Liar Loans and Foreclosure

Posted on September 8th, 2008 by saman

Liar loans are mortgage loans that are approved without the borrower being required to show proof of their income and/or assets. The worst of these “liar loans” have been called “ninja loans”. A ninja loan means no income, no job and no assets. The nation has been hit with the end result of subprime mortgages and is currently dealing with a second wave of home losses because homeowners have defaulted on these “liar loans”. In certain parts of the nation, the liar loans may drag out the mortgage problem for an additional two years.

There are many owners of homes with liar loans that are stuck in their situation. They cannot refinance their home because the prices of houses have dropped and lenders and banks are now in need of a full disclosure of your assets and income.

The amount of money lost on liar loans could reach one hundred billion according to Economy.com. This is in addition to four hundred billion in losses on subprime mortgage loans.

Freddie Mac and Fannie Mae are two of the country’s largest backers and buyers of home mortgages. Between April and June they lost a combined amount of three billion dollars. Half of these losses came from the faltering of liar loans.

Liar loans were very profitable because of the high fees and high interest rates. A mortgage broker who assigned a liar loan to the home owner could get as much as fifteen thousand dollars in fees for a loan worth three hundred thousand dollar loan. In traditional lending, mortgage brokers only received two thousand and four thousand dollars in fees on a loan with a fixed rate.

When the housing boom occurred, liar loans were very popular with real estate investors that wanted to flip homes fast. These loan included interest only features that let the home owner would pay only the interest on the loan and not the principle for the first couple of years.

Loans that were even riskier than liar loans were ARM or pick a payment loans. These were adjustable mortgages that gave potential home buyer the option to defer some interest payments and attach them to the principal of the loan.

The low payments of liar loans assisted home owners in buying homes in areas where the prices of houses were rapidly going up. This allowed individuals to purchase more house than they could reasonably afford.

Since prices of foreclosed homes have dropped, about thirteen percent of home owners with liar loans got two monthly behind on their house payments in the month of May

Countrywide Financial which is now a part of Bank of America was one of the top suppliers of liar loans. The company is now paying for this because over twelve percent of Countrywide’s twenty five billion dollar pick-a-payment loans are in default. Eight three percent of these loans have space or no documentation.

Freddie Mac and Fannie Mae began to engage in risky loans after dealing with an accounting scandal. At the same time Bear Stearns and Leahman Brothers were backing loans that were even riskier because both government backed companies felt they had to compete.

Fannie Mae and Freddie Mac are now reviewing loans that have defaulted and are investigating whether or not the lenders or banks have engaged in fraud. If evidence is found, lenders will be forced to take responsibility for their losses.