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Michael White is the CEO of The New Mortgage Company. He has seventeen years in real estate as lender, owner, and mortgage originator. He has purchased and sold more than 275 properties for his own account, made hundreds of real estate loans for his portfolio, and originated hundreds of mortgages as a broker.

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Bring Criminal Charges Against Chief Executives of Leading Originators And Securitizers of Stated-Income Mortgages

You can steal and burn money many different ways. Leaders of financial firms use a conservative bias with money they lend to protect society’s most precious asset: Savings accumulated through blood, sweat, tears — sacrifice.

Unless you live in interesting times. What was sacred is profane. We have and do live in interesting times. The basic rules of lending were banned in the credit bubble. Sacrifice was a joke. Money was easy. Now we have the aftermath of the crisis. It is only beginning.

The most notorious method for stealing burning squandering money in our real-estate-and-mortgage bubble was something called stated-income loans. The popular term now is liar loans. What does that mean?

Amherst Mortgage Insight April 13 2010 opinion on stated income

For the person who can’t believe fraud could be committed on a grand scale, who believes the world works according to right and wrong, the truth is stark and simple: Originating banks allowed borrowers to say or to “state” or to lie about their income and no proof was required to back up what was said or “stated” or lied about.

You could lie about your income to take out a new mortgage and the bank never checked to see if what you said was true or false.


The Mortgage Asset Research Institute referred to a study that found 60 percent of applicants who used stated income exaggerated what they earned by more than 50%. They verified this fraud when mortgage application statements about income were checked against IRS records on income reported to the federal government.

Loan officers were the grand facilitators and front-line perpetrators of this fraud. On a refinance, the loan officer simply looked at a particular borrowers credit report, added up the debt payments on credit cards, car loans, and mortgages, and created an income figure which made the debts affordable including the new mortgage. A purchase worked exactly the same way. The income was a derivative of the amount the borrower wanted to spend to buy their new home. Many borrowers were not innocent, but other borrowers were playing on a field where they had no experience. They could easily be lead to believe in the acceptability of this criminal fraud.

There is no question about what these mortgages are. Individuals borrowing money fabricated the amount of their income. The banks required no verification of the statements about income. By that action banks encouraged the fraud. If this failure to verify factual statements is acted out on a grand scale, then the bank is the leader and creator of the fraud. If stated-income mortgages were created by bank policy overseen and approved by top management, then those managers and overseers are the leading criminals in the conspiracy.

With stated-income loans, the banks did not ask for supporting documents like W2 forms and pay checks. They did not verify statements about income against what was reported to the IRS. Yet the first job of a bank in lending is to check the supporting documents.

If you borrow money, you need income to pay it back. The first job of a bank is to check to see if you have income to pay the borrowed money back. If you eliminate the verification of income for a mortgage borrower, you eliminate your ability to predict the likelihood of repayment.

bailout cartoon

The reason this phenomenon rises to the level of a high crime is that a huge number of these mortgages were originated. Stated-income mortgage fraud was not an isolated crime. It was done countrywide, so to speak. A report from the Mortgage Brokers Association for Responsible Lending said 37% of non-agency (subprime) loans securitized in 2005 required no documentation of statements about income made in the mortgage application.

I worked in the subprime units at Countrywide and Wells Fargo during the bubble years (2004 to 2007). I saw this phenomenon first hand. To pretend that there is anything mysterious or unknown about the methodology of these loans is simply to add a lie on top of a lie on top of a lie.

Following civil charges being filed against Goldman Sachs, what is clear now is that the crime of stated-income mortgages deserves to be explored fully by criminal prosecutors.


The top management of leading originators and securitizers of stated-income mortgages should face criminal charges. While they may say that they didn’t understand the fraud which was committed, there is no question they led these organizations. There is no question complicity within management was required. Loan officers acted recklessly and dishonestly and criminally, as did borrowers, but neither loan officers nor borrowers decide that supporting documents verifying statements about income are unnecessary. That’s a management decision.

All top managers should be called to testify before Congress about their knowledge of the underwriting of stated-income loans. The reporters who cover these companies and their top executives should also ask: “What did you know about stated-income mortgages? When did you know it?”

That we have gone so far in the financial crisis without this basic work being done testifies to the farcical nature and grandiose ineptitude of regulators, prosecutors, politicians, and especially the media. It’s truly a carnival of stupidity. Right and wrong are unknowable because they are too simple to understand.

The biggest names at the biggest commercial banks and investment banks deserve fire, hatred, condemnation. Prosecute the criminal act of encouraging false statements of income on mortgage applications. The factory-like creation of stated-income mortgages lies in a central place of perhaps the most destructive fraud in world history.

