When I originally bought my house in Ann Arbor in the summer of 2000, I got a loan through a mortgage broker. It was a "no income verification" loan, which I was able to get with a good credit score and by putting 20% down. I got a 5-year fixed ARM, and the broker assured me he'd help me refinance for free after a couple years. The broker took care of everything, and there wasn't a hitch.
At the end of 2002, rates had gone down significantly, and I called up the broker again to refinance. Of course, his previous offer to help me refinance for free was just a load of bullshit; he wanted to charge a lot and the deal he offered wasn't very good, so I went off on my own to refinance. I first called Wells Fargo (I think) but never actually got through to anybody. I then called Washington Mutual, and they were only too happy to help.
Washington Mutual offered me a great rate, so I was going to save about $350/month for another 5-year fixed ARM. Thankfully, this wasn't a super-gimick loan where I was paying interest-only, but after 5 years it was going to reset to a significantly higher rate. However, I was fairly confident (correctly so!) that wouldn't still be in Ann Arbor in five years, so this wasn't going to be a problem.
Anyway, I fill out all the paperwork, and it all looks good since I have a good credit score, and a significant amount of equity in the house (I wasn't taking any money out). But I still needed to fax them a table listing my sources of income-- they weren't going to verify any of the sources, but they still wanted this on record. I wrote down an honest list, faxed it to the loan officer, and got a call back:
Loan Officer: The income you've listed here isn't sufficient to give you the loan.
Me: Wait, you aren't verifying it, does it matter?
Loan Officer: It matters for our records.
Me: So what can I do? That's my income.
Loan Officer: Do you have any other sources of income? Perhaps there's a Rykoff Family Trust that provides you with income?
Loan Officer: Is there a Rykoff Family Trust that provides an extra $5000/year income?
Me: A Rykoff Family Trust???
Loan Officer: That's right, is there a Rykoff Family Trust?
You could hear her winking over the phone.
I wrote down what she told me to; I got the loan; and sold the house before the rate reset. But they were so eager to give me the loan, and were actively encouraging how to doctor the application. And so it's no surprise that they got swallowed up in this mess.