Arnold Kling  

What is a NINJA loan?

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The acronym NINJA stands for no income, no job, and no assets. Often, I hear this described as lenders willing to make mortgage loans to borrowers with no income, no jobs, or no assets. Technically, this is not correct. NINJA loans were mortgages where the borrower did not have to supply verification of income, job, and assets.

On any mortgage application, including a NINJA loan, the borrower must state his or her income, place of employment, and assets. With an ordinary loan, the borrower provides documents the allow the bank to verify these statements that the borrower makes on the application. A pay stub would be one such document. A bank statement would be another.With a NINJA loan, the lender takes the borrower's word for what is put on the loan application.

With either a NINJA loan or a regular loan, the borrower commits fraud if the borrower's income, job, or assets do not match what is on the application. When house prices were rising, lenders were happy to overlook fraud, because the borrower did not default, so who cares?

My point here is that many, if not most, of the loans that are going into foreclosure are loans where, if the investor wanted to press the case, the borrower could be found guilty of fraud. Nobody wants to do this. Instead, we are all supposed to feel sorry for the borrowers. But it is another reason to argue that, in Tyler Cowen's phrase, this was predatory borrowing.

There were many borrowers who did not know that they were lying on their loan applications. The lender may have filled out the application for them. But some borrowers knew they were lying and did it anyway.


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COMMENTS (21 to date)
Daniel Klein writes:

I wonder whether the borrower is sometimes highly uncertain of his own creditworthiness, and as certification to himself of his own creditworthiness he uses whether the lender is willing to lend to him. He uses the lender's willingness to lend as a seal of approval of himself to himself (or his long-term self).

Part of this uncertainty could stem from a sense of bullsh-t formality and governmentalization of paperwork. The borrower might think: "Oh, the government forces them to ask these questions, and if they care about the accuracy of my responses, they will take the trouble to verify them. We both need to get around the stupid restrictions imposed by government and lawyers."

Meanwhile, the lender was perhaps not entirely up to speed on the extent that the lender's own sense of creditworthiness and personal responsibility depended on the lender's own decision.

A mismatch here, an asymmetry in interpretatiion, could have contributed to the problems.

chris writes:

In a civil action for fraud, the plaintiff needs to prove that he relied on the defendant's false statement and that the reliance caused his damages. If the bank didn't care whether the borrower had income because it was counting on refinancing after the home price rose, it couldn't prove fraud.

Æternitatis writes:

@Daniel Klein

That might be a plausible interpretation if the loan application asked for some subjective self-assessment. "Do you think you are credit-worthy? Do you expect to repay this loan?" Some bona fide self-misassessment might be psychologically plausible on questions like that.

But of course that is not what loan applications ask. Predatory borrowers make legal representations that they earned income, that they owned stuff, that they held jobs, all of which they didn't. For those to be sincere untruths would generally require clinical mental defects.

The rest of them (i.e. almost all) are just con-men with self-serving justifications. Everybody was doing it! The loan officer didn't really care! They deserve all the public opprobrium they so singularly have avoided getting.

@Chris

Hardly. The relevant legal question is not whether the bank (or its agent) on a deeply metaphysical level "cared" about some fact or another. The relevant question is whether the false statement influenced the bank: Is it plausibly that the bank would have acted differently absent those false statements?

And the answer here is: Not just plausibly, but indisputably yes. Did the bank issue any loans without such legally binding representations? Probably not, and certainly not many. Is there any plausible argument that if the predatory borrower had told the truth rather than lying the bank would still have issued the loan? I don't think so.

Of course few, if any, cases are going to be brought about this massive fraud. If you are poor, and therefore judgment proof, and showered with public sympathy, and therefore unlikely to be criminally prosecuted, you are above the law and can commit fraud with impunity.

Both public and private prosecutors are going to after the deep pockets of a publicly reviled bogeyman (see recent prosecutions and threats thereof against Goldman Sachs and BP). In short, whether you are in legal jeopardy depends not on whether you have complied with the law, but on how much the ignorant median voter and the most unscrupulous prosecutor likes you.

Rebecca Burlingame writes:

I can see Daniel's point and what's more, some people were entirely sure of their creditworthiness but just did not want to put up with the hassle of excess paperwork or time. It was worth it to them, to put down 20 percent or more and be done with the process, not realizing what they got may in fact have been subprime. This sure puts the idea of a NINJA loan in a different light, for me.

mark writes:

One of the best legal rules, in terms of making for efficient use of public resources, is "in pari delicto", i.e., if the party bringing a lawsuit is involved in the wrong that it's complaining of, the state will not bother to adjudicate that dispute. It ought to be invoked in this context.

Æternitatis writes:

@mark

"In pari delicto"? Really?

