Many buyers who took the bait on Alt-A loans (also known a liar loans) are increasingly finding themselves in trouble.

Initially, Alt-A loans were catered to financially sophisticated borrowers with strong credit scores and hefty down payments who would not or could not document their income or assets. People who were self-employed or whose income fluctuated, paid higher rates to take out these no-hassle loans. But then the mortgage companies began to loosen up on their requirements.

From the Washington Post:

For years, Alt-A loans performed as well as prime ones, reinforcing the idea that income hardly mattered if a borrower had good credit, said Dave Stevens, a former Freddie Mac official and now president of Long & Foster.

“We had a period of time with ever-improving housing market conditions and there was no history of default to look back on,” Stevens said. “Every year, the investors and lenders were proved right, that certain people did not need to document their income, so the lenders started becoming more lenient.”

Increasingly, Alt-A mortgages came to be known as “liar loans” because so many lenders and borrowers did not provide accurate income data. Lenders also took on more risky borrowers and aggressively marketed Alt-A loans, including option adjustable-rate mortgages.

Result – More and more people are now finding out that they can’t afford the home they puchased. It’s costing them a ARM and leg to stay afloat. The big question now for these borrowers, how do they stop the bleeding.

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