It seemed ridiculous when we first read about them and apparently they were. I am referring to the undocumented loans that were being offered by banks and mortgage companies a few years ago. These were loans with no income verification. The mortgage industry named them “liar loans” since they required no proof of income or existing assets. Some of these people were not even employed when these loans were approved. Obviously, the people granting and approving these loans were motivated solely by their own greed.

Just as we believed the housing market was possibly starting to improve, many of the “liar loans” are defaulting in record numbers. Most of these mortgaged properties are located in states where home prices have decreased the most, such as California, Nevada, Arizona and Florida. The homeowners with these loans are unable to refinance because they paid record prices at purchase and the homes have since sharply devalued. This leaves only foreclosure as an option.

Many of the lenders who provided “liar loans” are now defunct and others may soon be following. Brokers who provided borrowers with this type of loan earned greatly inflated commissions, as the loans themselves carried substantially higher fees and interest rates. A broker who might earn between $2,000 and $4,000 on a normal mortgage loan was earning close to $15,000 on a “liar loan”. Unfortunately, we, the taxpayers, are picking up the cost and dealing with the problems generated by this unseemly business practice.