Stated Income Loans Created Risks for California Borrowers - One Man Went to Jail, While the CEO of Countrywide Walks

March 30, 2011

Stated Income Loans allowed borrowers to merely state their income, without a thorough investigation by the lender. They allowed borrowers to lie about their incomes, so they became known as liar loans. The loose underwriting, where the lenders really did not care what the truth was, were a badge of the housing boom. They lead to toxic loans, or worthless junk, as the CEO of Countrywide described them in emails.

There are a couple of ways the liars can get caught. One is by applying for a loan modification. Then they submit information as to their true income, which is investigated. This is becoming a way the lenders can get at a borrower in bankruptcy. Anyone with a stated income loan who wants to talk to their lender may need to consult with a real estate attorney. Another, more insidious way to get caught, is when the IRS sends an attractive female undercover agent to befriend you to get you to talk while she is wearing a wire. That is what happened to a man now doing a 21 month sentence for mortgage fraud.

The undercover agent asked Charlie Engle about his investments. He said he had been speculating in real estate during the bubble and that "I had a couple of good liar loans out there, you know, which my mortgage broker didn't mind writing down, you know, that I was making four hundred thousand grand a year when he knew I wasn't."

When he gets out of prison, he will have to pay restitution to the lender, Countrywide. That lender's former CEO, Angelo R. Mozilo, faced a government fraud lawsuit based in part on those emails mentioned above. While admitting the loans were toxic, he was selling them to investors as good loans. He settled by paying fines and restitution, but that won't be too bad as Bank of America and insurance will foot much of the bill. These are the government's priorities. Like banks too big to fail, The Bank CEO was too big to jail. But Charlie, who did just what Mozilo wanted him to do, does time.