Monday, June 2, 2008

Borrowers Who Lie

Amir Efrati of the Wall Street Journal asks the question “Are Borrowers Free to Lie?” in an article about a court case in California. A bank sued Cecelia and Norman Hill for lying on a mortgage application. What makes the case unusual is that the Hills have already been through bankruptcy.

Even though the Hills’ debts had already been dealt with during the bankruptcy, the bank argued that the Hills should still be responsible for their mortgage because they lied on their application.

This case illustrates the abuses that went on during the housing bubble. No matter which party you focus on, they deserve to lose.

The Hills deserve to lose for lying. However, they have already faced the significant financial pain that comes with bankruptcy. Anything more would seem to be piling on.

The bank deserves to lose because they ignored their own rules about checking the accuracy of loan applications. The application listed the Hills’ occupations as a delivery driver and an employee for an auto-parts distributor with a combined income of $191,000. Someone wasn’t trying very hard to find fraudulent applications.

The Hills claim that the inflated incomes were filled in by their mortgage broker and the bank. If this is true, then the mortgage broker deserves to lose as well.

In the end, the court did the only reasonable thing which was to say that the Hills don’t have to pay anything to the bank beyond what was awarded during the bankruptcy. But, it would have been nice to see all parties lose, including anyone who made a commission or bonus from the mortgage.

To answer the question asked in the article “Are Borrowers Free to Lie?”: yes, they are if the bank is stupid, the mortgage broker corrupt, and the borrowers are content to go through bankruptcy after their financial lives blow up.

5 comments:

  1. Personally, I think it's fraud and criminal charges should be considered.

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  2. But when is it inappropriate to lie? My guess is when you get called down by the CCRA then you might want to be as trutful as possible.

    Either that or keep lieing and see what happens? At least you end up living rent free with 3 square meals a day, and a friendly roommate.

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  3. Jim: I had the same thought about criminal charges, but against whom? The borrowers who signed papers without reading them, or the mortgage broker and bank employee who filled out the forms with lies for the borrowers, or the other bank employees who looked the other way and collected their bonuses? My vote is for all of them.

    Big Cajun Man: You're right about the dangers of lying to tax collectors.

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  4. Yes, all of them. During the investigation, hopefully the extent and frequency of all the lies will come out.

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  5. I suspect outside of the bankruptcy context, the Court may have awarded partial damages to the bank but also said it was contributory negligent in not conducting the proper due diligence.

    But since it was in a bankruptcy court and the bank got its pound of flesh from the liquidation of the estate, I am not sure kicking the borrowers while they were down would constitute appropriate justice.

    Having said that, you reap what you sow in life and I feel sorry for no one in this story. The sad part of this story is that 3-5 years from now we'll read another similar story but replace real estate with some other bubble commodity.

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