It's been over a year since I last posted on liar loans -- these are mortgages which the borrower obtains despite offering no documentation on their income, employment or assets. These liar loans were also known as Ninja loans -- which is short for no income, no job, and no assets. The Associated Press reports that such liar loans will add $100 billion to the losses our economy is already suffering thanks to $400 billion worth of losses from subprime mortgages.
The problem we face as an economy is that it's hard to see where the liar loans end and the collateralized debt obligations (CDOs) and other asset-backed securities begin. In a sense, they are all liar loans. In the case of the mortgages, borrowers created paperwork that was inconsistent with their actual financial condition so they could get the money. In the case of CDOs, the issuing investment bank bought a AAA rating from a rating agency which created the illusion that the security was safe. Conceptually, there is little difference -- both depended on essentially forged paperwork to make the loan go through.
Why did banks issue liar loans? They were afraid to lose market share. But that doesn't make it right. As my mother used to say to me, if the other kids jumped off the Empire State Building, would you do it too? AP brings this to life in an interview with David Zugheri, co-founder of Texas-based lender First Houston Mortgage who said, "Everybody drank the Kool-Aid. 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.''
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
8-19-2008 @ 8:25AM
al coholic said...
I notice you didn't post any figures on how many of these "liar loans" are delinquent. I'm speculating that few of them are.
Why? Because they are a different breed than the loans that were given to sub prime borrowers. Many of these loans were given to people with modest schedule C income that didn't conform to mindless underwriters who don't have a clue about how the world works. Tons of small businessmen maximize their take home money by minimizing their stated income.
Estimates vary but many think that the "underground economy" might be as much as $30% of the nation's business. Loans to people in this segment of are approved by bankers who "know the game" and realize that small businessmen may not show much W-2 or Schedule C income, but are still good credit risks.