Sunday, January 13, 2008

Predatory Borrowing With Fake Paycheck Stubs

From George Mason economist Tyler Cowen writing in today's NY Times:

There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70% of recent early payment defaults had fraudulent misrepresentations on their original loan applications. One study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also 5 times as likely to go into default.

Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.

In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years.

As an example of how easy it is to submit fraudulent income data with fake paycheck stubs, you can buy software for $70 from FakePayCheckStubs (see ad above) to "print out personalized instant paycheck stubs for your new or existing business! Authentic looking stubs will FOOL EVERYONE or 100% Money Back Guarenteed! (sic)"

4 Comments:

At 1/14/2008 7:37 AM, Anonymous Anonymous said...

Any broker or lender can confirm that it is relatively easy to confirm the documentation submitted by most borrowers attempting fraud.

The cause of the increase in fraud that results in mortgages is that lenders and brokers were not doing their job.

Would anyone reading this stand on a street corner and put out a sign saying you would lend hundreds of thousands of dollars to anyone that had documentation "proving" they could repay the loan? You would be a fool to lend anything to them without checking third party sources for confirmation.

 
At 1/14/2008 1:06 PM, Anonymous Marko said...

I scratch my head every time someone says "predatory loan." That used to be applied to very high interest loans. This is probably the first time in history low cost, easy to obtain loans to buy houses have ever been considered predatory. Who is getting hurt most by these loans to people that could not afford the house? Dollar wise, it is obviously the bank. Why is the current administration doing such a horrible job at answering this stupid propaganda??

Great post professor!

 
At 1/15/2008 6:13 AM, Blogger juandos said...

Yes indeed, a great post...

"The cause of the increase in fraud that results in mortgages is that lenders and brokers were not doing their job"...

Exactly! How could any bank or lending institution allow their employees to make loans without checking to see if the supposed pay stubs were valid or not?

 
At 10/09/2008 9:14 AM, Anonymous Anonymous said...

is this real?

 

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