"Liar Loans" Are Back! 2008 Here We Come

Tyler Durden's picture

Earlier this year, as the US auto sales miracle unfolded on the back of record loan terms and record high average monthly payments, we continually argued that underwriting standards were likely to deteriorate going forward as competition for the finite pool of creditworthy borrowers heats up. 

Helping to drive (no pun intended) the shift towards looser lending standards is the proliferation of the originate-to-sell model - the same originate-to-sell model that helped steer the US housing market right off a cliff in 2007/2008. The concept is simple: if you’re making loans with the intention of carrying them on your books, you’re likely to care far more about the creditworthiness of the borrower than you are if you’re simply going to ship the loans off to Wall Street to be run through the securitization machine and then sold off to investors via MBS. That same dynamic is now at play in the market for car loans. Auto-backed ABS issuance should come in at around $125 billion this year - that’s up 25% from 2014 and accounts for more than half of total consumer loan-backed supply.

As was the case during the lead up to the housing market collapse, this dynamic embeds an enormous amount of hidden risk in the paper backed by the shoddy loans. This paper is very often highly rated because despite what happened in 2008, the idea still exists that although one risky loan may be properly viewed as a speculative investment, a whole bunch of pooled risky loans are somehow safe as can be. 

But even as alarm bells are going off in the subprime auto market and also in the market for student loan-backed paper, there hasn’t been as much concern for the MBS market where apparently, everyone seems to think that market participants (lenders, borrowers, and Wall Street gamblers) have learned their lesson. Of course no one ever, ever learns which is why we weren’t at all surprised to hear that “liar loans” - a relic of the good old days - are back and, in keeping with everything said above, are creeping into mortgage-backed paper. Here’s Bloomberg with the story of Velocity Mortgage Capital LLC:

The pitch arrived with an iconic image of the American Dream: a neat house with a white picket fence.

 

But behind that picture of a $2.95 million home in Manhattan Beach, California, were hints of something darker: liar loans, those toxic mortgages of the subprime era.

 

Years after the great American housing bust, mortgages akin to the so-called liar loans -- which were made without verifying people’s finances -- are creeping back into the market. And, like last time, they’re spreading risks far and wide via Wall Street.

 

The Manhattan Beach story -- how the mortgage on that house was made and subsequently packaged into securities with top-flight credit ratings -- recalls a time when borrowers, lenders and investors all misjudged the potential danger.

 

The story begins earlier this year, when a TV producer bought the cream-colored home. His lender, Velocity Mortgage Capital LLC, says it writes mortgages for people buying homes only for business purposes, such as renting them out, and requires all customers to sign documents stating their intentions.

 

Soon Velocity was bundling the $1.92 million mortgage and hundreds of other loans into securities through Wall Street’s securitization machine. Kroll Bond Rating Agency featured a picture of the house in a report on the $313 million deal, most of which was rated AAA. Marketing documents for the offering, which was managed by Citigroup Inc. and Nomura Holdings Inc., characterized the buyer as an “investor.”

 

But when a reporter recently knocked on the door in Manhattan Beach, the buyer answered and said he never planned to rent out the place. Nor, he said, had he signed documents stating he would. He was living in the house with his family.

So he lied. Got it. Bloomberg goes on to explain that Velocity essentially takes advantage of the fact that mortgages made for "business purposes" are exempt from federal regulations designed to ensure that lenders are verifying borrowers' finances. 

But don't worry, because there are safeguards in place. Velocity, for instance, ensures that borrowers are telling the truth by ... taking their word for it. Here's Bloomberg again:

Chris Farrar, Velocity’s chief executive officer, says his company takes steps to ensure customers really are buying homes for business purposes. These include having every borrower hand write and sign letters testifying to their plans.

And then there's Kroll which, you're reminded, also plays a rather large role in rating subprime auto deals, who doesn't seem to be all that interested in knowing whether or not Velocity has done enough due dillegence:

In assigning AAA grades, Kroll partly relied on Velocity’s promise to buy back any loans that fell short of the standards, said Nitin Bhasin, a Kroll managing director.

