September 19th, 2008 by Kenneth Long
The housing crisis is finally boiling over into financial markets, creating turmoil that threatens some of the oldest and most established financial institutions. To blame are greed and ineffective mortgage regulations that allowed the crisis to become so widespread. Specifically, the focus of these problems center around “no documentation” or “stated income” mortgage loans which are affectionately known as NINJA loans.
What is a NINJA Loan?
A NINJA loan is a description of mortgage loan that originated without the important documentation to prove that the applicant can reasonably adhere to the loan terms. It stands for “No Income, No Job or Assets.”
Many of these loans were based on unsubstantiated lies from either the applicant, the mortgage broker or both. The lender that ultimately approved the loan did so without exercising due diligence to ensure that the applicant could afford the mortgage.
Additionally, many of these loans were packaged and sold to other lenders. Fannie Mae and Freddie Mac may have bought some of these loans. Additionally, many of these loans packages ended up in investors hands as Collateralized Debt Obligations (CDOs).
CDOs were previously viewed as relatively safe investments, since they were secured by real property. However, with many of these properties now worth less than the loan balance and record numbers of homeowners losing their homes to foreclosure, many CDOs were subject to heavy losses that would be incurred by investors.
The fall of Bear Stearns was just the tip of the iceberg. Lehman Brothers filed the largest bankruptcy in history due to massive losses and resulting shareholder panic. American International Group (AIG) was effectively nationalized, with the federal government taking an 80% stake in the firm to prevent collapse. Even the venerable Merrill Lynch allowed a sale to Bank of America to prevent a short sale-fueled decline in its stock price.
With Morgan Stanley now being eyed by everyone from Barclays Bank to Wachovia, the fallout from this crisis may finally be reaching rock bottom. Predictions of a “great recession” may not be realized if the government’s plan to form a new bailout entity works. This could finally give financial institutions a “buyer” for their toxic loan portfolios.
The root of all of these problems is the NINJA loan. The greed that caused most investors and related companies to turn a blind eye to the potential risks put our entire financial system at risk. All of this occurred because of the weakness of mortgage regulations that allowed for these “stated income” loans to occur in the first place.
A brighter outlook can be found in North Carolina. North Carolina law places greater restrictions on the exotic loan products that are likely to be defaulted on. With greater consumer protections in place, the housing markets were unable to overheat as they had in other areas. As such, many areas of North Carolina averted much of the housing slump. Charlotte and Raleigh did not experience a rapid decline in housing prices, and many areas still saw measurable growth in housing prices.
As long as financial institutions accept poorly documented loan applications and investors still purchase the loan portfolios, there will always be a much higher risk to our financial system. Don’t feel bad for the firms that are in trouble. It is their fault, and the NINJA loan is the root cause of their problems.
This entry was posted on Friday, September 19th, 2008 at 10:16 am and is filed under Homeownership, Saving and Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.