More Photos (2):

Other articles by Alan Zibel:

U.S. home sales edge up but recovery still fragileMortgage aid program is expandedSuicide suspected in death of Freddie Mac acting CFO KellermannForeclosure threat up 24%; Arizona rate among largestFebruary new home sales rise unexpectedlyFebruary existing home sales rise by 5.1 percentObama administration launches housing planDo you qualify? What can you get? Q&A addresses some of the key questionsObama outlines $75 billion mortgage relief planObama unveils $75 billion mortgage relief plan

Health Care
Sierra Tucson
Eating Disorders Program Coordinator General
A1 Communications
Cable Techs Trades/Construction
RANCHO RESORT
MAINTANANCE POSITION

In the mortgage industry, they are called "liar loans" — mortgages approved without requiring proof of the borrower's income or assets.

The worst of them earn the nickname "ninja loans," short for "no income, no job and (no) assets."

The nation's struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.

"Those loans are going to perform very badly," said Thomas Lawler, a Virginia housing economist. "They're heavily concentrated in states where home prices are plummeting," such as California, Florida, Nevada and Arizona.

Many homeowners with liar loans are stuck. They can't refinance because housing prices in those markets have nose-dived and lenders are now demanding full documentation of income and assets.

Losses on liar loans could total $100 billion, according to Moody's Economy.com. That's on top of the $400 billion in expected losses from subprime loans.

Fannie Mae and Freddie Mac, the nation's largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from sour liar loans, which are officially called Alternative-A loans (Alt-A for short) because they are seen as a step below A-credit, or prime, borrowers.

Many of the lenders that specialized in such loans are now defunct — banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More lenders may follow.

The mortgage bankers and brokers who survived were more cautious, but they acknowledge that they too were swept up in the housing hysteria to some extent.

"Everybody drank the Kool-Aid" said David Zugheri, co-founder of Texas-based First Houston Mortgage. They knew that if they didn't give the borrowers the loans they wanted, a borrower "could go down the street and get that loan somewhere else."

The loans were immensely profitable for the mortgage industry because they carried higher fees and higher interest rates. A broker who signed up a borrower for a liar loan could reap as much as $15,000 in fees for a $300,000 loan. Traditional lending is far less lucrative, netting brokers around $2,000 to $4,000 in fees for a fixed-rate loan.

During the housing boom, liar loans were especially popular among investors seeking to flip properties quickly. They also were commonly paired with "interest-only" features that allowed borrowers to pay just the interest on the debt and none of the principal for the first several years.

Even riskier were "pick-a-payment" or option ARM loans — adjustable-rate mortgages that gave borrowers the choice to defer some of their interest payments and add them to the principal.

While some borrowers were aware of their risky features and used them to gamble on their homes' value or pull out money for vacations, others said they were victims of predatory lending.

The low monthly payments of liar loans helped many home buyers afford to purchase in areas of the country where prices were skyrocketing. But they also helped drive up prices by allowing people to buy more than they could truly afford.

Case in point: About 40 percent of loans made in California and Nevada in 2005 and 2006 were either interest-only or option ARMs, according to First American CoreLogic.

"It was pretty evident that the only thing that was supporting these loans was higher home prices," said Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.

Now that prices have fallen, almost 13 percent of borrowers with liar loans were at least two months behind on their payments in May, nearly four times higher than a year earlier, First American CoreLogic said.

Countrywide Financial Corp., now part of Bank of America Corp., was one of the top providers of liar loans. The company is now paying the price. More than 12 percent of Countrywide's $25.4 billion in pick-a-payment loans are in default, and 83 percent had little or no documentation, according to a Securities and Exchange Commission filing last week.

Critics say Fannie Mae and Freddie Mac, which bought or guaranteed liar loans from lenders including Countrywide and IndyMac, should have stuck with traditional 30-year, fixed-rate mortgages.

"I personally think that they ventured beyond their mission," said Richard Smith, a mortgage broker in Chattanooga, Tenn. Because of their decision to back shakier loans, he said, "the home-buying public is going to have to pay."