‘Tis a consummation devoutly to be wished on no country or people, yet it has been done here and to us. The poison is in our economy. It is suicidal. It is criminal. There is no question.


PRINT — Bring Criminal Charges Against Chief Executives of Leading Originators And Securitizers of Stated-Income Mortgages

Please forward questions, corrections, and reactions to comments below or send me an email. If you have data on who originated and securitized stated-income loans please forward it to me. Please send an email if you would like to take out a new mortgage.


Michael David White is a mortgage broker in Chicago.

There Are 9 Responses So Far. »

  1. Great article, but if you were an originator and owner, and investor of 200 plus properties, then you too were an advocate of the product that you state you want to criminialize. Its hard to take anyone seriously that has these views on the industry when you were probably a top producing agent yourself either at Countrywide or Wells Fargo or as an owner. The real question is how many stated income, no doc, no income no asset loans or option arm loans did you do in your past. I would think at least 5-10% if not more of your total production during the high times and even up to today doing HAMP loans that are too a stated income loan with the exception of a signed 4506T form signed by the borrower. So there is no need to prosecute management that was acceptance of this product, but the investors whom created the product for the retail market to sell to the consumer. Your article is an oxymoron because you sold those stated income products knowing yourself they were not right, but yet you want to prosecute and so called bring criminal charges to management of companies like a Countrywide or Wells Fargo, what about yourself as a owner do you think you deserve to be prosecuted for following the guidelines and products of what was offered at the time to our consumer?

    Any one remember “FAST AND EASY”? 5% DOWN NO QUESTIONS.
    November 2007, 9am the fax at the company printed a flyer: 100% FINANCING, NO INCOME, NO ASSETS WITH A 580 CREDIT SCORE. To me that was the bottom of the barrel, threw it in the trash, hope I had saved it could be worth a lot today.
    As a mortgage originator same as all others, we had the account executives from all lenders give lines like “we ask fo a 4506 but do not worry, we do not execute it, my question was always: Are you enticing me to commit fraud?
    I lost a lot of business by holding to my standards of “show me how you can pay for the home” even if the program did not ask. The party was great and everyone (Wall Street, Lenders, mortgage originators and specially the same homeowners that now claim “I did not know” got drunk) exept yours trully.
    Hope there are many like me out there. Tomorrow will be another day.

  3. I think that you have done a good job on the article but in my view it has a glaring flaw. I think when you analyze the behavior you can see that the lender most likely was negligent in making loans without verifying income. The logic behind not verifying income is that the borrower had credit scores that revealed a history of paying their obligations timely and responsibly (that logic is very questionable on sub-prime lending). Using that logic, they went on the belief that borrowers would act responsibly and borrow what they could afford, which is what their past proved. However, a borrower who lies regarding their income may have committed civil or criminal fraud. A 1003 even states that “the information provided in this application is true and correct as of the date set forth opposite my signature and that any intentional or negligent misrepresentation of this information contained in this application may result in civil liability, including monetary damages, to any person who may suffer any loss due to reliance upon any misrepresentation that I have made on this application, and/or in criminal penalties including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, Sec. 1001, et seq.” So, while the behavior of the lender does not give rise to fraud but at best negligence, the behavior of the borrower does give rise to fraud. The real question is does the negligence of a lender trump the fraud of the borrower? I doubt it. Even though I am the side of the borrower. That is why loan mods and short sales are risky because the borrower is now telling them they committed fraud which if they said nothing would be difficult to prove.

  4. To even mention that the borrower is implicit in this fraud is ludicris. If some idiot is willing to lend me money under these terms, why shouldn’t I take it? It’s his money. Also, never saw mention of the debt rating agencies that gave these loans a rating so they could be sold on the secondary market. I believe the reason we even got to this point is because the US govt. was encouraging the real estate bubble so that America wouldn’t miss the millions of manufacturing jobs that were shipped overseas during this time period. The govt. and in particular the fed is the real culprit. Lets stop playing games here.

  5. David,

    You have just touched on an article to be written next week about Bubbles and the Housing Market.

    As to the comment about borrower fraud, I must say that whether such fraud should be likely depends upon the totality of the circumstances. I regularly review files where I can show that borrower fraud existed in the form of Stated Income, and I can also show that borrower fraud was not an issue, and that Fraud in the Inducement is a considered factor.

    As to Michael’s article, I can show through the PSA and other documents complicity at all levels of the lending process with Stated Income Loans. Of course, lenders will never be prosecuted because they are insulated from such by politicians and the Fed. Don’t believe for an instance that the Goldman Sachs hearings will lead to anything. Why the politicians are “attacking” GS, they are playing “footsie” under the table.

