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Tuesday, August 19, 2008

Liar, liar, mortgage on fire...

From a recent real estate news feed comes this story on more toxic loans, called liar loans. 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 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." That argument sets as well with me as the “it is what it is” statement that many people use these days as an excuse to just accept what’s happening around us without protest or reaction.

The liar 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 insist they were victims of predatory lending. I tend to have little sympathy for most of the “victims” in this mess, since so many were just acting out of greed, more than out of ignorance as they claim.

However, there certainly were (and still are) lots of slick-talking mortgage crooks out there preying on the truly ignorant. Somehow most of them find a way to slink away with the stuff hits the fan, only to pop up again somewhere else with a new scheme. Remember the bums running the S&L’s when so many of them went belly up? Well, guess who was running the mortgage companies that caused the current mess? Many of the same guys! Those guys certainly were well qualified to give liar loans to people.

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