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`Liar loans' threaten to extend mortgage woes
The already-battered lending market sees a new wave of issues as many default on contracts approved without proof of income
By ALAN ZIBEL The Associated Press
Aug. 23, 2008, 12:59AM
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Paul Sakuma Associated Press
Homeowners were already being hit with foreclosures, and now the housing market is seeing a second wave of losses as those with "liar loans" are defaulting.
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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 consumer proteciton against payday loans struggling housing market, already awash in subprime foreclosures, is 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 two more years.
"Those loans are personal loans no credit check going to perform very badly," said Thomas Lawler, a Virginia housing economist. "Theyıre 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 demanding full documentation of income guaranteed loans and assets.
Losses on liar loans could total $100 billion, according to Moody's Economy.com. That's on top of the $400 deceptive student loans billion in expected losses from subprime loans. 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 best debt consolidation loans from sour 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 san diego jumbo loans that specialized in quicken loans such loans are defunct ‹ banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More lenders may follow. The mortgage bankers and brokers who survived were more cautious but Loans Affiliate Programs Htm acknowledge 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. They knew if they didn't give the borrowers the loans they wanted, the borrower "could go down the street and get that loan somewhere else."
The loans were also immensely profitable for the mortgage industry because they carried higher fees and higher 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 $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 fast personal loans quickly. They were also commonly paired with "interest-only" 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 fha housing loans the choice to defer some of their interest payments and add them to the principal.
While some borrowers were aware of their risky features and used them to gamble on their home's value or pull out money for vacations, others like Salvatore Fucile insist they were victims of predatory lending.
ARM-locked
Fucile, 82, and his wife, Clara, wound up in an option ARM from IndyMac after consolidating hard business loans for brokers two mortgages on their suburban Philadelphia home. Fucile was attracted by the low monthly payments but says the mortgage broker who signed him top ten online loans up for the loan didn't tell him the principal balance could increase. It has risen about $24,000, to $276,000.
"He put me in a bad position," said Fucile, who fears he will be forced into foreclosure. "He misled me."
IndyMac was taken over by the Federal Deposit Insurance Corp. last month.
FDIC spokesman David Barr declined to discuss the Fuciles' case but said the agency has temporarily frozen all IndyMac foreclosures and is working on a broad plan to modify mortgages held by the Pasadena, Calif.-based bank.
The low monthly payments of liar loans helped many home buyers afford to purchase in areas of the country where prices were skyrocketing. No Cost Refi Loans But they also helped drive up prices by allowing people to buy more than they could truly afford. Case in point: About 40 percent zack loans feet of loans made in California and Nevada in 2005 and 2006 were either unsecured loans up to 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.
Now that prices have fallen, almost 13 percent of borrowers with liar loans were at least two months behind on their payments in May, nearly four times higher than a year earlier, according to First American CoreLogic.
Countrywide Financial Corp., now part of Bank of America Corp., was one Refinance Refinancing California Home Loans of the top providers of liar loans. The company is now paying the price. More than 12 percent of Countrywide's $25.4 billion in pick-a-payment loans are in default, and 83 percent had little or no documentation, according to a recent Securities and Exchange Commission filing.
Volatile market for firms
Critics say Fannie Mae and Freddie Mac, which bought or guaranteed liar loans from lenders including Countrywide and IndyMac, should have stuck with traditional 30-year fixed-rate mortgages.
"I personally think that they ventured beyond their mission," said Richard Smith, a mortgage broker in Chattanooga, Tenn. Because of secondary market for rv loans their decision to back shakier loans, he said, "the home-buying public is going to have to pay."
Fannie and Freddie entered the market for risky loans just as they emerged from accounting scandals. At the time, Wall Street giants such as Bear Stearns and Lehman Brothers Holdings were backing a growing share of ever-riskier loans, and both government-sponsored companies felt pressure to compete.
Freddie Mac wanted "to stay competitive in the market and take steps to preserve market share," spokesman Michael Cosgrove said.
Fannie Mae increased its purchases of liar mortgages "at the requests no credit business loans of many of our customers," according to spokesman Brian Faith.
Both companies also were able to unsecured bad credit personal loans use subprime student loans for k-12 and liar-loan investments to meet government-set affordable housing goals.
Now Fannie, Freddie and other mortgage investors are reviewing defaulted loans to see whether lenders committed fraud. If they find enough evidence, they could force lenders to assume responsibility for losses.
But it's unclear how much money they might recover, especially from lenders that have gone under or been seized by the government.
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