Posted on Tue, Aug. 19, 2008
'Liar loans' bring new wave of mortgage difficulties
By ALAN ZIBELThe Associated Press
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In the mortgage industry, they are called "liar loans" — mortgages approved without requiring proof of the borrower’s income or assets. The worst of them earn the nickname "ninja loans," short for "no income, no job, and (no) assets."

The nation’s struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for an additional two years.

"Those loans are going to perform very badly," said Thomas Lawler, a Virginia housing economist. "They’re heavily concentrated in states where home prices are plummeting," such as California, Florida, Nevada and Arizona.

Many homeowners with liar loans are stuck. They can’t refinance because housing prices in those markets have nose-dived. And lenders are now demanding full documentation of income and assets.

Losses on liar loans could total $100 billion, according to Moody’s Economy.com. That’s on top of the $400 billion in expected losses from subprime loans.

Feeling the crunch

Fannie Mae and Freddie Mac, the nation’s largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from liar loans, which are officially called Alternative-A loans (Alt-A for short) because they are seen as a step below A-credit, or prime, borrowers.

Many of the lenders that specialized in such loans are now defunct — banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More may follow.

The mortgage bankers and brokers who survived were more cautious, but they acknowledge that they too were swept up in the housing hysteria to some extent.

"Everybody drank the Kool-Aid," said David Zugheri, co-founder of Texas-based lender First Houston Mortgage.

If they didn’t give the borrower the loan he or she wanted, the borrower "could go down the street and get that loan somewhere else," he said.

How they work

The loans were also immensely profitable for the mortgage industry because they carried higher fees and interest rates. A broker who signed up a borrower for a liar loan could reap as much as $15,000 in fees for a $300,000 loan. Traditional lending is far less lucrative, netting brokers about $2,000 to $4,000 in fees for a fixed-rate loan.

During the housing boom, liar loans were especially popular among investors seeking to flip properties quickly. They were also commonly paired with features that allowed borrowers to pay just the interest on the debt and none of the principal for the first several years.

Even riskier were "pick-a-payment" or option ARM loans — adjustable-rate mortgages that gave borrowers the choice to defer some of their interest payments and add them to the principal.

The low monthly payments of liar loans helped many home buyers afford to buy in areas of the country where prices were skyrocketing.

But they also helped drive up prices by allowing people to buy more than they could truly afford. Case in point: About 40 percent of loans made in California and Nevada in 2005 and 2006 were either interest-only or option ARMs, according to First American CoreLogic.

"It was pretty evident that the only thing that was supporting these loans was higher home prices," said Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.


http://www.star-telegram.com/business/story/842627.html