One of the problems with stated income mortgage loans -- whether they are first mortgages or HELOCs -- is that the lender relies on the borrower to correctly represent income. And in some cases, the borrower overstates his or her income in order to get the loan.
Recently, this happened with National City. National City initiated foreclosure proceedings against a borrower with a stated income HELOC. The borrower filed for Chapter 7 bankruptcy. Calculated Risk describes the ruling:
Judge Leslie Tchaikovsky ruled that a National City HELOC that had been "foreclosed out" would be discharged in the debtors' Chapter 7 bankruptcy. Nat City had argued that the debt should be non-dischargeable because the debtors made material false representations (namely, lying about their income) on which Nat City relied when it made the loan. The court agreed that the debtors had in fact lied to the bank, but it held that the bank did not "reasonably rely" on the misrepresentations.
You mean that mortgage lenders should also do their own due diligence in making sure that borrowers can repay loans? Fancy that...
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