Liar Loan

What is 'Liar Loan'

A liar loan is a category of mortgage that refers to low-documentation or no-documentation mortgages that have been abused substantially. On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply stated 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. These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders.

BREAKING DOWN 'Liar Loan'

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. These loans are called liar loans because the SISA or NINA features open the door for abuse when borrowers or their mortgage brokers or loan officers overstate income and/or assets in order to qualify the borrower for a larger mortgage.

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.

Why Liar Loans Were Allowed to Spread

Borrowers or brokers might misstate the income in order to secure low- or no-documentation mortgages in order to advance the sale of a property that would otherwise not be authorized. The proliferation of such liar loans was pointed to as a contributing factor in the financial crisis and related housing bubble, as borrowers received approvals on mortgages that actually surpassed their ability to repay the balance according to the terms.

The nature of such loans may have originally been intended to give individuals and households with nontraditional income the opportunity to become homeowners. Self-employed individuals, for instance tend to not receive monthly pay stubs or might not have a consistent salary. The implementation of such financing, however, allowed for individuals who had no intention of paying their mortgages to come into ownership of residence. Mortgage brokers may have pushed these loans, particularly prior to 2008, as the overall real estate market saw valuations run up, and over-speculation led to unscrupulous actions.

Some liar loans took the form of NINJA loans, meaning the borrower had no income, no job and no assets to speak. The introduction of regulatory reforms, such as the Dodd-Frank Act, put new constraints in place to deter and prevent such activity from continuing after the financial crisis exposed the practices that led to the spread of liar loans.