Liar Loans
Good article today on Slate about Liar Loans.
Ten months after the loans were made:
The article compares this kind of disregard for the rules to a street intersection where every half the people are running red lights. If one person occasionally runs a light, it is dangerous, but if everybody does it the system fails and you end up with a lot of dead people.
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
Ten months after the loans were made:
* 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.
The article compares this kind of disregard for the rules to a street intersection where every half the people are running red lights. If one person occasionally runs a light, it is dangerous, but if everybody does it the system fails and you end up with a lot of dead people.
Comments
This article still dances around the issue as to what was going on over the last decade: the belief of all parties that real-estate prices only go up. If you start with that underlying assumption, then the credit quality or income of the borrower is irrelevant. Heck, if house prices will inevitably keep appreciating by 10% a year, then who cares if the borrower has a job at all? Appreciation will automatically build equity and allow people to either refinance, or sell for a profit.
"Liar loans" were merely the extreme manifestation of this universally held belief in perpetual appreciation.