The Making of a 'Liar's Loan,' With Help From the Loan Officer

Mortgage application
Mortgage application

Now that we're in the midst of the post-housing bubble foreclosure mess, it's easy to lose sight of part of how we got here: "liar's loans."

Liar's loans were mortgages that didn't require the wannabe borrower to prove she could repay the loan. They came in various flavors, allowing the borrower to state without proving her income, or assets, or both. These loans violated all the basic principles of underwriting, the process banks abandoned during the housing bubble. And it's no wonder most are ending in foreclosure.

And as a fax-email exchange first posted by the blog Foreclosure Fraud shows, the fraudulent nature of these loans was not only no secret at the banks, but bank staff steered applicants into filling out mortgage applications with false information. While I realize what follows is a single exchange, keep in mind when reading it that:

  • It involves a "Senior Loan Officer" -- how rogue can the behavior be?

  • The tone and details indicate this was a normal activity for at least this employee.

  • While it involves a JPMorgan Chase (JPM) loan, it cannot be true that Chase was the only mortgage lender behaving this way. Nothing that's come out to date about housing-bubble loans suggests Chase was unusually irresponsible. To the extent a big mortgage lender has gotten that rep, it's been Countrywide, which Bank of America (BAC) swallowed.

  • The borrower was sent documents and apparently was asked to sign them. Rather than sign them, the borrower asked questions. When reading the questions, think about the idea that the borrower was asked to sign these papers.

  • Finally, the borrower seems pretty sophisticated. Imagine how the process would work with a less sophisticated one. would they ask any of the questions?

So, here are the key bits:

On Sept. 25, 2006, aspiring borrower faxes Marc Bristol, senior loan officer of JPMorgan Chase Home Mortgage, regarding a mortgage application:

"I have the following concerns with the documents you sent me:

(1) I do not make $34,000 a month or anything close to this figure. I am not comfortable signing a document with a number I can not document in some form.

(2) There are repeated mentions that this is an adjustable rate mortgage. I could find no mention of the frequency and amount of the adjustment. I need this.

(3) I do not wish to escrow insurance or taxes. I will pay these.

(4) Apparently this is a $417,000 first and a $70,000 second. Where are the documents for the second? What is the rate, how adjustable, what are the costs, what is the term? Why are we doing it this way?

I will need the information and answers I have requested before I can execute and return the documents."

And the borrower cc'd someone else, presumably a co-applicant, given Bristol's same-day emailed response, which is as follows:

I hope all is going well you. [sic] This e-mail is in response to the fax you had sent me. I'll address each numbered concern:

1. This is a stated-income deal. We had to state an amount that will be consistent through each deal. There are certain ratios that have to be met for income to debt. With [property 1] AND [property 2] AND taxes and insurance on your current, this is the figure that made the ratios fit. Since you have ample equity and assets, along with great credit, this where the luxury of a stated program comes in. It will not need to be documented. If there is a form 4506 (request for tax transcript) in the package that needs to be signed, it is only to verify that you FILE your taxes.

2. This is a loan that is listed for 5 years. The initial fixed, locked-in rate will be good for 5 years. After that it turns into a 1 year adjustable, meaning that, on it's [sic] 1 year anniversary, it will adjust, adding an index (1 year LIBOR) and a margin (2.25%) together. The maximum cap is 5 years over the life of the loan.

3. Escrows will be waived. The only reason they show up is for qualifying purposes. If they were on the Good Faith Estimate, I apologize. Please remove ANY "reserves deposited with lender" and initial.

4. The route we took to get the absolute best rate, was keeping the first mortgage at a "conforming" or "conventional" amount. 417,000 is that maximum amount. Once it went to a "JUMBO" or "Non-Conforming" loan amount, the rate jumps .25%
The second mortgage of 70,125 is to avoid mortgage insurance and allow you to put less down. The ideal goal would be to pay that one down and use it for future purchases.

I appreciate all your business and want you to be as comfortable with me as possible. I know we've had some delays that seem a bit silly, but I guarantee that I'm laying the foundations for these deals and several more. Once we get these initial few closed, it's smooth sailing from there on out. If you'd prefer a sit-down sometime this week, please let me know. I know you gentlemen are busy, but I want you to be confident AND comfortable with me.


Marc S. Bristol
Senior Loan Officer

JP Morgan Chase Home Mortgage

When I reached out to Chase for comment on this 2006 exchange, spokeswoman Daisy Cabrera said: "Our disciplined underwriting requires that we verify income on all mortgage applications." I'm sure that's true these days, and it was probably true pre-bubble, but as to those heady bubble days? The fax/email exchange speaks for itself.

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