Thursday, January 18, 2007

The Gong Show #2 - Liar's Loans

For this weeks Gong Show, I am presenting the 'Stated Income' mortgage or as its also known - the Liar's Loan. What is a 'Stated Income' mortgage you ask?

This is the marketing pitch from a leading Canadian mortgage company:
"You are independent. And so is your income. But what you make on paper isn't always what you can bring to the table. So when it comes to affording the home you want, getting the mortgage you need can be a trying experience. It doesn't have to be that way. There are different ways of measuring worth. After all, shouldn't your business be your business? Now, there's a mortgage that assumes you are as good as your word. The mortgage is a stated income mortgage tailor-made for self-employed Canadians. It offers an easier mortgage approval process that accommodates your income situation. When it comes to getting the home of your dreams, something as simple as a T4 shouldn't get in your way. All it takes to qualify is your word on income, some employment verification and an assurance that your lending ratios, credit and tax liabilities are in good order."

Stated income loans are also called 'liar's loans' because they almost invite the borrower to lie about his or her income. The practice of mortgage brokers selling this product hasn't really been epidemic in Canada (yet), but in the US and other countries the use of stated income mortgages has balooned well outside the intended target user of the product. From well heeled self employed persons to 23 year old wannabe Donald Trumps.

This financial product seems to me like it should get the gong because of its susceptibility to fraud and misuse. What do you think? What do you think of the CMHC (the federal government) insuring these mortgages?


solipsist said...

I posted a link to this post over at vancouver (un)real estate because it is, in a way, pertinent to a post about mortgages there.

I am dead-set against CMHC insuring these, or zero-down mortgages. They have turned into racketeers IMHO.

When I was pre-approved (by a bank and a broker) I needed to supply my notices of assessment (for 3 years) from Rev. Can. The bank offered me way more mortgage than I would ever even think of taking, and the broker was more stringent (or stingy?). Mind you, the bank has my nut in a GIC.

I do know someone who forged a T4 slip to get their first mortgage. He went on to foreclosure and divorce.

bc_cele said...

These loans are totally bogus, and for the most part, unnecessary. I was self-employed for a number of years and was still able to get loans. They were based on my 'Notice of Assessments' for the last two years and a statement from my current year-to-date statements; normally they want an accountant to verify them, but since I was one I was taken at my word. I could also get loans for my vehicles based on a sizable down payment and my credit score.

Seeing how these financial instruments have lead to massive fraud down in the US, I'm shocked that CMHC is doing this. Talk about being out to lunch.

mohican said...

I hear a resounding gong!

I agree bc_cele that even if you are self employed there are very effective ways of being approved with a normal mortgage.

I agree solipsist that the CMHC has waaaay overstepped their bounds in insuring the banks and mortgage companies from default risk on these insane products. I don't even know why we need the CMHC, there are private sector companies who would gladly take over that business and not risk our tax dollars.

Uncertain Buyer said...

Gong here. How much does the Borrower have to pay to the CMHC for this great product?

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