What is a liar loan?
A “lying loan” is a category of mortgage that refers to mortgages with little or no documentation. On some low-documentation loan programs, such as declared income / declared asset loans (SISA), income and assets are simply shown on the loan application. For other loan programs, such as No Income / No Assets (NINA) loans, no income or assets are shown on the loan application form. Some lying loans come in the form of NINJA loans, an acronym which means that the borrower has “no income, no job and no assets” proper. These loan programs open the door to unethical behavior on the part of unscrupulous borrowers and lenders, and have historically been greatly abused.
How a liar loan works
These loan programs are designed for borrowers who have trouble producing income and asset verification documents, such as previous income tax returns, or who have non-traditional sources of income, such as tips or a personal business. . Originally, they were designed to give individuals and households with non-traditional sources of income the opportunity to become homeowners. The self-employed, for example, tend not to receive monthly pay stubs and may not have a constant salary.
Low documentation mortgages generally fall into the Alt-A category of mortgages. Alt-A loans are highly dependent on the borrower’s credit score (FICO score) and the mortgage loan-to-value ratio as tools to determine the borrower’s ability to repay the mortgage.
Loans to liars offer people who do not have traditional incomes the opportunity to own property, but they have historically been greatly abused.
How borrowers and brokers use liars
These loans are called liar loans because they open the door to abuse when borrowers, their mortgage brokers or loan officers overstate income and / or assets in order to qualify the borrower for a larger mortgage. Borrowers or brokers could distort the statistics to secure low or no documentation mortgages and thereby advance the sale of a property that would not otherwise be authorized.
The proliferation of lying loans has been reported as a contributing factor to the financial crisis and related housing bubble, as borrowers received approvals on mortgages that exceeded their ability to pay off the balance on terms. Some mortgage brokers pushed these loans, especially before 2008, as the global real estate market saw its valuations increase. Indeed, overcrowding has led to unscrupulous actions. Often the result was that individuals who did not intend to pay their mortgage were allowed to become homeowners.
After the financial crisis exposed the practices that led to the spread of liar loans, regulatory reforms, such as the Dodd-Frank Act, put new constraints in place to deter and prevent such activity in the future .