Strict Loan Documentation Standards Will Help Prevent the Next Housing Bubble

By: Robert Thomson 

One of the most egregious practices of the Great Housing Bubble was the fabrication of income by borrowers that was facilitated and promoted by originating lenders. Stated-income loan programs were widespread, and they were the cause of much of the uncertainty in the secondary mortgage market during the initial stages of the credit crunch in the deflation of the bubble. Basically, investors had no idea if the borrowers to whom they had lent billions of dollars were capable of paying them back. 

Without proper documentation of income, investors lost all confidence in the secondary mortgage market. Stated-income loan programs were one of the first casualties of the credit crunch. These programs should be eliminated totally due to the inherent potential for fraud and the undermining of confidence in the secondary mortgage market stated-income loans create. If lenders can be sued based on the content of the loan documents, and if borrowers can be fined or go to jail for committing fraud or misrepresentation on loan documents, both parties have strong incentive to prepare these documents completely and correctly. Originating lenders will argue this adds to their costs and will result in higher application fees. The amount in question is very small, particularly relative to the dollar amount of the transaction. A small amount of additional expense here will provide huge benefits by assuring investors the borrowers to whom they are loaning money really have the income to pay them back. The benefit far outweighs the cost.

If such a law were passed, agency interpretation and court case precedents will end up defining adequacy in loan documentation. A single W2 does not establish a work history, but 2 years worth is probably excessive documentation. One of the most contentious areas will likely be documenting the income of the self-employed. In theory, the self employed must document their incomes to the US government either through Schedule C reports or corporate K-1s. The argument the self-employed have traditionally made is that these documents understate their income. Since many self employed take questionable tax deductions, there is probably some truth to the claim that tax records understate their income; however, why should the self-employed get to have both benefits? If the self-employed had to use their tax returns as loan documentation, they probably would not be quite so aggressive in taking deductions. A new business without a tax return or with only one year of taxable receipts probably is not stable enough to meet standards of income necessary to assume a long-term debt. 

The poor quality of loan documentation during the bubble was a mistake of originating lenders; therefore, in this proposal much of the burden of paperwork and liability for mistakes falls on the lenders. During the deflation of the bubble, lenders paid an enormous price for some of their lax paperwork standards, but much of the problem was also due to borrowers misrepresenting themselves in the loan documents. There were instances where lenders encouraged this behavior, but in the majority of cases, the document fraud was perpetrated by the borrowers. The only recourse available to a lender is a civil suit as there are few criminal penalties associated with loan documentation and almost no enforcement. It can be very difficult and costly for lenders to pursue civil damages, and few lenders attempt it even when they have a strong case. To create a more balanced set of responsibilities, the borrowers must face criminal penalties for fraud and misrepresentation on loan documents. If borrowers know the lender can turn documents over to a prosecutor who will charge the borrower with a crime if they make false material statements, borrowers will be much less likely to commit these acts.

If loan documentation standards are tightened, much of the fraud in the system would disappear. Mortgage fraud inflated prices and reduced investor confidence in mortgage-backed securities. The inflated prices set the market up for a fall. The reduced investor confidence in mortgage-backed securities halted the flow of investment capital into the housing sector and exacerbated the decline of house prices. These problems would have been avoided if loan documentation standards were higher. 

Article Source: ABC Article Directory


Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall? Learn more and get FREE eBooks at: www.thegreathousingbubble.com/ Read the author's daily dispatches at The Irvine Housing Blog: www.irvinehousingblog.com/

Find Apartment Rentals minus the Hassle

By: Kenn Fong 

When you are looking for apartment rentals, it can sometimes be a nerve wracking process. Frustration is pretty much par for the course. It is especially overwhelming when you are looking for your first apartment. The good news is that a little organization can make the process much, much easier. You simply need to know exactly what you are looking for, what you are able to spend, and what concessions you are willing to make. 

One of the biggest things that you need to make sure that you do before you even head out to look for an apartment is make a list of everything that you want out of an apartment. How many bedrooms you are looking for, are the appliances new, is the water and heat included in the monthly cost? These are all very important questions that should be considered before you look for your dream apartment. 

If, for example, you have pets, you will want to look for buildings which accept them. Other considerations include the kind of amenities you are looking for - gym, pool, laundry room, parking garage, et cetera. All of these things can help you narrow down your apartment search. 

After completing your list, however, you need decide which of those features do not need. If, for example, there is a gym or a YMCA down the street, you may be able to do without the in house gym. You need to be willing to make some compromises, depending on what is on the market and what you can afford. 

One thing that you need to remember when you are searching for the perfect apartment is to compromise. You may not be able to afford everything that is written down on your list, you definitely need to take your budget into consideration and if you go into apartment hunting with this attitude, it will be a lot less frustrating. 

You need to make sure that you are not going to go out apartment hunting with the flat or apartment of your dreams in mind. Making compromises and concessions is an absolute necessity when looking for an apartment. 

After your list is compiled and you have come up with some potential apartments, then you need to start taking specific notes. Make a list of addresses, names - for owners, landlords, and so on - and the features that each apartment has. Now you are ready to visit each one and talk to landlords, asking specific questions that will ultimately lead you to finding your new apartment! 

Article Source: ABC Article Directory


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