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Mortgage Meltdown Word of the Week: Liar Loans.

Posted on | October 14, 2008 |

In case you haven’t yet heard the term Liar Loan….

From Investopedia:

“A category of mortgages known as low-documentation or no-documentation mortgages that have been abused to the point where the loans are sometimes referred to as liar loans. On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply stated on the loan application.”

I love terms like “low-documentation” loan programs, don’t you? Sounds much better than give money to anyone with a pulse loan program.

“On other loan programs, such as no income/no asset (NINA) loans, no income and assets are given on the loan application form. These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders.”

“Open the door”? It’s practically sounding the dinner bell! This is exactly the sort of loan that Casey Serin took advantage of when building his flipping fortune, only he ended up getting flipped and walking away from his mortgage obligation, leaving the honest tax payers holding the bag. He’s a real class act.

Investopedia goes on to say:

“These loan programs are designed for borrowers who have a hard time producing income and asset verifying documents, such as prior tax returns, or who have untraditional sources of income, such as tips, or a personal business.”

Am I missing something here? How hard is it for honest people to produce income verifying documents? Either you have an income, can afford the loan and have the documentation to prove it, or you probably can’t afford the loan. In which case, hasta la vista baby.

Well, that’s how it would work in my world. Obviously, I’m not the one running things or we wouldn’t have been giving home loans out like candy in the first place.

“Low-documentation mortgages usually … depend heavily on a borrower’s credit score (FICO score) and the mortgage’s loan-to-value ratio (LTV) as tools to determine the borrower’s ability to repay the mortgage.”

I don’t care if you have a picture-perfect credit score and the value of the property is assessed at $1,000,000 when you’re taking out a $250,000 loan - if you have no income and no assets, how are you going to pay the loan off?

What wizard of smart thought this one up?

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Comments

2 Responses to “Mortgage Meltdown Word of the Week: Liar Loans.”

  1. MoneyGrubbingLawyer
    October 14th, 2008 @ 2:03 pm

    Wow, with loan programs like that it’s no wonder so many banks are getting hammered.

    “Do you think you can afford this loan?”
    “Ummm… sure!”
    “Here you go!”

    Even people with “non traditional” income sources like tips or self employment income should be able to produce tax returns verifying their income claims. If not, they’re either lying on their taxes or haven’t been in that business long enough to have made any filings, and in either case they’re not great loan candidates.

  2. Joe
    October 15th, 2008 @ 10:40 am

    MGL:

    Amen brother!

    It’s all part of what makes the bailout so hard to push on the public too. The way it’s supposed to work is companies that engage in these kinds of activities fail when things catch up with them. Of course, these banks are “too big to fail” so they basically get away with it.

    It’s a big mess.

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