have read the documents and should have known what she was getting into. But the professionals in the transaction should have done better. And that disgusts me that we have allowed those type of people to smear the good name of our industry and the many upstanding people who work in it.
Tom
December 3, 2009 — 1:06 pm
Dan Connolly says:
Everyone jumping in saying the buyer was at fault, or the buyer made out pretty well obviously didn’t read the original Washington Post Article. If they did its time for another round of continuing education ethics classes.
As realtors we have an obligation to be fair to all parties. The realtors who told her she would get rich operating her day care center in the upscale neighborhood knew better. They were lying and she was blinded by the hope of a better life. They deposited money in her account so it would look like she qualified. They committed fraud.
The world is full of people who send in money to get rich quick schemes if the person selling the scheme comes across as sincere and professional. These people are gullible and easy marks. Are they responsible for their actions? sure they are! That is the mantra of the con artist! If we take advantage of these desperate souls we should go to jail.
December 3, 2009 — 6:37 pm
Sean Purcell says:
The agents lied, the lenders lied and the borrower lied. But (as far as I know), it’s only the borrower who got “punished.” To that I say… GOOD!
We need to get back to a culture of self-reliance, consequences and consumers who actually use the lump over their shoulders as more than a hat stand. Would I enjoy knowing that the agents and the lender suffered losses far exceeding Mrs. White’s? Of course. But there’s no gain in that. The only way we right this ship is when people are shouldered with the responsibility and repercussions of their actions. This has the benefit of killing two birds with one stone: not only will we have a lot less Mrs Whites in the world.. but we’ll have a lot less lying agents and lenders too.
The free market of supply and demand works best when everyone has an honest stake in the proceedings.
December 4, 2009 — 12:31 am
Sean Purcell says:
PS
There is absolutely nothing wrong with being “motivated solely by profit.” In a free market, firms that lie and steal get away with it for a little while, but eventually are driven from the business… IF the consumer has a stake in the game. The surest way to creating wealth is by taking care of your customers and effecting referral business. It costs 19x more to get a new customer compared to keeping an old one. Even when motivated solely by profit – especially when motivated solely by profit – we are incentivized to do the right thing.
December 4, 2009 — 12:37 am
James Boyer says:
Wow, I have not seen or heard of anything like the example given above. Worst one I have seen was a would be client who’s condo was never worth more then 400K had it mortgaged up to 650K. The owner had done this on advice from a “Investment Advisor” and put the excess cash into the stock market. This was all back in 2007.
Well the condo has been listed as a short sale for the past 6 months now, and through the grape vine I hear that foreclosure is just around the corner at this point.
Boy that was some great financial advice wasn’t it???
December 5, 2009 — 11:56 am