I’ve railed against liar’s loans here.

Now a professional writer at Slate explains liar’s loans and the mortgage meltdown better than I ever could.

The term is mortgage-industry slang for what’s more formally called a “stated income” mortgage””a mortgage that a lender gives without checking tax returns, employment history, or pretty much anything else. Many of the loans that are in trouble now, or will be in trouble soon, fall into this category.

In 2006 in some parts of the country, these loans made up as much as half of new mortgages, for both subprime borrowers and for homebuyers with high credit scores.

The organization had compared a sample of 100 stated income mortgage applications to IRS records.

More than 90 of the applications overstated the borrower’s income at least a little. More strikingly, more than three out of five overstated it by at least 50 percent.


Shedlock analyzed one particular bundle of loans from Washington Mutual consisting of 1,765 mortgages from around May 2007, a total of $519 million in loans.

These were not “subprime” loans. The borrowers’ average credit score was 705, well within prime territory. This is a fairly typical package of loans for a mortgage-backed security, but one thing that does make it stand out is the proportion of these loans that didn’t ask for income documents: 88 percent.

* Eighteen percent of the loans are already in foreclosure””or have already been seized by Washington Mutual.

* One in four of this bundle of liar loans is already 60 days past due.

Remember, these are folks with good credit histories””and one in four of them is well on his way to losing his home, or has already lost it.

None of this could have happened without everyone’s willing participation.

Keep in mind that in some places (for instance, San Diego), half the people in the market were taking out stated income loans and so bidding up prices to points where almost any house became impossible to finance for someone who did not lie.

All emphasis added was mine.