Liar Loans Redux: They’re Back and Sneaking Into AAA Rated Bonds

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.

Today’s versions bear only passing resemblance to the ones that proliferated in the mid-2000s, and they’re by no means as widespread. Still, they reflect how the business is starting to join in the frenzy that’s been creating booms in everything from subprime car loans to junk-rated company bonds.

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.

Source :Bloomberg