What Is a Liar Loan?
A "liar loan" is a category of mortgage that refers to low-documentation or no-documentation mortgages. On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply noted on the loan application. On other loan programs, such as no income/no asset (NINA) loans, no income and assets are given on the loan application form. Some liar loans take the form of NINJA loans, an acronym that means the borrower has "no income, no job, and no assets" to speak of. These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders, and have historically been abused substantially.
How a Liar Loan Works
These loan programs are designed for borrowers who have a hard time producing income- and asset-verifying documents, such as prior tax returns—or who have untraditional sources of income, such as tips or a personal business. Originally, they were intended to give individuals and households with nontraditional income sources the opportunity to become homeowners. Self-employed individuals, for instance, tend to not receive monthly pay stubs and might not have a consistent salary.
Low-documentation mortgages usually fall into the Alt-A category of mortgage lending. Alt-A lending depends heavily on a borrower’s credit score (FICO score) and the mortgage’s loan-to-value ratio (LTV) as tools to determine the borrower’s ability to repay the mortgage.
Liar loans offer people with nontraditional income the opportunity to own property, but they have historically been abused substantially.
How Borrowers and Brokers Use Liar Loans
These loans are called liar loans because they open the door for 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 might misstate the statistics in order to secure low- or no-documentation mortgages and thus advance the sale of a property that would otherwise not be authorized.
The proliferation of liar loans was pointed to as a contributing factor in the financial crisis and related housing bubble because borrowers received approvals on mortgages that exceeded their ability to repay the balance according to the terms. Some mortgage brokers pushed these loans, particularly prior to 2008, because the overall real estate market saw valuations run up. In effect, overspeculation led to unscrupulous actions. Often the result was that individuals who had no intention of paying their mortgages were allowed to come into ownership of a residence.
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 going forward.