I read a great piece in the NY times today about how the lack of due diligence by the lenders due to pure greed put buyers into liar loans(loans where income was not verified, many were known as alt-A loans) that they could not afford. This could trigger the next wave of lawsuits as the blame game starts on how the housing bubble got so out of control. The banks are trying to keep this debacle quiet.
The NY Times explains:
"WE’VE all heard a great deal in recent months about the greedy borrowers who caused the subprime mortgage calamity. Hordes of them duped unsuspecting lenders, don’t you know, by falsifying their incomes on loan documents. Now those loans are in default and the rapacious borrowers have moved on with their riches.
People who make these claims, with a straight face no less, overlook a crucial fact. Almost all mortgage applicants had to sign a document allowing lenders to verify their incomes with the Internal Revenue Service. At least 90 percent of borrowers had to sign, seal and deliver this form, known as a 4506T, industry experts say. This includes the so-called stated income mortgages, affectionately known as “liar loans.”
So while borrowers may have misrepresented their incomes, either on their own or at the urging of their mortgage brokers, lenders had the tools to identify these fibs before making the loans. All they had to do was ask the I.R.S. The fact that in most cases they apparently didn’t do so puts the lie to the idea that cagey borrowers duped unsuspecting lenders to secure on loans that are now — surprise! — failing.
Ok so the perception out there is people got greedy and lied about incomes and bought homes that they could not afford. The reality is the banks could have EASILY stopped this by using form 4506t to verify incomes through the IRS. 90% of people signed the document to allow the lenders to check their incomes through this form.
Mike Summers had a company that he marketed to lenders that would check incomes via this IRS form for a only a $20 dollar charge. Sounds like a no brainer as a lender to spend $20 bucks for verification when you are lending someone $500,000 right? Wrong as the NY Times explains:
"Mr. Summers said Ameriquest and other prospective clients used lame reasons for turning him down. Submitting the forms was too costly, they said ($20 per loan, on average), or too time-consuming (the information came back to the lender in about one business day).
In 2006, the I.R.S. made it even easier for lenders to verify borrowers’ incomes by automating its systems, Mr. Summers said. The turnaround time under the new system fell significantly.
Still, the tool remained unused. When a customer signed up for Veri-tax’s service, it was typically to spot-check the quality of loans after they were made, Mr. Summers said.
“My estimate was between 3 and 5 percent of all the loans that were funded in 2006 were executed with a 4506,” Mr. Summers said. “They just turned a blind eye, saying, ‘Everything is going to be fine.’ ”
This is greed in its purest form by the lenders. Only 3-5% would spend the $20 to verify income. $20 dollars when you are making thousands on a deal is nothing! This is how things got out of control folks. Lenders simply turned there heads to the income verifications because the fees were too lucrative.
Now the million dollar question. Do the borrowers have a legitimate lawsuit against the lenders claiming that the lender did not do their due-diligence in terms of protecting the home buyer from taking on a loan that the lender knew they couldn't afford?
The next question is since the lenders are almost all out of business. Does this make the investment banks and banks responsible for this lack of due diligence in terms of protecting the buyer from themselves?
Many lawsuits could result from this as the Times explains:
"Can investors stuck with losses on these loans sue to recover their investments based on this due-diligence failure? After all, mortgage originators made representations and warranties to investors that the quality of these loans was good when it clearly was not. And they made these representations knowing that they had not bothered to conduct quick and easy borrower-income checks.
“Investors hoping to put back the loans for deficient underwriting under reps and warranties would end up going back to the originators,” said Josh Rosner, an analyst at Graham Fisher & Company and an authority on mortgage-backed securities. “Given that many of these lenders are out of business, ultimately this could come back to the bank or investment bank.”
“The general view is this should not be talked about out loud,” Mr. Rosner added.
Wall Street will certainly battle forcefully against such lawsuits, if investors bring them. But its role as one of the great enablers in this mortgage debacle is something that even Wall Street can’t deny."
It looks like the great enablers have a huge battle on their hands that nobody wants to talk about. Imagine the legal fees that these banks could potentially face. The housing crisis continues to get more ugly by the day.