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Sunday, September 28, 2008

How Bad is it...Three Words...620 Stated, Stated

Do you want to know just how bad our mortgage crisis is? First, you should know just how far credit was loosened at the height of the boom. The most aggressive loan, one that became an industry standard, was one known as 620 Stated/Stated. What does this mean? It means someone with a 620 credit score could get a loan without ever proving either how much money they made or how much money they had in the bank, and they could do all of this and still buy a property WITH ABSOLUTELY NO MONEY DOWN.

Now, let's just see how irresponsible this loan was. The median credit score is about 660-670. That means the middle of the country has a score of 660-670. As such, someone with a score of 620 is somewhere in the bottom fifty percent of this country. They are probably somewhere in the bottom 30-40% of all scores. As such, someone who is looking up at 60-70% of the country in terms of credit worthiness was still able to get a loan. They weren't merely able to get a loan though. The could get a loan even though they never had to verify just exactly how much money they made yearly. Often times, these were salaried employees who made exactly the same each and every month. Banks were allowing teachers to state that they "made" a 100k yearly. Secretaries were allowed to state that they "made" 60k yearly. Janitors could "state" that they made 50k and more. Small business owners and salespersons could state whatever they wanted, since those professions had no limits.

Of course, there is more. Besides stating their income, these loans allowed borrowers to state how much they had in the bank, 401k and other investments and money accounts. If you think it was ridiculous that someone is allowed to state but not verify their income, how ridiculous is it to state but not verify the assets they have in a bank account? Of course, we are still not done. After a 620 score stated income and stated assets, they were still allowed to buy a home with no money down. If you think it can't get any worse, it can. Sometimes, banks would allow these same borrowers buy two unit properties with the same guidelines. How dangerous is that? Well, since there is no history of rental income, often times, bank would merely accept a"lease" to verify the income the borrower would receive from the extra unit. In other words, their income, their bank assets, and their rental income could easily be simply made up.

How prevalent is this loan? No one will ever know that, but I suspect that more than half these loans will default. Let's think about just how dangerous these loans are. Since they bought the property with no money down, the loan is almost certainly worth more than the value of the property. Since they put nothing down, they have litte invested in the property. Since these folks are in the bottom 30-40% of all credit worthiness, they have a great motivation to simply go bad on the loan.

Now, if you aren't already scared, let me really scare you. Guess how human nature works. Once an extreme loan is developed, guess where most professionals gravitate to. This was never some off the wall program that was used sparingly, not at all. Once this program was developed, mortgage professionals suddenly had a plethora of new loans to do. That's because there were all sorts of folks that didn't qualify under previous programs. Suddenly, they had a program for them. That's exactly what happened. Unfortunately, human nature is such that the most extreme products are also the ones that are most used. When some financial analyst uses the term toxic, just remember the loan 620 stated stated.

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