Foreclosures – Part II

Point 2

Where did the money come from, and how easy was it to get?

No-docs were used more aggressively as the boom began to fizzle.

The following appeared in a Wall St Journal article.

Brokers had extra incentives to sell those loans, which have terms that often are confusing to borrowers.

Rate Sheet via WSJ

For instance, according to a March 2007 “rate sheet” (Click on image left) distributed by New Century Financial Corp., now in bankruptcy-court protection and no longer making subprime loans, brokers could earn a “yield spread premium” equal to 2% of the loan amount — or $8,000 on a $400,000 loan — if a borrower’s interest rate was an extra 1.25 percentage points higher than the Irvine, Calif., lender’s listed rates.

Borrowers weren’t supposed to see the information. Tiny print at the bottom of the document warned: “For wholesale use only. Not for distribution to the general public.”

On average, U.S. mortgage brokers collected 1.88% of the loan amount for originating a subprime loan, compared with 1.48% for conforming loans, according to Wholesale Access, a mortgage research firm.

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And in this report of 61,000 Sacramento-area mortgages over two years, the Sacramento Bee says

In 2005, while the market was still relatively healthy, the median household income of Sacramento County homebuyers was $78,650, according to U.S. census data. The median income reported on loan applications was $90,000, a difference of 14 percent, according to records available under the Federal Home Mortgage Disclosure Act.

In 2006, as the market went cold, incomes were pumped up even more. Homebuyers in Sacramento County earned median household income of $79,735, but the median income reported on mortgage applications was $97,000, a 22 percent difference.

Income discrepancies pop up throughout the region. The median income on mortgage applications in Yolo County last year was $104,000; the median income of Yolo homebuyers was $83,400. El Dorado County homebuyers earned $100,000 but their loan applications said they earned $126,000. Placer County homebuyers earned $90,115, but loan applications said they earned $116,000.

In northern Sacramento, including Del Paso Heights and North Highlands, the median income reported on mortgage applications last year was $95,000. But the median income for all northern Sacramento households was $36,000, according to research firm Claritas.

In south Sacramento, including Meadowview, Fruitridge and Florin, the median income reported on mortgage applications was $84,000. But the median income among all south Sacramento households was only $36,000 in 2006. Only 12 percent of all households in those neighborhoods earned as much as $84,000, Claritas said.                             (From the The Sacramento Bee Published: Sunday, Nov. 18, 2007)

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….specialists spoke of a reckless culture in which lenders failed to make even basic checks on borrowers’ income. Phillip McCall, a mortgage fraud investigator, cited a case of a warehouse worker who applied for a mortgage, claiming an income of $7,500 per month: “Basic common sense is going to tell you someone in a warehouse is not going to be earnings $90,000.”

Read the full article here….

Who is to blame for this……. Part III to follow