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.
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