 

“That’s a question for Velocity, I think: How do they make sure when they’re making a loan that it’s not owner-occupied,” Bhasin said.

Bhasin is correct. It is a question for Velocity. And one you'd think Kroll would want a very concrete answer to before assigning an AAA rating especially given what we learned in the lead up to the crisis about investors' strange propensity to, you know, rely on ratings agencies to do their jobs before giving a deal the triple-A stamp of approval. 

And because we wouldn't want anyone to think that the problem is confined to a handful of "liars" taking out mortgages for "business purposes," we'll leave you with the following from FT who reports that the ZIRP-induced hunt for yield has opened the door for the triumphant return of subprime non-Agency RMBS:

For “subprime”, read “non-prime”.

 

Yield-hungry investors are ready to endorse a revival of bonds backed by riskier US residential mortgages, as lenders warm to housebuyers who do not meet strict borrowing guidelines introduced after the financial crisis.

 

But the now toxic label of subprime mortgages has been dropped. Instead, Angel Oak Capital is in the process of pricing a deal for a bond offering of so-called “non-prime mortgages” — a term funds are using to describe mortgages that do not meet government standards. Lone Star Funds completed a deal worth $72m in August.

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neidermeyer's picture

Do I need photo ID? I'd really like a new Lotus.

A Nanny Moose's picture

Government =  ideas so fucking mind blowingly awesome, that they require coercion.

My brother in the Air Farce texted me, lamenting that Military bases are always adjacent to shit neighborhoods. I responded that everything government touches, turns to shit.

Divine Wind's picture

 

 

 

The teaser paragraph for this post states the following:

"In a further sign that we've learned nothing since the crisis...."

I actually think the loan providers and the underwriters actually learned quite a bit during the 2008 crisis.

They most certainly learned there is very little oversight.

They also learned in the aftermath that nothing was done to prevent them doing the same the next time around.

Wash.... Rinse.... Repeat

 

Hankster's picture

that's exactly what they learned - profits are private, losses are public.  

Pookie wants some pie! Get it while the getting's good!

chunga's picture

Everybody seems to know about this liar loan stuff except "yield hungry investors". Actually they do know about it but don't care. They just use wall street parlor tricks to make moar money on loans that never get paid back than those that do.

A Nanny Moose's picture

Acute narcicistic cognitive dissonance, combine with lack of mathz skeelz

Bossman1967's picture

More games that if I played like that straight to jail and throw aay the keys but these guys will hide in thier New Zealand homes and fly away.UNFUCKING BELIEVABLE

Tallest Skil's picture

DO IT. END THE MADNESS. Bring it all down, all the way to its rotten, fiat core.

Oxbo Rene's picture

I'd like to see it all come down too, but ....
It'll just grow back again .........

q99x2's picture

There is a huge caldera on New Zealand that is getting ready to erupt into a super volcano.

Arthur Schopenhauer's picture

I hear all the elites are building airstrips to fly in to New Zealand and safely sit out the coming apocalypse in America.

That's the best fucking news I've heard in a long time.

Not if_ But When's picture

I'm really gonna get hammered if I have to watch C-Span again covering a committee hearing where execs from these types of outfits are put under oath, questioned, lectured, and set free as birds.  Methinks I'll get hammered and stoned so I can just marvel at it instead of getting upset.  (Can't wait to pay my taxes to bail the financial world out again)

moneybots's picture
"Liar Loans" Are Back!"

 

When did they go away?

 

I got re-fi ads in the mail, years ago, which stated they had no income verification loans available.  This was after the housing crash.  I even double checked the ad to see if they were sending an old ad, but at the bottom, was mentioned some of those alphabet names that were created after the crash.

Arthur Schopenhauer's picture

I had dudes calling me, trying to loan me $550,000 HELOC loan my property over a year ago when I knew damn good and well it wouldn't appraise for anymore than $345,000. These muthurfuckers are everywhere.

