There is a type of loan where a borrower can state his or her income without having to prove it.
No tax return. No pay stubs. Just a signature.
These "liar loans" ushered new investors into the Florida real estate market, spurred boom towns like North Port and Lehigh Acres, and ultimately contributed to bank failures and neighborhoods blighted by foreclosures.
They also opened the door for fraud.
Commerce Bank of Southwest Florida made its share of liar loans, according to state regulatory reports. It started making them after the real estate market had peaked. The bank failed in just four years because it tried to compete with much larger banks in a crowded marketplace.
Many of Commerce Bank's loans went to speculators who were buying homes from builders, intending to flip them for a profit as soon as they were out of the ground.
Two home builders bought property with stated-income loans — which is the official name for a "liar loan" — "based on fraudulent information" and failed to repay them, creating $1.7 million in losses for Commerce Bank, according to regulatory reports.
Commerce also lent $344,000 to Hans Bauer, a mortgage broker later extradited to Germany on mortgage fraud charges. And it gave $1.5 million to Brian Dunphy, who used the money to build a waterfront house in Fort Myers.
Dunphy "engaged in some fraudulent statements" when he applied for the loan, regulatory reports say.
Examiners found Commerce Bank made these loans, which all ended in default, because it was following the lead of other larger lenders in the area.
But its chief executive, Mark L. Morris, argues that his bank did nothing wrong, and that Congress approved stated-income loans to encourage homeownership among people of low to moderate incomes.
"There's two sides to every story," Morris said. "Regulatory reports are intentionally designed to say doom and gloom. We were praised the year before the market collapsed. Then when the market changed, they chose to point fingers at management and the board of directors."
Morris said the reason for Commerce Bank's failure was that Fannie Mae and Freddie Mac — the giant, government-backed mortgage companies — stopped buying loans in 2007. Commerce Bank had nowhere to sell its loans, real estate prices began to drop and borrowers walked away from mortgages.
"Our dilemma was that we did not have 14 to 15 years of retained earnings to fall back on," Morris said.