Beware Of Liar Loans
Some borrowers are lying about their income in order to buy a home. This show exposes the sleazy side of mortgage lending.
I'm beginning to have serious doubts about the sanity of some homebuyers, particularly those who are willing to go to extremes in a desperate effort to `get on the property ladder'.
In particular, I fear for the finances of homebuyers who are willing to lie about their earnings in order to secure a higher mortgage than they would otherwise qualify for. Indeed, I'd urge you to listen to the File on 4 programme broadcast on BBC Radio 4 at 8pm this evening. If you miss it tonight, you can catch it on Sunday at 5pm, or use the BBC's listen again online service.
File on 4 reveals the results of a BBC investigation into the UK's `subprime' mortgage market. Subprime lenders offer home loans to people who have difficulty borrowing on the high street, for example, adults with poor credit histories, low incomes or irregular earnings. Furthermore, around half of all subprime mortgages are `self-certified' loans, where lenders don't ask for any proof of income from borrowers.
Of course, as borrowers don't have to provide documentary proof of earnings, some succumb to the temptation to exaggerate their income in order to obtain a loan. Indeed, the BBC found evidence that some mortgage brokers advise their clients to `bump up' their wages in order to obtain larger loans. In fact, industry insiders and whistleblowers warn that fake `wage inflation' is rampant among borrowers in the subprime sector, and needs to be stamped out.
Obviously, borrowers who overstate their earnings in order to get larger loans risk losing their homes when they become unable to meet their monthly repayments. One man interviewed by the BBC has a genuine income of £25,000, but was encouraged to state his annual salary as £50,000 on his `self-cert' mortgage application. This enabled him to borrow more than £200,000, or over eight times his true wage. His mortgage repayments now take up the majority of his take-home pay, so he has fallen behind with his repayments and faces repossession -- that is, eviction and the forced sale of his home.
Furthermore, knowingly inflating your income in order to obtain credit is described in criminal law as "attempting to obtain pecuniary advantage by deception", or, purely and simply, fraud. Worryingly, when `liar loans' eventually collapse, some borrowers will face criminal proceedings and even prison sentences. Surely that's too high a price to pay to leap on the wretched, overpriced property ladder?
Let's hope the BBC forwards its findings to City watchdog the Financial Services Authority (FSA), which is conducting its own inquiry into mis-selling by subprime lenders and brokers, as I explained in Malevolent Mortgages Under Attack. Indeed, the FSA has already banned several brokers who have engaged in these shady practices.
Unless this unsavoury system is killed off, mortgage arrears and repossessions will soar, heaping more misery on overstretched borrowers. What's more, the International Monetary Fund has warned that the UK's subprime mortgage market faces similar problems to those already encountered in the US. This could prove nasty for both the housing market and the economy, so watch this space...
Finally, ask yourself: is buying a home worth paying any price, no matter how high? Not for me, thank you!