NihilistZero's picture

Liar loans have ALWAYS been availiable if your FICO is high enough and you put 10-20% skin in the game.  The NINJA loans of Housing Bubble 1.0 were unique in that you could put next to nothing down and have a shitty credit rating and no assets.  What's happening now seems similar to what the S&Ls engaged in during the Housing Bubble 0.5 BETA of the late 80's.  Beneficiaries of the Greenspan inflation were given loans on RE, much of it in CA, that went sour once the defense spending of the COld War subsided.  This is basically going to be our third go round of near the exact same playbook.

Anyone in prime areas like SoCal should be prepared to BTFD as was the play in 2010, 1996 and 1982.

Arthur Schopenhauer's picture

The rats are jumping ship.

Get the fuck back on that goddamn ship ya dirty stinkin' rats!

Poke that mutherfucker with a goddamn stick.

doggis's picture

THE ENTIRE CENTRAL BANKING MODEL OF MONEY PRINTING AND FRAUD IS THE LIFEBLOOD FOR ALL  "LIAR'S LOANS"........

AS LONG AS THE POPULATION IS ASLEEP, THE SYSTEM WILL BE RUN BY LIAR'S!!

THE FIRST CENTRAL BANKER THAT IS HAULED OFF TO "POUND ME IN THE ASS" PRISON - IS THE MOMENT "THE LIAR" PART OF LIAR'S LOAN WILL DISAPPEAR!!

GOT THAT!

HardHatBanker's picture

But 90% of the issuance is AAA....

RaceToTheBottom's picture

Funny thing is that the same guys that were trained in the original mess are the ones now running these companies....

 

Nothing is going to change until these scum start losing their lives.

 

exartizo's picture

They are simply and irrevocably incontrovertibly irrascibly incredibly GREEDY Denizens Of The Deep State.

They are like sharks.. they have to keep swimming to breathe.

Similarly, they must keep The Ponzi afloat by any means possible.

Is anyone really surprised? really?

dsty's picture

Hey guys

We have just got to stop lying.

But that is really hard to do.

I've tried.

 

jmar42's picture

How we get in on the class action lawsuit and claim dumbshitness???

oooBooo's picture

There's no need to lie. Create a corporation. Buy the house as the corporation. Rent the house from the corporation.

artichoke's picture

But you won't get homeowner financing as a corporation.  If you can buy it for cash, none of the financing problems exist.  If you can buy it with financing for a rental, I bet you're pretty well off anyway.

artichoke's picture

But you won't get homeowner financing as a corporation.  If you can buy it for cash, none of the financing problems exist.  If you can buy it with financing for a rental, I bet you're pretty well off anyway.

artichoke's picture

This really is different.  The financials still have to work out.  The buyer has to show some evidence of a business, somewhere, and it's harder in cashflow terms to qualify for a business loan.  Like much harder.  The average middle class person of modest income should try doing this.  They'll get turned down, betcha.

 

So the guy is rich, buys this dwelling, and decides to live in it himself.  I have little worry here.

artichoke's picture

To be even more blunter, the problem with stated income loans is that they admitted a class of borrower that should not be a borrower, not reliable enough.  This doesn't have that problem, so the lie has little economic effect and is benign.

rai_saville's picture

This is unbelievable to say that how people are claiming for mortgage loans and houses simply by the disguise of business purpose. Well, if it is happening, these people cannot be blamed only. One has to understand their lack of inspiration funds in mortgage lending market that would keep them inspired to find honest mortgage loans.

 

bradcollin133's picture

Unfortunately the problem with such high interest rates of short-term loans can’t be solved just by closing this business. As we all know bank system does not provide people with no credit history with any financial assistance, as they can’t confirm their solvency. So they have to try 24 hour payday loan when they have no other options. And this situation should be changed on the governmental level as the people with low income have no protection of the government. They are just made to deal with such lenders and pay such charges.