The housing boom brought another change. Mortgages are no longer held for long by banks but are packaged together as massive bonds and sold on Wall Street. Propelled in part by demand for these bonds, companies began offering loans that required little or no documentation of borrowers' income.

These "stated income" loans were designed for a limited purpose: giving self-employed people a crack at homeownership. But during the boom, the number of such loans exploded to the point that they became a running joke in the industry, earning the nickname "liar loans." Estimates vary widely, but research suggests that they made up a significant portion of all mortgages during the boom — 58 percent in a study by First American LoanPerformance.

Last year almost forty per cent of subprime borrowers were able to get "liar loans"—mortgages that borrowers can get simply by stating their income, which the lender does not verify. These loans were ideal for speculative gambles: you could buy far more house than your income justified, and, if you could flip it quickly, you could reap outsized profits. Flat-out fraud also proliferated: consider the mortgage taken out by one "M. Mouse."

Mortgage consultant D. James Croft, the former chief of examinations and supervision at the Federal Home Loan Bank Board, says borrower misrepresentation — the little-white-lie level of fraud — is "pervasive" in some portfolios, particularly those with significant concentrations of low-documentation mortgages originated in the past several years. "Low doc" loans, popularized by industry giants including Citicorp Mortgage Inc., allow borrowers to submit minimal verifications on earnings, debts and employment status. Some lenders aggressively marketed even "no-doc" loans, where borrowers submitted no proof of income whatsoever at application. If the loan amount required an annual household income of $100,000, in other words, a $50,000-per-year earner could simply tell the originating mortgage broker that he qualified. No W-2s or tax returns were necessary, hence their sobriquet in the industry — "liar loans."