‘Liar loans’ worsen housing slump, officials say

WASHINGTON – Mortgage-application fraud by borrowers and brokers is fueling a wave of foreclosures that will prolong the U.S. housing slump, according to Robert W. Russell, counsel to the U.S. Office of Thrift Supervision, Bloomberg News reports.
“Misstatements about employment and income are being made every day,” Russell said. Some buyers and mortgage brokers “are just putting down on paper what underwriters would require,” he said. “Everyone calls these loans ‘liar loans’ because we know these people were lying,” Jim Croft, a spokesman for the Reston, Va.-based Mortgage Asset Research Institute, told Bloomberg.
Mortgage fraud complaints more than doubled between 2003 and 2006, according to the Financial Crimes Enforcement Network, a division of the U.S. Treasury Department. Such fraud cost lenders an estimated $1 billion last year alone, according to the Mortgage Bankers Association and the Federal Bureau of Investigation.
Low- and no-documentation loans – established in the 1980s, mainly for the self-employed – soared last year to an estimated $276 billion or 46 percent of all subprime mortgages, from about $30 billion in 2001, according to New York-based analysts at Credit Suisse Group. The default rate in February was 12.6 percent among homeowners with such loans, versus 1.5 percent for those with fully-documented loans, San Francisco-based mortgage consulting group First American LoanPerformance told Bloomberg.