So if you buy a car with a rolled-back odometer or other faked documentation, you should not be able to bring an action to recover against the dealer because you, after all, were also in the wrong by believing his lies? You really should have known that some car dealers will lie and not believed them! It was quite irresponsible of you to trust them and then expect the legal system to bail you out. Or in other words, "you f***ed up, you trusted us!"

That is hardly a statement you or any sensible person would be willing to endorse as a legal principle.

A lot of people hate banks these days for reasons both good and bad. But your argument, Mark, is little more than a thinly veiled attempt to vent animus against banks by stripping them of legal rights and protections enjoyed by everybody else. That is not how the rule of law is supposed to work.

Tim Worstall writes:

Well, we know what will happen of course, such NINJA loans will be made illegal, if they haven't been already.

Which would be most annoying to people like me. People who have taken out one in the past.

For various boring technical reasons (like moving country every few years, having no one job but handful of concurrent part time ones etc) a NINJA was the only loan I could get when I wanted to remortgage a place in one country to buy another in a second.

Sure, such loans can get abused and I'm sure they did. But that doesn't mean that everyone who got one abused it.

Noah Yetter writes:

Is this really true? In the This American Life/NPR Planet Money series on the financial crisis they described a progression in loan types that included "Stated Income/Stated Asset", "No Income/Stated Asset", and finally "No Income/No Asset". That seems to imply that you would not even be claiming to have a particular level of income, simply making a promise that you could pay back the money.

Jeff writes:

Yes, the no-doc loans were mostly fraudulent, but then, they were designed to be. Think about it for a minute. No-doc loans cost the borrower more (in points and interest) than documented loans, and the vast majority of people who got them could easily have documented their true income. So the only reason to go with a no-doc loan is fraud.

Do you really think the lenders didn't realize this? As we say in the software business: "That's not a bug, it's a feature!" The lenders wanted to make bad loans, because bad loans carry higher rates and look more profitable than good loans, at least until the borrower stops paying. But by then the executives all have their bonuses based on the fake profits, and they can rely on the taxpayers to take the fall.

Some of you really need to start paying attention to William Black.

Lee Kelly writes:

I helped process a lot "NINJA" loan applications during the boom. Although the applicants were naive, they certainly weren't honest homebuyers. Most of them knew people who had made a lot of money speculating during the bubble, and they wanted a piece of the action. A large proportion of applicants (compared those seeking ordinary loans) were dodgy foreigners with patchy histories and bad credit. They didn't understand the system very well, but they were nonetheless trying to play it for all it was worth. Most of them lied. Applicants had a large incentive to lie, because they perceived a big payoff down the road.

The mortgage companies didn't care, much less the mortgage brokers and packagers I worked for. Every successful loan application brought commission, and the more risky the loan appeared the larger the commission. The rest is history.

Lord writes:

The reason for not prosecuting these is the lender or agent of the lender, generally just an intermediary, was part of the fraud. They didn't want documentation because it could establish their fraud, thus just a wink wink nod nod. Since lenders believed appraisals and rising prices were gifts from God, they didn't even consider them very risky. If they were confronted with their deception, they would just assert they were deceived, not by the borrower but by the Fed who led them to believe the future would always be brighter. That is who they really work for after all.

Æternitatis writes:

@Lee Kelly

That sounds about right. Undoubtedly a lot of originators of such loans, or at the very least much of their personnel, were in on the scam--or at least had no incentive to be too careful.

In so far as they were co-conspirators in the fraud with the predatory borrowers, they were negligent in some sense, or they failed to live up to their contractual commitments to the parties they sold the mortgages too, these originators may very well and should have some legal liability as well.

However, the ultimate owners of the mortgage-backed securities (MBS)--be they other banks, financial institutions, or individual investors--they obviously were not in on the fraud. If they had been, they would not have bought these MBSs.

@mark

To deny these ultimate holders a right to recover against the predatory borrowers (as well as other possible miscreants), as you propose, because they were in pari delicto with the predatory borrowers would be as perverse as denying Bernie Madoff investors any right to recover against him because they should have known better than to trust him.

It is true that these investors (either with the predatory borrowers or Bernie Madoff) could have been more cautious. Indeed, they should have. But if you are too trusting or incautious, you don't lose your legal remedies. You merely run the risk that they may prove inadequate as doubtlessly they will even if every predatory borrower was made to pay as much of his debt as he he could be (rather than being given a free pass as "victim" like the current system does).

Thomas Sewell writes:

A lot of these were legitimately for the self-employed. Every other piece of paperwork (taxes, etc...) they fill out is designed to minimize their apparent income and assets so that they can legally avoid taxes and such. That causes a major issue when documenting income for a loan, when they want it to show a true higher income.

From a banking perspective, someone who makes 60K and reduces that on their taxes with a truck payment of 6K to 54K because they're self-employed as a plumber doesn't "really" make less than their employee who also drives their own truck and makes 60K, but that's not what their income tax documents say.

