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 California, 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 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 (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 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 they too were swept up in the housing hysteria to some extent.
“Everybody drank the Kool-Aid” said David Zugheri, co-founder of Texas-based lender First Houston Mortgage. They knew if they didn’t give the borrower the loan they wanted, the borrower “could go down the street and get that 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 around $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 were victims of predatory lending.
Fucile, who is 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 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 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 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 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 Securities and Exchange Commission filing last week.