No-doc loans
Submitted by Econbrowser
Just an anecdote, but an interesting one.
From SFGate.com (via Calculated Risk):
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One Oakland woman, who asked not to be identified, explained how she exaggerated her income– with encouragement from her mortgage broker– when she refinanced her home.
“He didn’t say anything illegal out loud,” she said. “He didn’t say ‘lie,’ he just made a strong suggestion. He said, ‘If you made $60,000, we could get you into the lowest interest level of this loan; did you make that much?’ I said, ‘Um, yes, about that much.’ He went clickety clack on his computer and said, ‘Are you sure you don’t remember any more income, like alimony or consultancies, because if you made $80,000, we could get you into a better loan with a lower interest rate and no prepayment penalty.’ It was such a big differential that I felt like I had to lie, I’m lying already so what the heck. I said, ‘Come to think of it, you’re right, I did have another job that I forgot about.’ “
The transaction between the broker and customer was just the first link in the mortgage securitization chain. To the extent that the originator washed his hands of the whole thing by immediately selling off the loan to the next sucker in the chain, you can understand the incentives for the originator to cheerfully go clickety clack on his computer. But as I’ve said many times, the big question (and fundamental problem) arises from the incentives for investors further up the chain who willingly poured in the cash necessary to fund these deals.
Source: Mortgage securitization.
One key problem with that chain of incentives seems to be the off-balance-sheet status of the bankruptcy-remote trusts that ultimately held the loans. Tanta interprets a recent statement from Financial Accounting Standards Board director Russell Golden as signaling the intention of the FASB to end the off-balance sheet status of such entities. If so, I would view that as an unambiguously favorable development.
The brighter the light we can shine on this whole process, the better. And the accountants would serve us well by leading the charge.
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August 5th, 2008 at 5:18 pm
[...] collapsed mortgages have been those that should have never been offered: NINAs, NINJAs, and other no-doc loans offered to people with shabby credit [...]