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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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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 nelnet student loans worst of them earn the nickname "ninja loans," short for "no income, no job and (no) budget car loans assets."
The nation's 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 signature personal loans parts of the country, the loans business loans flint mi are threatening to drag out the mortgage crisis for Crcg Loans For Churches two more years.
"Those loans are 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, Comparison Of Loans In Uk 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 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. Fannie Mae and Freddie Mac, the nation's largest buyers and backers of mortgages, lost a manchester nh personal loans combined $3.1 billion between April and June.
Half of their credit losses came high risk consumer 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 that specialized in 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 acknowledge they too were swept up in the housing hysteria to some extent.
"Everybody drank the Kool-Aid," said Acorn Loans Contra Costa County David Zugheri, co-founder government forgiven loans of Texas-based lender First Houston Mortgage. They knew if second chance auto loans they didn't give the borrowers the loans they wanted, the borrower "could go down the street and get that what are official loans to governments 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 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 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 internet loans were victims of predatory lending.
ARM-locked
Fucile, 82, and his wife, Clara, wound up in an option ARM from IndyMac after consolidating two mortgages on their suburban Philadelphia home. Fucile was attracted by the low monthly payments but says the mortgage broker who signed him 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 hud loans 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. 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 california special education college loans 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 wholesale unsecured business loans 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 of the top providers of liar loans. The company types of bank loans 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.
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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 jumbo loans me broker in Chattanooga, Tenn. Because of 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 government loans maine as Bear Stearns and charley farley home loans 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 citifinancial home equity loans Cosgrove said.
Fannie Mae increased ohio grant and student loans its purchases of liar mortgages "at online short term installment loans the requests of many of our customers," according to hour cash loans spokesman Brian Faith.
Both companies also were able to use subprime 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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