Borrowers Lie for Better Loan Mods, Real Estate Players Say

About 588,000 borrowers walked away from homes last year, double the number in 2007, according to a recent study by credit-scoring firm Experian and management consultants Oliver Wyman.

(ABC News Photo Illustration)

In his 25 years as a real estate agent, Jim Klinge has seen plenty of borrowers try to work the system, especially in subprime-scourged North San Diego, where he works and lives. Like many in his industry, he says the Obama administration's $75 billion loan modification plan is giving rise to another bout of fraudulent mortgage activity. "With all certainty, it's being gamed," he says.

Under the president's program, if a borrower is deemed in "imminent default," the lender and Uncle Sam will rework the mortgage by lowering interest rates, stretching out the payback term or lowering the principal to reduce the monthly payment to less than a third of the borrower's current income.

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The idea is to keep people who bought too much house paying their mortgages in order to stem the next wave of foreclosures. Moody's estimates 5 million Americans will lose their homes in the next three years, even with a "robust" government modification effort. Klinge and other industry players say borrowers are fibbing about their income and expenses in order to get lower payments, just as they lied in order to buy a bigger home on the way up. "And it's a lot easier to show you're broke," he said.

The administration hoped to help 4 million borrowers--about 1 in 15 Americans with a mortgage--through its modification push. So far, only about 200,000 trial modifications are in process. (See "Weak Progress On Loan Modifications.") "The real question is how many people fall into these categories," says Steve Malanga, a senior fellow at the Manhattan Institute, a conservative think tank.

Under the program, if a borrower makes too much money, the prospect of getting a lower monthly mortgage payment might encourage them to ratchet down their current income. Millions of Americans are self-employed, so they could decide to pay themselves less this year and invest more in their company. "It's a real hazard," Malanga says.