This recent story from the NYT is getting passed around everywhere as a textbook case of misapplied justice.
“Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans.”
For those who haven’t seen it – a tale where a borrower is investigated, prosecuted, then later jailed for lying about his income on a “liar” or stated income loan – is worth a full read, if only for the irony of someone going to jail for lying to take out a liar loan.
Irony aside, most of the commentary has been sympathetic to the borrower in an “everybody was doing it and he seems like an otherwise good guy, plus his broker really filled out the application and by the way why is Angelo Mozilio not living in custody yet?” kind of way.
And while I am generally in agreement those sentiments (akin to throwing drug users in jail but not going after the dealers) I’d rather use this article to make a couple of constructive points that are worth understanding as we look back on the sub-prime era:
1. When you sign a loan application, you own it (see disclosure above) and everything in it. It may be a fact that your loan officer told you what to enter, or filled it out “for you” and she was the crookedest witch in all of mortgage banking, but this tends to be a very tough thing to prove under rigorous legal standards when your signature happens to be in all the correct places.
So, before you sign, read it and ask that any errors be corrected – correct them yourself in pen and ink if you have to. Do this twice: Once at application, then again at closing. Then keep copies.
2. What happened to Mr Engle was intentional, and stated-income loans, by intelligent (if nefarious) design were set up from the beginning to transfer this type of legal risk to borrowers. This is what “liar loans” were all about – setting up the borrower as the bagholder if anything went wrong in the future.
This way, sub-prime lenders could approve and earn fee income on loans that should never get within 300 yards of a closing table. Then, after the loan implodes, plausibly claim to regulators or investors that it was not their lax lending standards that led to default. Instead, it was: The borrower lied to us.
Meanwhile, everybody swallowed the party line that stated income and it’s incestuous family tree (No Doc, NINJA, etc.) was all about lubrictating the wheels of real estate commerce by giving loans to worthy borrowers who don’t report a lot of income or had situations “too complicated” (code for: Recently started or outright un-profitable and sometimes illegal small businesses) for traditional underwriting.