Definition of liar loan

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What is a lying loan?

A liar loan is a category of mortgage loan that requires little or no proof of income. Since the lender does not verify income and assets by reviewing W-2 forms, tax returns and other documents, these loans are considered “lying loans” because lenders are simply taking the borrower at their word. .

Key points to remember

  • A liar loan is a category of mortgage loan that requires little or no documentation of income and assets.
  • Loans with or without documentation were originally designed for borrowers who had difficulty producing documents to verify their income and assets.
  • These loans contributed to the financial crisis of 2007-2008 as a significant increase in property values ​​encouraged brokers to push these types of loans.
  • Regulatory reforms such as Dodd-Frank require lenders to reasonably and in good faith determine a borrower’s ability to repay any mortgage secured by housing.

How a lying loan works

For some low-documentation loans, such as Stated Income Mortgages / Declared Assets (SISA), the income and assets are simply noted on the loan application. On the other hand, with No Income / No Assets (NINA) mortgages, the lender doesn’t even require the borrower to disclose their income and assets at all.

Some lying 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 to unethical behavior by unscrupulous borrowers and lenders, and have historically been abused.

Loans with or without documentation were originally designed for borrowers who find it difficult to produce documents to verify their income and assets, such as past tax returns. Or they could derive income from non-traditional sources where such documentation is not available, such as tips or a personal business.

The low-doc and no-doc loans were intended to give individuals and households with non-traditional sources of income the opportunity to become homeowners. For example, self-employed people tend not to receive monthly pay stubs and may not have a constant salary.

Low documentation mortgages generally fall into the Alt-A mortgage category. Alt-A loans rely heavily on a borrower’s credit rating and mortgage loan-to-value ratio as tools in determining the borrower’s ability to repay.

Liar loans offer people with non-traditional income the opportunity to own property, but they have historically been abused.

How borrowers and brokers use lying loans

Low doc and no doc loans are called lying loans because they open the door to abuse when borrowers, their mortgage brokers or loan officers overestimate income or assets in order to qualify the borrower for a larger mortgage. . Borrowers or brokers could do this in order to secure mortgages that would not otherwise be authorized.

The proliferation of lying loans contributed to the 2007-2008 financial crisis and the housing bubble. A research paper estimated that lying loans accounted for $ 100 billion in losses, or 20% of the total losses, recorded during the crisis.

Borrowers received approvals for mortgages that exceeded their repayment capacity. Some mortgage brokers pushed these loans, especially before 2008, because the overall real estate market saw a significant increase in valuations. Indeed, excessive speculation has led to unscrupulous behavior. Often, people who had no intention of paying off their mortgage were allowed to own a home.

Following the financial crisis, regulatory reforms such as the Dodd-Frank reform of Wall Street and the Consumer Protection Act put new constraints in place to discourage and prevent such activity from continuing. The reforms required lenders to make a reasonable and good faith determination of a borrower’s ability to repay any mortgage secured by housing.

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