Lenders Put the Lies in Liar’s Loans and Bear the Principal Moral Culpability

By William K. Black

A reader has asked several important questions about liar’s loans that are critical to understanding the causes of the ongoing U.S. crisis. By 2006, half of all loans called “subprime” were also liar’s loans. Roughly one-third of all home loans made in 2006 were liar’s loans. The crisis was originally called a “subprime” crisis, but it was always a liar’s loan crisis. The reader is correct to inquire about causation and moral culpability… Yes, “liar’s” loans are what the industry called “stated income” and “alt-a” loans when they were talking among themselves. Income was the primary category that was “stated” – i.e., listed without any verification as to accuracy – in a liar’s loans. Some liar’s loans, however, also “stated” employment, assets, and liabilities. “Stated income” is a euphemism for a liar’s loans, but it is at least honest about its insanity. Readers get it right immediately – they understand that no honest mortgage lender would make loans on this basis. (I expand on this point below.)

This Time Had Better Be Different: House Prices and the Banks

Steve Keen looks at 130 years of home value, mortgage debt, total debt and bank stock history. He finds this time is different for the Australian housing bubble, but not in a good way: the effects now could be worse.

Unemployment and Foreclosures

There seem to be some weak and also some fairly good correlations between foreclosures and unemployment. However, there seem to be other factors as well. States with the largest housing bubbles all fall in the group of states with the biggest foreclosure problems. Perhaps a combination of size of bubble and high unemployment could explain which states have the biggest foreclosure problems.

Explaining the Housing Bubble

In the simplest terms, the housing bubble was caused by a flood of liquidity chasing mispriced risk.