I know I've commented on this one before, but I want to lay a few things to rest here.

First, my qualifications to speak on the matter. In my years in the markets and in the world of work I have spent most of my time either self-employed, doing 1099 contract work, or running a closely-held company. There have also been stints where I was an old-fashioned W2 employee.

During exactly none of those times would it have been difficult or impossible for me to prove my assets and income. In fact, quite to the contrary - I could always produce a tax return.

Now people will say "but what if you run a small business and have a lot of write-offs?"

Uh, write-offs come because you're not making money. If you're not making money, you don't have money, right?

Let's take a real example - I currently own and operate a LLC. The LLC, Cuda Systems LLC, has two primary functions - it is company that sells spam-protecting software into the commercial marketplace (primarily governments) and it also is, at the present time, involved in developing a piece of diving equipment.

The latter is likely to be spun off into a second LLC if I actually decide to market that product.

Ok.

Last year the LLC incurred quite a bit of expense. The supplies to make the prototype of this piece of diving gear cost quite a bit of money. Tooling, some equipment, electronic components, sent-out jobs (machining, PC boards, etc), software (e.g. 3D CAD), etc.

All of this is a perfectly legitimate business expense. As a result the LLC showed a loss for this last tax year.

Well, ladies and gents, that was a real loss! I really had to spend the money. You can't generate a loss (or offset income) without really spending the money! At least, you can't do it legally.

Now I understand that some people are doing "stated" loans because they say "its too tough" to produce balance sheets, P&Ls, and tax returns. Huh? Can you explain that one to me again? You're running a small business but you don't have a balance sheet, a P&L statement, or a tax return?

Let me guess - you're selling on eBAY and not reporting the income (or paying tax on it.) You're doing unauthorized construction contracting (in Florida this is a felony!) for cash and pocketing the money (and not paying taxes on it.) Or any one of a number of other things.

What's the common denominator? You're breaking the law!

So now you want to buy a house. You go to Mr. Lender, and Mr. Lender becomes a complicit part of your little game full of fraud, in that he allows you to "state" your income. By doing so he has furthered your attempt to either (1) rip off the government, or (2) simply lie.

Either way the very fact that you want to "State" your income (instead of proving it) means that you're cheating somewhere.

And, it seems, the split is about 50/50. When HUD started investigating this, they found that about half of all these "Stated income" loans had incomes inflated by 50% or more.

The other half, I presume, belonged to massive tax cheats.

Perhaps you can explain something to me - how do you defend issuing loans to people who are at risk of the IRS coming in and seizing everything (including that nice house!), or, in the alternative, who are lying about their income and thus are unlikely to be able to pay (and once again that nice mortgage isn't going to be paid off)?

Perhaps this gambit works in times when the housing bubble is inflating at a ferocious rate, but those days are behind us.