Home » Posts tagged 'liar loans'
Tag Archives: liar loans
“Liars Loans” are Back…but with a Twist
“Liars Loans” are Back…but with a Twist
Most of you will be intimately familiar with the roll “liars loans” played in last decade’s financial crisis. In a nutshell, these were loans in which the borrower was encouraged to lie about his or her income in order to qualify for a mortgage they couldn’t actually handle. In the aftermath of the crisis, regulations have been put in place to ensure lenders verify income and the ability of the borrower to service the mortgage. As is always the case, there’s a loophole, and Wall Street is already exploiting it.
The loophole pertains to loans for homes that will be used for business purposes. Unsurprisingly, people are lying about the true use of their homes to avoid regulations. Some of these are then being packaged in AAA rated bond issuances.
From Bloomberg:
The pitch arrived with an iconic image of the American Dream: a neat house with a white picket fence.
But behind that picture of a $2.95 million home in Manhattan Beach, California, were hints of something darker: liar loans, those toxic mortgages of the subprime era.
Years after the great American housing bust, mortgages akin to the so-called liar loans — which were made without verifying people’s finances — are creeping back into the market. And, like last time, they’re spreading risks far and wide via Wall Street.
Today’s versions bear only passing resemblance to the ones that proliferated in the mid-2000s, and they’re by no means as widespread. Still, they reflect how the business is starting to join in the frenzy that’s been creating booms in everything from subprime car loans to junk-rated company bonds.
Just in case you aren’t up to speed on the subprime auto bubble:
Subprime Auto Loan “Titan” Foolishly Proclaims There’s Nothing to Worry About
Gotta Keep Dancing – Honda Executive Laments “Stupid” Auto Loans Driving U.S. Sales Higher
Chinese Homebuilders Expand in America as U.S. Auto Loans Hit Record Levels
…click on the above link to read the rest of the article…
Home Capital scandal may presage a slowdown: Don Pittis
Is false income data a symptom of an industry that has run its course?
Could the scandal at Home Capital just be the beginning? The Canadian alternative mortgage company halted its shares after it was revealed that some of its brokers had been falsifying information on the income of mortgage customers.
As the soaring housing markets in Alberta and Saskatchewan go off the boil, a gradual weakening in Canada’s roaring real estate business may reveal more irregularities in the market.
It is a phenomenon we have seen happen so frequently that the uncovering of scandal in a market is often seen as a cause rather that a symptom of a market’s decline. Sometimes they go hand in hand.
On a conference call yesterday Home Capital CEO Gerald Soloway insisted that the problem with its brokers was not an indication of a mortgage fraud crisis across Canada. Home Capital’s delinquencies remain low, and the company says it has stopped doing business with the brokers that investigators had shown to be pretending customers’ income qualified them for mortgages.
Pressure to succeed
It is hard to draw a direct line of cause and effect between the first few scandals in a weakening market and that weakening.
But as markets get into trouble, more and more accounts get shuffled off to the riskier end of the business. Pressure to succeed intensifies. People trying to make a living are more willing to take shortcuts. And it is only as the markets weaken that shortcuts — or outright fraud — are revealed.
There are many examples but the most notorious case is Bernie Madoff, author of what many consider be the biggest swindle in U.S. history. Madoff’s scheme was to accept investors’ money and falsify the income statement on their investment returns. Even as other funds began to do badly, Madoff’s remained strong.
…click on the above link to read the rest of the article…
Liar Loans Pop up in Canada’s Magnificent Housing Bubble
Liar Loans Pop up in Canada’s Magnificent Housing Bubble
For a long time, the conservative mortgage lending standards in Canada, including a slew of new ones since 2008, have been touted as one of the reasons why Canada’s magnificent housing bubble, when it implodes, will not take down the financial system, unlike the US housing bubble, which terminated in the Financial Crisis.
Canada is different. Regulators are on top of it. There are strict down payment requirements. Mortgages are full-recourse, so strung-out borrowers couldn’t just mail in their keys and walk away, as they did in the US. And yada-yada-yada.
But Wednesday afterhours, Home Capital Group, Canada’s largest non-bank mortgage lender, threw a monkey wrench into this theory.
Through its subsidiary, Home Trust, the company focuses on “alternative” mortgages: high-profit mortgages to risky borrowers with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. They include subprime borrowers.
So it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September: “falsification of income information.” Liar loans.
Liar loans had been the scourge of the US housing bust. Lenders were either actively involved or blissfully closed their eyes. And everyone made a ton of money.
So Home Capital revealed that it has suspended “during the period of September 2014 to March 2015, its relationship with 18 independent mortgage brokers and 2 brokerages, for a total of approximately 45 individual mortgage brokers,” who’d together originated nearly C$1 billion in single-family residential mortgages in 2014. That’s 5.3% of the company’s total outstanding loan assets, and 12.5% of its total single-family mortgage originations in 2014.
That’s a big chunk. The company, however, didn’t disclose why it took so long to disclose this.
It said an “external source” had warned it about income falsification on mortgage applications submitted by a number of brokers. Its investigation did not find any evidence of falsified credit scores or property values, it said.
…click on the above link to read the rest of the article…
