“predatory borrowing”

HARRY S TRUMAN once said he wanted to talk to a one-armed economist, “so that the guy could never make a statement and then say: ‘on the other hand.’ ” Yet economic knowledge continues to progress in unexpected ways. Here are a few of the things we learned in the last 12 months:

So We Thought. But Then Again . . . IT’S NOT JUST THE LENDERS

Excerpt:

IT’S NOT JUST THE LENDERS There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.

Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.

In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application.

Comment: Hence the need for Lenders to perform due diligence on borrowers!