Did you hear the one about Countrywide Financial demanding that mortgage originators buy back many of the so-called stated-income loans that it had purchased from them during the late great housing bubble?
Countrywide purchased stated-income loans, but is now insisting that the original lenders repurchase them.
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It boggles the mind. This, after all, is Countrywide we’re talking about: Countrywide, which came to represent, in the public mind, the dirtiest of all the subprime lenders. Countrywide, which handed out fraudulent stated-income loans — they were often called “liar loans” — like candy. Countrywide, whose former chief executive, the disgraced Angelo Mozilo, once actually admitted to analysts, “I believe there is a lot of fraud in stated-income loans.”
This same company is now insisting that other lenders that made stated-income loans — loans that Countrywide eagerly bought to fatten its balance sheet — must repurchase them on the grounds that, golly, the loans turned out to be fraudulent. The hypocrisy is breathtaking.
At least, it is until you realize one other salient fact: since early 2008, Countrywide has been owned by Bank of America. Then it all starts to make some perverse sense.
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You know what a stated-income loan is, don’t you? It is — or, rather, it was — a loan in which the borrower doesn’t have to verify his or her income, but simply states it. (Not surprisingly, since the subprime bubble ended, stated-income loans have become pretty much extinct.) On the face of it, you would think that no lender in his or her right mind would accept an income figure based solely on the borrower’s word. But you would be very, very wrong.
There actually is a tiny group of borrowers for whom a stated-income loan makes sense, and for whom the product was originally intended: someone with a large amount of income, but whose tax returns are so complex that it is difficult to calculate the person’s effective income. A borrower who can make a down payment of, say, 35 or 40 percent, has a large stock portfolio and has a high credit score — that person is a good lending risk no matter his or her actual income.
But whenever lenders have stretched these loans beyond that very narrow category, bad things have resulted. In the 1980s, for instance, Citibank took a stated-income loan product that had had some moderate success in New York City and offered it to the rest of the country — then watched its default rate explode. It wound up not only withdrawing the product, but also indemnifying Fannie Mae and Freddie Mac, which had guaranteed many of the loans.
During the subprime madness earlier this decade, stated-income loans became the dominant feature of most subprime loans. Documenting income, after all, took time and effort, and who had time for it when everyone in the business was making subprime loans as fast as humanly possible? “Stated-income loans were viewed as relief from documentation,” said Lou Barnes, the founder of Boulder West Financial Services. (Boulder West is now owned by the Premier Mortgage Group.)
Competitive pressures also prompted the growth of stated-income loans. With such loans so easy to get, mortgage originators that refused to make them began losing business to those, like Countrywide, that were only too happy to make them.
Finally — and perhaps most important — stated-income loans became a means for both borrowers and lenders to commit fraud. That may have been their greatest appeal. Real estate speculators used stated-income loans to buy properties that would otherwise have been out of reach, hoping to flip them quickly, before their lack of income caught up with them. Far more frequently, however, mortgage originators used stated-income loans to put people into homes that were far beyond their means, knowing full well that the chance of the borrower ever paying back the loan was practically nil.
As I mentioned in a column a few months ago, the Mortgage Guaranty Insurance Corporation — which is embroiled in litigation with (who else?) Countrywide over whether Mortgage Guaranty has to pay off insurance on stated-income loans that went bad — hired investigators to root out some examples of fraud. To take just one example alleged in the document: a self-described dairy foreman who listed his monthly income as $10,500 was actually a dairy milker making a tenth of that amount. The mortgage broker was completely aware of this fraud, according to the complaint. Nonetheless, the borrower got a $350,000 mortgage.
The complaint by Mortgage Guaranty reads: “By about 2006, Countrywide’s internal risk assessors knew that in a substantial number of its stated-income loans — fully a third — borrowers overstated income by more than 50 percent.” The complaint adds, “Countrywide deliberately disregarded these and other signs of fraud in order to increase its market share.”
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