NINJA Loan

It describes subprime loans of inferior quality and high risk.

A NINJA loan describes subprime loans of inferior quality and high risk. It was a notation scheme for the degree of paperwork required by the mortgage originator.

Ninja Loan

The only time an applicant had to present their application details was their credit rating, which was assumed to reflect willingness and capacity to pay. It was dubbed a no income, no job, and no assets loan.

These loans were particularly prevalent during the United States housing bubble from 2003 to 2007. Still, the subprime mortgage crisis in July/August 2007 made them more well-known as a prime illustration of improper lending practices.

The word gained popularity during the 2008 financial crisis as the subprime mortgage crisis was blamed on such loans.

It functions on two levels: as an abbreviation and a reference to the fact that NINJA loans are frequently defaulted on, with the borrower vanishing like a ninja.

Introduction

It is a slang word for a loan given to a borrower with little or no effort made by the lender to check the borrower's capacity to pay back the debt. "No income, job, and assets" is what it means.

Most lenders require loan applicants to show proof of a consistent source of income or sufficient collateral, but this loan skips these requirements.

Before the 2008 financial crisis, they were more frequent. However, following the crisis, the US government introduced new laws to improve standard lending standards across the credit sector, including tightening loan-granting procedures.

How a NINJA Loan Works

Financial institutions that provide them make decisions based on a borrower's credit score alone, with no proof of income or assets such as tax returns, pay stubs, or bank and brokerage accounts.

Working

To qualify, borrowers must have a credit score over a specific value. However, because subprime lenders typically supply NINJA loans, their credit score criteria may be less stringent than traditional lenders like big banks.

These loans came with a variety of terms. Some may provide a low beginning interest rate that gradually rises over time. Borrowers are obligated to return their debts within a set deadline.

Failure to make those payments may result in the lender taking legal action to recover the debt, lowering the borrower's credit score and limiting their capacity to get future loans.

Loan Framework 

Framework

1. A minimum credit score is required

The lending institution would provide the loan based on the borrower's credit score, with no extra verification of assets or income required under the NINJA loan structure.

In other words, if your credit score was high enough, you could get it easily. Subprime lenders provided most of the loans, putting downward pressure on the credit score threshold.

2. The very first terms

They frequently feature an introductory or "teaser" rate to make the loan look more appealing. However, the interest rate on them increased over time to reflect the lender's increasing risk.

3. Repayment of loans

NINJA loans, like traditional loans, were to be repaid within a specified duration agreed upon by both the lender and the borrower.

If a borrower fails to make an interest payment or repay the loan (i.e., defaults), lending institutions may pursue legal action to recover the debt, lowering the borrower's credit score.

This can impact an individual's capacity to get future loans and, in many cases, confiscate their assets.

Pros and Cons

Pros 

1. There is little to no paperwork.

NINJA loans were more straightforward to handle than regular loan applications because they only required credit score verification.

The loan procedure was speedy, which appealed to some applicants, particularly those who did not have or did not want to prepare standard loan documents.

2. Credit was made available to people who would not be eligible

They provided finance to people who a commercial bank would be denied. As a result, the folks acquired critical goods such as houses and vehicles.

Cons

1. Increased danger

Both borrowers and lenders were exposed to greater risk with NINJA loans. This is because no collateral evidence was required on the lender's side, making the loans unsecured.

In the case of a default, the lender could not confiscate any assets to recoup their losses.

Individuals frequently took out larger loans than they would have received from a typical bank. As a result, the borrower would often borrow above their means to repay the debt.

2. It is simple to cheat

Because there was no standardized process, NINJA loans provided a faster option to make loans to borrowers than established techniques. As a result, it wreaked havoc on the credit market and contributed to the global economy's final collapse during the financial crisis.

An omen of NINJA loan: 1980s and 1990s in the UK

Omen

  • Mortgage endowments: During the 1980s and 1990s, homebuyers were led into endowment policies to pay for their mortgages, which accounted for nearly three-quarters of all mortgages sold. They were not related to the stock market's success and were not made evident to buyers. There was no certainty that they would be able to pay off the mortgage. Although the stock market meltdown highlighted their vulnerabilities, the bank or building companies that sold them made a lot of commission.
  • Precipice bonds: Companies like Lloyds TSB and Bradford & Bingley touted such bonds as guaranteed securities with 10% or more yields. The guarantee was for income -- the stock market fall meant that the only way the companies could pay such returns was by eating up the capital, something investors were unaware of. Large compensation claims and mis-selling fines followed swiftly.
  • Payment protection insurance: offered in conjunction with personal loans, these plans are pricey, have extensive get-out conditions, and the commission paid is sometimes more significant than the loan's profit.

