Defaults on 'Liar Loans' Rise

The next category of mortgages going bad are the so-called “liar loans.” They were approved without the borrower having to prove that they had an income or assets.

Some home owners with these loans are stuck. They can’t refinance because housing prices in the market where they were the most common have declined.

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. Moody’s warns that these troubled loans could prolong the credit crisis another two years.

Fannie Mae and Freddie Mac, the 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," or known as Al-A.

News of these losses are driving down stock prices for Fannie Mae and Freddie Mac, making it more likely that the U.S. Treasury Department – and ultimately taxpayers – will have to bailout the quasi-public banks.

Source: The Associated Press, Alan Zibel (08/18/08)