So for a stated income, or "no-doc" loan, generally all they needed was their accountant willing to provide a letter that explained they were self-employed. Then the loan originator (not the borrower themselves) usually just filled in an income number that qualified them for the loan, sometimes underestimating their true income and sometimes overestimating it. If they had docs to prove their income, then there would be no point in paying the extra money to do a no-doc loan.

I'm not as familiar with no-docs later than about 5 years ago. Over time they may have changed to loosen up who could get one and the amount of sheer fraud involved.

tjames writes:

I got a no-doc loan (really, I think stated income, stated asset, using the terminology above) as a self-employed person in 2000. At the time, I had a self-employment history of less than 1 year, so there just wasn't documentation of any length to supply. But, I also put up 20% of purchase price and accepted a rate of 8.75% (IIRC) for the privilege. In others words, I mitigated the lender risk with a prudent down payment, and I accepted a risk premium on interest. I don't see any problem making loans like this.

I am thinking no-doc is really a problem for lenders only if there is insufficient property equity to cover the lender who must foreclose. The insufficient-equity-angle, which Arnold has brought up numerous times before, could be a big culprit, since requiring no-docs to put up 20% minimum would probably have driven off many speculators/gamblers, and minimized the losses to lenders to the point where it might have hurt when the bubble burst, but not been a global crisis.

Lord writes:

It isn't really the equity ratio that matters but the change in it. Less equity, more leverage, translates directly to higher prices. Increasing prices, less perceived risk, larger loans, lower equity required. When equity can no longer be reduced, leverage no longer increased, prices hit the wall, creating more perceived risk, smaller loans, and more equity required, but there is no more equity to be had, so prices begin to fall, substantiating the risk. This is the danger of changing leverage.

Andrew_M_Garland writes:

Stimulus Does Not Cure a Recession

Criminals did much of the home loan borrowing, or shady mortgage brokers skimmed money from loans made to unwitting clients. They took advantage of No Documentation Loans, the most idiotic idea in 50 years. It was Fannie Mae, Freddie Mac, and Congress who gave the seal of approval to No Doc Loans by buying 20% of them. A lot of the money went to consumption, over many years, supporting increased production of consumer goods.

Pandaemoni writes:

While I do not feel sorry for the borrowers who lie on their applications, I have to say, I don't feel all that sorry for the bankers who engaged in willful blindness by refusing to so even basic due diligence. It seems clear to me that the reason they did that was that the bankers knew they were just going to sell the loan, so what did they care if it was repaid?

In my experience, in fact, either those bankers or someone up the chain also lied, as every securitization has a "Credit and Collection Policy" that is supposed to set out minimum standards for the loans being bundled. In the C&Cs I worked with there was always a requirement that income be verified.

Mr Econotarian writes:

"every securitization has a "Credit and Collection Policy" that is supposed to set out minimum standards for the loans being bundled."

Yep, and now Freddie and Fannie want everyone who sold them a fraudulent loan to buy them back...

Foobarista writes:

The main "legitimate" customers for NINJA loans were illegal immigrants or small business owners who ran cash businesses (and who had lots of cash lying around that wasn't declared to Uncle Sam). Often, in California at least, you had many who were both. Other more legit customers for such loans were consultants or other self-employed types with massively variable income, who are traditionally not well-understood by banks.

The difference was that NINJA or low/no-doc loans used to require a bigger down payment to make up for the lack of docs and greater risk. When I was a consultant, I got a no-doc loan with a 40% down payment.

Alfredo Galtarossa writes:

Here is a point for all of those that would like to keep on blaming the borrowers and keep on defending the lenders.
(TILA "Truth In Lending Act" Section 226.34(a)(4)
Repayment ability. Engage in a pattern or practice of extending credit subject to SS226.32 to a consumer based on the consumer’s collateral without regard to the consumer’s repayment ability, including the consumer’s current and expected income, current obligations, and employment.)
This makes NINJA loans or NO DOC loans Illegal period and most states have their own anti predatory lending practices statutes.
Some lenders committed fraud by altering the borrowers application increasing their Income in it to comply with an acceptable Debt to Income ratio, creating acceptable Jobs that they knew no one would verify, Inventing bank accounts and keeping this documents away from the borrower and settlements at no more that 45 minutes, approving loans to borrowers that could not repay them for the only reason of feeding the system with Notes to create Mortgage Backed Securities to be sold as CDOs in Wall Street, Lenders certainly committed silent fraud by not verifying the borrowers ability to repay the debt. NO Borrower forced the lender to extend credit so easily.

Boonton writes:

It's 'predatory borrowers' if they were doing this without the broker's knowledge or approval. In more than a few cases, though, the brokers were actively advising people to 'fudge' their income in order to get the loan, sometimes even filling it out *for* the people taking the loan. This leads me to ask why not have some criminal prosecutions of some of the 'mortgage sweat shops' that clearly were engaging in this?

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