Liar Loan
Definition
A Liar Loan is a type of mortgage loan where lenders do not verify the applicant’s income, employment status, or assets. Borrowers can state their income and assets without having to provide proof, leading to the potential for exaggeration or falsification. This kind of loan is also known as a “Stated Income Loan,” “No-Documentation Loan,” or as part of the larger category of “NINJA Loans” (No Income, No Job or Assets).
Examples
- Example 1: During the early 2000s housing boom, a borrower states their income as $120,000 yearly even though their actual income is only $30,000. The lender does not verify this income and approves them for a mortgage based on the stated income.
- Example 2: A self-employed individual applies for a mortgage and states their income based on expected future earnings, which are significantly higher than their current income. They are approved for the higher loan amount without having to provide tax returns or other proof of income.
Frequently Asked Questions (FAQs)
1. Why were Liar Loans popular?
Liar Loans became popular because they simplified the loan approval process and allowed more people to qualify for mortgages, thus increasing home buying activities and driving up market prices.
2. Were Liar Loans legal?
While not inherently illegal, Liar Loans became controversial and contributed to wide-scale mortgage fraud, leading to significant risk exposure for lenders and investors. They have since been largely curtailed by stricter lending regulations.
3. What role did Liar Loans play in the financial crisis of 2008?
Liar Loans were a significant factor in the financial crisis of 2008. The prevalence of these and other subprime loans led to widespread defaults when borrowers could not meet their mortgage obligations, sparking a financial meltdown.
4. Are Liar Loans still available today?
Regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, have made Liar Loans rare. Today, lenders face stringent regulations requiring thorough verification of a borrower’s financial information.
5. What is the difference between a Liar Loan and a NINJA Loan?
A Liar Loan refers specifically to mortgages where income and assets are stated but not verified. A NINJA Loan (No Income, No Job or Assets) does not require the borrower to provide any proof of income, employment, or assets at all.
Related Terms with Definitions
- NINJA Loan: A type of loan that does not require any proof of income, employment, or assets.
- No-Documentation Loan: A mortgage where lenders require little to no documentation to verify the borrower’s claims.
- Stated Income Loan: Similar to No-Documentation Loans, but specifically plaintiffs their income without proof.
- Subprime Lending: Lending to borrowers with lower credit ratings and higher risk of default.
- Mortgage Fraud: Fraud related to property and mortgages, including falsified borrower’s information to obtain loans.
Online Resources
- Investopedia - What Is No-Doc Loan
- U.S. Securities and Exchange Commission - Mortgage-Backed Securities
- Consumer Financial Protection Bureau - Ability to Repay and Qualified Mortgage Rule
References
- “The Big Short” by Michael Lewis, describing the role of subprime mortgages and Liar Loans in the financial crisis.
- “All the Devils are Here: The Hidden History of the Financial Crisis” by Bethany McLean and Joe Nocera.
- Articles from financial news outlets like The Wall Street Journal and The Financial Times.
Suggested Books for Further Studies
- “The Big Short: Inside the Doomsday Machine” by Michael Lewis
- “Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves” by Andrew Ross Sorkin
- “All the Devils Are Here: The Hidden History of the Financial Crisis” by Bethany McLean and Joe Nocera
- “Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis” by Paul Muolo and Mathew Padilla
- “The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It” by Robert J. Shiller
