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 $2.95m (€2.64m) home in Manhattan Beach, California, were hints of something darker: Liar loans — toxic mortgages of the subprime era.
Years after the great American housing bust, mortgages akin to 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 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 story begins earlier this year, when a television producer bought the cream-coloured home.
His lender, Velocity Mortgage Capital, says it writes mortgages for people buying homes only for business purposes, such as renting them out, and requires all customers to sign papers stating their intentions.
Soon Velocity was bundling the $1.92m mortgage and hundreds of other loans into securities through Wall Street’s securitisation machine. Kroll Bond Rating Agency featured a picture of the house in a report on the $313m deal, most of which was rated AAA.
Marketing documents for the offering, managed by Citigroup and Nomura Holdings, characterised the buyer as an “investor.”
But when a reporter knocked on the door in Manhattan Beach, the buyer answered and said he never planned to rent out the place. Nor, he said, had he signed documents stating he would. He was living in the house with his family.
For lenders and investors — let alone knavish borrowers who might get in over their heads — the potential for trouble is real this time, too.
That’s because federal regulations put in place following the crash effectively outlawed liar loans.
Under so-called ability-to-pay requirements, lenders must take specific steps to ensure home buyers actually can afford the mortgages. If they don’t, homeowners can sue and potentially win damages that can dwarf the value of the homes.
But in a throwback to subprime times, Velocity and other specialty lenders routinely offer certain mortgages with limited reviews. That’s because the rules exempt mortgages made for “business purposes.”
Chris Farrar, Velocity’s CEO, says that his firm takes steps to ensure customers really are buying homes for business purposes.
“Our goal is to never make a consumer loan,” he said. In assigning AAA grades, Kroll partly relied on Velocity’s promise to buy back any loans that fell short of the standards, said Nitin Bhasin, a Kroll managing director.
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