Incomes went unchecked

Tuesday, April 8, 2008 | 2:05 a.m.

Critics of proposed federal legislation to help remedy the nation’s subprime mortgage crisis say much of the fault for the nation’s wave of home foreclosures lies with those who borrowed more than they could afford.

However, as financial experts said in a New York Times report this weekend, much of the criticism for these unsecured loans should fall on lenders many of whom failed to make sure borrowers earned enough to pay back their loans.

To obtain a home loan, most borrowers must sign a document that gives lenders permission to verify their incomes with the Internal Revenue Service. This includes not only loans for which borrowers provide a W-2 or other income verification documents, but also loans based on what a borrower says he or she earns.

Such permission to check with the IRS didn’t necessarily prompt lenders to do so. Mike Summers, vice president of sales and marketing at Veri-tax Inc., a company that performs these IRS checks for lenders, told the Times few subprime lenders were even willing to discuss such income checks.

Some lending companies said it cost too much, even though such checks cost about $20 per loan on average, Summers told the Times. Other lenders said the checks took too long, when in reality it took only a day to get the IRS information less time after 2006, when the IRS automated its system. Lenders “just didn’t want to know because it would kill the deals,” Summers said.

This is outrageous. Checking a prospective borrower’s income is among the most basic safeguards needed when making a loan.

In untangling the nation’s foreclosures, Congress must figure out who deserves help and how much help the government should give. Although the answers to those questions won’t be easy, it is abundantly clear that the government has no business bailing out lenders who failed to verify the incomes of those borrowing money to purchase homes.