  6. The government does not want GS investigated any further. If GS were, it would implicate the government, as they were the ones letting this scam continue to operate. The fraud was done to the secondary investors who bought this paper. They lost trillions. Moodys and S&P greased the wheels to all of this.

  7. I’ve worked with hundreds of home buyers who were the victims of fraud on the part of the lender. They told the truth about their income — the lender simply forged documents and changed their income to get the loan on a home that the lender got an inflated appraisal on. Buyers signatures were forged OR documents were faxed back and forth and a signature page from one document was used on the new forged income pages. I believe this happened often — the borrowers certainly did nothing wrong. Many had second mortgages registered against them without their knowledge — pure gravy for the builder/lender as he got the full price of the home from the lender.

  8. I agree with most of what has been posted here and I, too, have originated hundreds of loans during the peak period, 2001-2005. Yet there is still more that I can add and it’s about the pressures that loan originators were under to generate income for their bosses, and, of course, themselves. All of the subprime lenders that I worked with just wanted the numbers/ratios to ‘work’, i.e. be within their own established (by their own management!!) guidelines, DTI etc. This was difficult for some of the dummies with whom I worked, meaning that the other mortgage originators in my company were not mathmatically capable of setting up the correct numbers on the original 1003 that they were attemting to complete and have the borrower(s) sign in the home. So, my employer…. my company’s management…. told all originators to leave as INCOMPLETE all income/expense boxes on the 1003 so that the boxes could later be filled in by the processors with the numbers that would make sense/meet the ratios. We did gather and bring back to the office enough income/expense data/support forms to assist the processors, but we did not complete the 1003s in these areas while in the customers’ location. This meant that all borrowers/applicants/signors of the 1003s signed the 1003 as incomplete…. which is then not their fault (at least in the sense that they were not aware of the HUD requirement that all info/boxes be completed because they were undoubtedly told by the originator that everything was OK, etc., etc.) Thereafter, the processors (who also needed to keep their jobs) were coerced by management (of their own employer and the investors’ agents) to structure the numbers that fulfilled the ratios that made the app appear to be worthy of approval. And, VOILA !!!, it was approved! The next step (among others) was that the processor create a “typed/printed” version of the 1003 with all of the blanks now completed. This 1003 then worked its way to closing when it appeared among the hundreds of pages of closing docs which the borrower(s) was expected to sign within minutes. I cannot recall even one instance when the final 1003, with its lies as to income and expenses, was discussed with any borrower. Similarly, all borrowers never questioned what was now showing in their income and expenses “boxes” and they readily signed the final 1003. At the end of the closing, the closing agent was always sure to produce a very formal, legal-size and long-term storage type of envelope into which the agent placed all of the docs, tied it tightly, and then sent the borrower(s) on the way home. I’m sure the vast majority of these envelopes were never opened again…. even through the default stage.
    The point of my post is that I really do not place the blame on the borrower… except in the case of investor types in which case they are wholly and completely guilty, along with their brokers/originators of stupidity, if nothing else, as the cause of their own default(s)/demise.
    I have been employed recently with a recognized company which attempts to do HAMP and Freddie Mac mods. But, the difficulty in making the mods is rooted in that so many of the borrowers have liars’ loans right from the start. Even now, the borrowers cannot be modified because they don’t have the income to support even a 2.0% interest rate on a 40 year term.
    And, now all of those Option arms are about to be re-set. There will no longer be any minimum 0.95% TO 2.95% teaser payments. The new payments will require full P&I for 25 years at (relatively) much higher rates. This would seem to brimg more bad news to the mortgage markets and those related markets… even Fannie and Freddie…… but that’s another story !!!!
    Sorry to go on for so long…

  9. Hello again, As a followup to my own post, I am adding this. My immediatelty previous post realates that all of us employees were simply trying to keep our jobs. Yes, no matter how bad we were, from originator to processor to closer, we were only following management directives in oder to get a pay check. We employees did not set policy. So, if there is anyone to blame for the entire mortgage mess, it’s clearly everyone at the top level of management because they set the policies and the goals, and more. If they did not comprehend what they were doing, then who would/could? They cannot pass the buck!! All senior management of the banks/FNMA/Freddie/mortgage collateralizers/ratings agencies must share the blame for the calamity that will remain as a blemish, restraint, on the markets for many years into the future. There should be some manner by which the SEC, NYSE and NASDAQ can seek satisfaction in some form for wrongdoers transgressions. Finis.

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