Liar Loan
What Is a Liar Loan?
A liar loan is a category of mortgage loan that requires next to zero documentation of income. Because the lender doesn't check income and assets by taking a gander at W-2 forms, income tax returns and different records, such loans are said to be "liar loans" because lenders just take the borrower at their word.
How a Liar Loan Works
For certain low-documentation loans, for example, stated income/stated asset mortgages (SISA), income and assets are just noted on the loan application. Then again, with no income/no asset mortgages (NINA), the lender doesn't even need the borrower to uncover income and assets at all.
Some liar loans take the form of NINJA loans, an acronym that means the borrower has "no income, no job, and no assets." These loan programs open the door for unethical behavior by deceitful borrowers and lenders, and have been historically abused.
Low-documentation and no-documentation loans were originally intended for borrowers who have a hard time delivering paperwork to confirm their income and assets, for example, prior tax returns. Or probably they could get income from untraditional sources where such documentation is unavailable, like tips or a personal business.
Low-doc and no-doc loans were meant to give individuals and families with nontraditional income sources the opportunity to become homeowners. For example, self-employed individuals tend to not receive regularly scheduled pay nails and probably won't have a steady salary.
Low-documentation mortgages usually fall into the Alt-A category of mortgage lending. Alt-A lending relies heavily upon a borrower's credit score and the mortgage's loan-to-value ratio as tools to decide the borrower's ability to repay.
Liar loans offer individuals with nontraditional income the opportunity to own property, however they have been historically abused.
How Borrowers and Brokers Use Liar Loans
Low-doc and no-doc loans are called liar loans because they open the door for abuse when borrowers, their mortgage brokers, or loan officers overstate income or assets to qualify the borrower for a larger mortgage. Borrowers or brokers could do this to secure mortgages that would otherwise not be authorized.
The proliferation of liar loans was a contributing factor in the 2007-2008 Financial Crisis and housing bubble. One research paper estimated that liar loans accounted for $100 billion in losses, or 20% of total losses, registered during the crisis.
Borrowers received approvals on mortgages that surpassed their ability to repay. Some mortgage brokers pushed these loans, particularly prior to 2008, because the overall real estate market saw a significant run-up in valuations. In effect, over-speculation prompted deceitful behavior. Frequently, individuals who had no expectation of repaying their mortgages were allowed to come into ownership of a residence.
After the financial crisis, regulatory reforms, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act put new constraints in place to dissuade and prevent such activity proceeding. The reforms required lenders to make a reasonable and entirely pure intentions determination of a borrower's ability to repay any loan secured by a dwelling.
Features
- These loans were a contributing factor in the 2007-2008 Financial Crisis, as a significant run-up in property values encouraged brokers to push these types of loans.
- A liar loan is a category of mortgage loan that requires practically zero documentation of income and assets.
- Regulatory reforms, for example, Dodd-Frank expect lenders to make a reasonable and honest intentions determination of a borrower's ability to repay any loan secured by a dwelling.
- Low-documentation and no-documentation loans were originally intended for borrowers who had difficulty delivering paperwork to check their income and assets.
