Want to know why stated income loans are called liar loans? Because people lie on stated income loans. Not just some people, some of the time and by some little exaggeration. It’s most of the people, most of the time by mostly large exaggerations. Take a look at this Slate article on the liar loan and you’ll see why subprime is a drop in the bucket. Pay close attention to Mish Shedlock’s analysis of a pool of stated income loans with a median FICO of 705 and tell me we’re through the worst of it.
Remember, most of the good credit loans are ticking down to adjustment as we speak. Wave number two, gaining on the horizon is going to be grim.
From the article on the liar loans:
In 2006, a man named Steven Krystofiak gave a statement in a Federal Reserve hearing on mortgage regulation, representing an organization called the Mortgage Brokers Association for Responsible Lending. The organization had compared a sample of 100 stated income mortgage applications to IRS records.
More than 90 of the applications overstated the borrower’s income at least a little. More strikingly, more than three out of five overstated it by at least 50 percent. (emph mine) This isn’t a few people fibbing a little. This was the whole system breaking down.
The consequences are predictably depressing. A blogger named Michael Shedlock has done some terrific work tracking the performance of these kinds of loans. Shedlock analyzed one particular bundle of loans from Washington Mutual consisting of 1,765 mortgages from around May 2007, a total of $519 million in loans.
These were not “subprime” loans. The borrowers’ average credit score was 705, well within prime territory. This is a fairly typical package of loans for a mortgage-backed security, but one thing that does make it stand out is the proportion of these loans that didn’t ask for income documents: 88 percent.
Historically, a year into the life of a loan, well less than 1 percent of typical prime loans would be 30 days late or more. By the end of January, when Shedlock first looked at it, just eight months after the loans were made, almost one in five were at least 60 days overdue.
Shedlock looked at it again two months later, at the end of March. The results:
- Eighteen percent of the loans are already in foreclosure?or have already been seized by Washington Mutual.
- One in four of this bundle of liar loans is already 60 days past due.