Lending In The Age Of Lying; "Reframing" Is OK; Fraud Is Not

Lending In The Age Of Lying; “Reframing” Is OK; Fraud Is Not

By Jay Voorhees

August 9, 2021 4 min read

MORTGAGE BANK OWNER EXITS BUSINESS PRIOR TO 2008

Heejin and I were chatting recently with one of the few major mortgage bankers to have the foresight to get out of the mortgage business prior to the 2008 mortgage meltdown.

He knew the end was near because he was playing golf at Pebble Beach with a bunch of loan officers who were on their cell phones the entire time.

It turns out that the loan officers were “coaching” all of their subprime clients to blatantly lie about their income and assets.

That was the era when custodians, waiters, and lawn care workers ostensibly made $250,000 per year – just enough, it turns out, to qualify for subprime financing (used to finance homes for speculation).

I loved hearing this story because I suspect that the loan officers were “proud” to have the mortgage bank owner hear how “creative” they were, when they were really just committing fraud and scaring the hell out of him.

IS FRAUD BACK?

Fraud is not even close to the level it was prior to 2008, but it is on the rise according to this CoreLogic Report.

According to the report, fraud is more prevalent with purchase loans; Florida seems to see more of it than other states; and most fraud revolves around income, employment, and occupancy.

TO LIE IS HUMAN

Today’s blog was inspired by this excellent Andy Kessler Column in today’s WSJ – titled “To Lie Is Human.”

Mr. Kessler confesses his own sins by telling about the time he had his own son lie about his age several times in a single day (his son had to say he was older than he was to ride horses and younger than he was to get a free ski lift ticket). I would self-righteously scoff at that, but for the fact that I may have been guilty of making my own kids do the same about … a zillion times. Sorry kids! 😊

Kessler’s main point though was that lying seems to be peaking right now in the age of social media and fake news when politicians, bureaucrats, institutions, and media pundits seem to be able to get away with saying anything.

He also references famous financial markets fraudsters like Adam Neumann (WeWork) and Elizabeth Holmes (Theranos), claiming that they may have actually believed their own B.S. and that most people can’t help but to lie on occasion.

His final point was a quote by Mark Twain: “If you tell the truth, you don’t have to remember anything.” (you don’t have to keep track of all your lies)

“REFRAMING” INSTEAD OF LYING – TELL YOUR LOAN ADVISOR ANYTHING!

THIS is the main point of this blog. No lender will help borrowers commit fraud in this day and age for moral reasons and/or because the risk of getting caught (with severe penalties) is so high.

BUT – every loan advisor will happily help borrowers “reframe” various unfortunate events in a way to help borrowers qualify for a loan.

If a borrower owes back taxes, a loan officer might help a borrower blame his CPA as opposed to having the borrower say that he just failed to save enough – which could be a deal-killer.

If a borrower missed a rent payment, he might blame his bookkeeper or some other cause instead of just saying… “I forgot to pay…”

Job gaps can be similarly “framed.” Nobody is encouraging blatant lying – to be clear – as there needs to be an element of truth; but “reframing” things carefully can and will often save deals.

It is important for borrowers to remember that their loan advisor is a “conduit” or safety net between the borrower and the underwriter.

So, borrowers can and should disclose most everything to their loan advisor, so she can in turn help borrowers “reframe” things in a way that will prevent deals from dying.