Stated-income Loans - How Common Were They?

By Author: Lawrence Roberts
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One unique phenomenon of the Great Housing Bubble was the utilization of stated-income loans, also known as "liar loans" because most people were not truthful when stating their income. When house prices were going up, greed motivated many people to buy homes to capture appreciation. Actually having the income to qualify for a loan was a limitation to participating in the financial mania. Stated-income loan programs eliminated this barrier and allowed people to borrow as much as they wanted without concern for home much money they made to cover the payments.

Loan documentation is usually a routine part of obtaining financing. Lenders ordinarily require a borrower to provide documentation proving income, assets and debt. However, during the final stages of the Great Housing Bubble, loan documentation was seen as an unnecessary barrier to completing more transactions, and loan programs which circumvented normal documentation procedures flourished. The fact that these programs existed at all is remarkable proof of the risk lenders were taking through the relaxing or outright elimination of lending standards.

Eighty-one ...
... percent of Alt-A purchase originations in 2006 were stated-income, and 50% of subprime originations in 2005 and 2006 were stated income. Stated income loans increased from 18% of originations in 2001 to 49% in 2006 according to Loan Performance. In a related study by the Mortgage Asset Research Institute, 60% of stated-income borrowers had exaggerated their incomes by more than 50%., Obviously, lying about one's income to obtain a loan is not a conservative method of financing a property purchase.

The stated-income loan was originally provided to borrowers such as the self-employed who most often do not have W-2s to verify income. When these loan programs were first started, they were not made available to borrowers with W-2s as the transparency of the lie would have been obvious to all parties.

During the bubble rally, this loan was made available to anyone, and lying was not only encouraged, borrowers were often assisted in fabricating paperwork by aggressive loan officers and mortgage brokers. Since the loan could be packaged and sold to investors who had no idea what they were buying, there was a complete lack of concern for whether or not the borrower actually made the money stated in the loan application and thereby could actually make the payments on the loan.

Everyone involved was raking in large fees, the borrower was obtaining the real estate they desired, and for a time, the investor was receiving payments from the borrower. As long as prices were rising, everyone benefited from the arrangement. Of course, once prices started to fall, borrowers did not want to continue making payments they could not afford, and the whole system collapsed in a massive credit crunch.

Stated-Income loans were one major component of the Great Housing Bubble. The use of these loans helped inflate the housing bubble, and the elimination of these loans helped deflate it. Many people where occupying real estate they had no capacity to pay for, and most of these people ended up in foreclosure.
About Author:
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit Stated-Income Loans - How Common Were They?.