Mortgages: No-Doc Loans Are Back

Did you think the housing collapse killed off "liar loans"–those infamous bubble-era mortgages for which people were allowed to get creative in portraying their ability to make the payments? Well, they're back, and that may be a good thing.

In the height of the housing boom in 2006 and 2007, low-doc loans accounted for roughly 40% of newly issued mortgages in the U.S., according to mortgage-data firm FirstAmerican CoreLogic. Then came the housing collapse, with subprime loan defaults playing a leading role, particularly the low-doc "liar" variety. The delinquency rate for subprime loans reached 39% in early 2009, seven times the rate in 2005, according to LPS Applied Analytics.

It now appears that banks are quietly reestablishing the no-doc and low-doc mortgage market. In fact, low-doc loans accounted for 8% of newly originated loan pools as of this February, FirstAmerican Corelogic reports.

The banks extending these loans are mostly small community and regional outfits attracted to their relatively high interest rates (anything from 25 basis to 200 basis points over a conventional loan's interest rate). The lenders intend to keep the loans in their portfolios rather than securitize them.

These banks serve all kinds of borrowers, including a goodly number of self-employed folk, successful artists and financiers who tend to garner wealth in windfalls but don't have a sheaf of pay stubs to staple to a conventional loan application.

Some say the market overcorrected a bit when shutting down this type of loan, and loosening of the strings now may be a good thing for everyone.

What do you think? Do you think ANY bank or lending institution should allow "Liar Loans?" We'd love to hear your feedback. Just click the comment link below and tell us what you think.