NINJA Loans During the 2008 Global Financial Crisis

Crisis

Before the financial crisis, NINJA loans were typically part of the subprime mortgage and credit markets. Most subprime loans were sold to "Big Banks" and turned into asset-backed securities that were part of a collateralized debt obligation (CDO).

When mortgage delinquency rates rose in 2007, the value of an underlying asset (mortgages) fell. Before this, the US Congress enacted the 2007 Bankruptcy Bill, allowing destitute individuals to file for bankruptcy without recourse.

As more people could not pay their mortgages due to worsening economic conditions, more people stopped paying them. It set off a chain reaction that brought down several markets and economies.

A subprime mortgage is a loan to purchase a property by a borrower with a poor credit history. These borrowers most likely did not have the means to repay the debt, which created high-risk leverage investments for investors.

However, mortgage originators were still packing and planning to sell off low-value mortgages to investors worldwide.

As a result, the mortgage market had lent out 600 billion USD in 2006. Moreover, the actual home price had arrived at its peak, increasing 85% compared to 1997. That means they lost the home, and the value of mortgage loans had become zero.

Hence, the bubble burst and led the subprime market to drop simultaneously as the 2008 Global Financial Crisis.

A high rate of loan defaults contributed to the 2008 financial crisis and a drop in real estate values in many regions of the nation; the government enacted harsher lending regulations, making loans more heavily regulated than before, with mortgage loans bearing the brunt of the burden.

New lending and loan-application rules were established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The new guidelines effectively eliminated NINJA loans by forcing lenders to gather more detailed information about prospective borrowers, such as credit ratings and verifiable proof of employment and other sources of income.

The UK before the 2008 Global Financial Crisis

There was mounting evidence in the UK that sub-prime and self-certification mortgages (which do not need confirmation of a borrower's income) were being mis-sold, albeit not on the scale witnessed in the United States.

UK situation

Housing values had continued to rise, so borrowers in trouble could always sell up. However, there were indications that the housing market was in trouble.

The chief executive of Barratt Developments, one of the UK's leading housebuilders, warned in September 2007 that the Northern Rock crisis had caused a significant reduction in sales.

Mortgage rates were rising, and various studies indicated that prices were falling. If the slump continues, many more debtors might face significant financial difficulties.

''If anyone were conducting adequate checking into the borrowers' resources, they would discover that they were unaffordable,'' Peter Tutton, social policy officer at Citizens Advice, said.

Individuals on assistance are getting mortgages with minimal questions about how they will pay them back; people nearing retirement age are getting 25-year mortgages, and borrowers are being encouraged to lie about their salaries.

According to the consumer watchdog, the leading cause for the evil practice was apparent. It was also the root of various crises that had plagued the financial services sector since the widespread mis-selling of personal pensions in the 1980-90s: commissions.

Housing

Endowment mortgages, which were exposed as lousy investments with exorbitant fees, were promoted with zeal by lenders eager to collect large commissions in the 1980s and 1990s.

In 2007, six out of every ten mortgages were handled through brokers, and commissions were a standard component.

''Whenever the commission pays salespeople, there is always a motivation to sell as much as possible,'' Dominic Lindley, chief policy adviser, said.

Subprime and self-cert mortgage commissions were typically higher than regular mortgage commissions.

Procurement fees on subprime mortgages were estimated to be about 0.5%, compared to 0.3% for regular mortgages, according to the Intermediary Mortgage Lenders Association (IMLA), and arranging fees would also be higher.

Customers were encouraged to take out as large a loan as possible since the commission was higher the more significant the loan.

The looser the income and status checks were, the more likely unscrupulous advisors would market subprime or self-certification loans to borrowers who could not afford them.

That may explain why the subprime industry was one of the fastest-growing segments: nearly one in every five borrowers currently had a subprime or self-cert mortgage, accounting for more than £50 billion in total outstanding mortgages.

Due to the slowing property market and the impending expiration of almost 3 million fixed-rate mortgages, homeowners might see monthly payments climb by 15% or more, making them more vulnerable.

It finally brought the UK's subprime mortgage catastrophe to the public.

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Researched and authored by JunFeng Zhan | LinkedIn

Edited by Colt DiGiovanni | LinkedIn

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