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 another 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 Arizona, California, Florida and Nevada.
Many homeowners with liar loans are stuck. They can’t refinance because housing prices in those markets have nosedived, 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.
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 sour liar loans, which are officially called Alternative-A loans 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 lenders may follow.
The mortgage bankers and brokers who survived were more cautious, but acknowledge that they were swept up in the housing hysteria to some extent.