In 2006, the FBI studied three million mortgage loans and found that 30 to 70 percent of early payment defaults can be linked to misrepresentations in mortgage loan applications.
The figures aren't really surprising when you consider the fact that most of the defaults occurring right now involve borrowers who have not yet seen a payment reset. It is blatantly obvious there were an overwhelming number of borrowers approved for mortgages they could not afford.
The only way for this to happen was for someone to lie on a mortgage application. Some media stories have implied that it was lenders who did the lying and that most borrowers are victims of predatory lending schemes.
The truth is that borrowers did their fair share of lying too. More than 40 percent of subprime borrowers received loans without having to document their ability to pay. The borrowers simply 'stated' their income on the mortgage applications.
Almost 60 percent of stated-loan applicants inflated their incomes by at least 50 percent, according to the Mortgage Asset Research Institute. The worst part is that everyone knew the income was being inflated. The industry even had a name for these kinds of loans--'liar's loans.'
FBI Barking Up the Wrong Tree
Although lying on a mortgage application is a federal crime, borrowers who committed mortgage fraud are low on the FBI's list of priorities. Joseph Schadler, an FBI spokesman, said investigators will be focusing on organized property flipping rings and bogus foreclosure rescue schemes instead of lying buyers.
'We're going to pick the ones that are the most egregious and have the greatest impact on the economy,' Schadler said. 'Fraud for property is less impactful on the economy than the speculative fraud where people are trying to flip homes for profit.'
The FBI had better run the numbers again. Borrowers who committed fraud by lying on their mortgage application could cost this country trillions of dollars.
There are plans to allow lying borrowers to refinance loans they cannot reasonably afford through federally sponsored mortgage programs implicitly backed by taxpayers. Presidential candidates are talking about robbing taxpayers to help lawbreakers and other homeowners who are facing foreclosure.
The impact to the economy will be enormous and beyond any effect created by a foreclosure rescue scam or house flipping ring.
States Not as Lenient
Although the FBI has no intention of enforcing federal laws, borrowers may not be able to get away with lying much longer if some states have their way.
In Texas a new state law was passed last year that holds borrowers accountable for the information supplied on mortgage applications. Borrowers are required to swear that all of the information they supply is correct.
Lenders who suspect they are being lied to are required to report borrowers to new task forces that are being set up specifically for this purpose. Borrowers who are reported will have no idea what is going on until it is too late because lenders are not allowed to notify borrowers that the task force has been contacted.
Borrowers who are caught lying or inflating income could face up to 99 years in jail and a $10,000 fine.