What is a liar loan?

home made out of a dollar bill
A liar loan is a type of mortgage loan where a lender does not verify an applicant’s income.

These types of mortgage loans are sometimes called stated-income loans or no-documentation (no-doc) loans. Lenders willingly give an applicant a mortgage loan without verifying their pay stubs, proof of employment, or assets.

In contrast to this, a conventional mortgage loan requires these types of documents before an applicant will be considered for financing.

Liar loan applicants need only state their income and it is taken at face value. As a result, some applicants could lie, hence the moniker “liar loans.”

How Liar Loans Worked

At first, liar loans were designed to support families and borrowers who had undocumented income.

“Then these families with unverifiable, undocumented income could state their income at any amount and have it accepted by lender based on very loose guidelines,” said Gregory B. Meyer, the Community Relations Manager at Meriwest Credit Union.

For example, an applicant such as a contractor would have to state he was paid in cash. The client of the contractor would then confirm to the lender that the contractor was paid in cash.

Without having seen any paperwork verifying the applicant’s income, the applicant would then be given a mortgage loan.

Meyer explained that liar loans mainly helped borrowers with substantial down payments who didn’t want their income verified.

Liar Loan History

Originally, liar loans helped mortgage loan applicants who were self-employed or would have trouble providing verifiable proof of income, such as servers or personal business owners.

According to Bennie D. Waller, Professor of Finance and Real Estate at Longwood University, liar loans were once more readily available, but led to problems.

“Such loans are a large contributing factor to the housing collapse of 2008,” he said. “Many borrowers were claiming false levels of income, rental income (based on a receipt book purchased from an office store) and inflated asset values.”

George Bradbury, the Founder of Bradbury and Partners, said that at the height of the housing and subprime mortgage frenzy, liar loans were commonly seen in the form of “NINJA” loans, which stood for No Income, No Job or Assets.

“NINJA loans were offered by unethical mortgage loan officers, who were often in cahoots with equally unscrupulous borrowers that probably had no intention of making monthly payments,” said Bradbury. “Prior to the bursting of the housing bubble, there were several ‘mortgage products’ that fit the NINJA loan label, and they called for almost no underwriting or verification of income, assets or even the ability to repay.”

In the wake of subprime mortgage crisis, financial regulation tightened, which led to the present day rarity of liar loans.

Fortunately though, liar loans are now a thing of the past, according to Meyer.

“The Dodd-Frank Act bans any ‘kind’ of loan based on the inherently fraudulent ‘quality of the loan’,” he said. “The Act bans liar’s loans. Lenders can no longer offer stated income loans. All borrowers’ income must be verified in the underwriting process.”

Barring some kind of new legislation, liar loans will be a footnote in financial history.