Investopedia defines “liar loans” as,
“A category of mortgages known as low-documentation or no-documentation mortgages that have been abused to the point where the loans are sometimes referred to as liar loans. On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply stated on the loan application. On other loan programs, such as no income/no asset (NINA) loans, no income and assets are given on the loan application form. These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders.”
By “simply stated,” Investopedia means that, even though I might earn just $20,000 per year, I could walk into bank, “simply state” that I earned $50,000 per year and the bank would take my word as true without verifying my income. The bank would then issue a mortgage for a house appropriate for a $50,000 annual income rather than a $20,000 annual income. Because the bank wouldn’t bother to verify my income, I’d be free lie about my income and therefore move into a house that was perhaps twice as large as a house that I could actually afford.
At first, moving into the more expensive house might seem cool. But inevitably, it would become apparent that I’d over-extended myself by lying about my income and borrowing more than I could afford to repay. Then, based on my original lie, I’d lose the house and my equity to foreclosure and be forced to go back to living with my folks.
And the banking system that accepted and even encouraged my life would be stuck with a non-performing mortgage and a vacant house that couldn’t be sold.
The lesson is obvious: When borrowers are allowed to lie about their income or debt levels, everyone—both lenders and debtors—lose.
This lesson doesn’t only apply to mortgages and homeowners. It also applies to bonds and governments.
For example, our national government claims its National Debt is “only” $17 trillion—but the Congressional Budget Office has calculated the total national debt to be over $200 trillion. The $17 trillion figure is a lie.
When the world accepted the government’s “word” that the National Debt was less that $17 trillion, the world was willing and eager to lend to Uncle Sam. But, because Uncle Sam lied about the true size of his debt, those loans to the national government were every bit as much “liar’s loans” as the mortgage moneys loaned to borrowers who lied about their incomes.
Investopedia explained more about “Liar Loans”:
“These loan programs are designed for borrowers who have a hard time producing income and asset verifying documents, such as prior tax returns, or who have untraditional sources of income, such as tips, or a personal business.”
Do you suppose our government has a “hard time producing income and asset verifying documents”? Does government lie about the size of its debts, assets, inflation and unemployment?
What about being able to spin money out of thin air? Or cause inflation? Do those powers count as an “untraditional source of income”?
“These loans are called liar loans because the SISA or NINA features open the door for abuse when borrowers or their mortgage brokers or loan officers overstate income and/or assets in order to qualify the borrower for a larger mortgage. “
“Overstate” means lie. So does “understate”.
Liar loans don’t merely overstate income and/or assets. They also understate national debts, inflation rates, unemployment rates, etc. in order to qualify for more credit.
The “liar loans” that helped fuel the real estate boom of the early 2000s, also helped trigger the financial collapse of A.D. 2008 that lingers to this day.
Today’s national debt is fundamentally identical (on a global scale), to the liar’s loans of the early 2000’s. Just as local banks could knowingly issue overly large mortgages to unworthy credit applicants, so the world loaned excessive amounts of money to the US government in the form of bonds and trade deficits.
Both the local banks and the world’s creditors thought “this time it’s different”. “This time” they didn’t have to be hard-nosed about enforcing traditional lending requirements or performing their due diligence. “This time” the system was so smart, so sophisticated, that local banks (and the world’s creditors) could safely lend tens of thousands (or tens of trillions) to individuals (or governments) that lied about their incomes, assets and debts.
But, in fact, “this time” it wasn’t different. “This time” it’s never different. No one can safely lend money to borrowers who are unable or unwilling to repay their loans. No one can safely issue loans based on lies.
When creditors do lend to debtors who lie about their incomes, assets and debts, the fault is not only with the borrowers who lied about their incomes—it’s also with the bankers and lenders who allowed their lies, believing “this time it’s different”. Bankers and creditors who knowingly lend to liars aren’t the victims of fraud—they’re co-conspirators in the fraud. So, when the moment inevitably arrives when the creditors and borrowers are forced to face the consequences of “liars loans” both sides deserve to suffer losses. The liar will lose his overly large home and his equity. The creditors will lose their principal. Both sides will be impoverished by their willingness to lie and to knowingly accept lies.
Just as the inability to repay the loans given to unworthy mortgage applicant “liars” helped trigger the “Great Recession” of A.D. 2008, the inability of our government to repay the loans that comprise the National Debt will likewise trigger a global “Greater Depression” in the foreseeable future for exactly the same reasons.
In the end, our theories of economics and credit aren’t based on mathematics and financial formulae so much as morality.
When it comes to credit, if you’re lyin’, you’re dyin’. Maybe not immediately. But inevitably.