A Rose is a Rose, and a Liar Loan is... updated; Best of 2010 series

By Brett Sherman

[Aug 23,2010 update - Wow!  We have been crushed with responses to this one, and we understand why.  To clarify - we mean fraud by lenders and securitizers - prompted by Wall Street's demand for new mortgages, regardless of quality, to stuff into mortgage-backed securities. WE ARE NOT BLAMING THE BORROWERS... All references to borrower conduct was tongue in cheek.  We - unsuccessfully tried to show that - in most situations - borrowers who could qualify for a mortgage with a little bit of paperwork would have done so and saved a whole lot of money]

Subprime and Alt-A low documentation and no documentation mortgages - a fraud so transparent we wrote a song about it (kind of).

• I say 'low doc'; you say 'no doc'... I say Alt-A; and you say No Way...
• Low doc, no doc, alt-a, no way; Let's call the whole thing off!

_________________________________________________________________________

 

• Assume you found your dream home.  Luck is with you.  The house is for sale.

 

• Further assume that you have a good job, a decent salary, and your net worth is respectable.

 

• Unfortunately, you have a checkered (but not terrible) credit history, so you are unable to qualify for a prime (or agency) mortgage.

 

• Because you really want the house, you decide to stop in at Subprime Time, your friendly neighborhood subprime lender. You do not intend to actually apply for a loan just yet, but you are interested to find out if there is even a possibility that you could get a big enough mortgage to buy the house.

 

• In light of the informal nature of your visit to Subprime Time, you did not bring any pay-stubs or bank statements or anything like that with you.

 

• At Subprime Time, you meet with the manager.  You explain the situation to him.  You tell him how much money you have for a downpayment and how much you want to borrow.  The manager asks you a whole bunch of questions about your things like your educational background, employment history, and current income.

 

• Within a few minutes, the manager tells you he has heard enough.  He can approve you right away based on the information you provided. Now, it is you who are smiling.

 

• The manager explains that YOU HAVE TWO CHOICES -

 

 

1.  Subprime Time can lock a rate in for you right now. You simply fill out an application, and you can close in ten days.  You don't need to provide proof that you have a job, let alone any of the other financial information you just discussed.  Subprime Time is willing to take your word for all that stuff.  Just say the word and the loan is yours.

 

2.  You can still be approved for the mortgage right away, but the mortgage commitment is only good if you fully document your financial circumstances, employment status, and some other information.

Beware the Ninja:

To recap:

Option 1 is a no verification subprime mortgage (also called a liar loan and a NINJA loan).  Option 2 is a fully documented subprime loan.

 

Apart from the application process, there is only one meaningful difference between the NINJA mortgage loan and the full verification subprime loan -

 

 

• The fully documented loan is CHEAPER than the NINJA loan.

 

 

Why?  Because underwriters view people who document their income, employment, assets, etc., are considered as lower credit risks than people who choose to apply for a no document NINJA loan.

 

So, which loan to choose?  Hmmm.  If you told Subprime Time the truth about your finances, and if you are otherwise sane, you will decide to document your loan application and obtain your subprime mortgage at a lower interest rate.

 

And the point is... (this is not an original conclusion by the way):  The whole point of liar loans / Ninja loans was to provide applicants with the opportunity to pay for the privilege of making sure nobody checked out their story.

 

Put another way - NINJA borrowers bribed lenders (i.e., agreed to pay a higher interest rate) for the privilege of lying about their finances on mortgage applications.

 

* * * * *

AS ALWAYS, THE SHERMAN LAW FIRM and WALL STREET LAW BLOG ask our very knowledgeable readers to tell us if we are wrong.

 

 

Comments

[mt security systems]

Surprising this happens. Well, its a fact that we must face.

[auto glass replacement]

A little risky but im sure it's gonna be all worth it.

[E]

I think we are missig the point on this. These "ninja" loans as you like to call it where originally created to help self-employed borrowers get mortgages. If your in the business you would know Fannie, Freddie and FHA make is very hard for a business owner get a mortgage. It did get out of control and needs to stripped down and rebuilt. But because we are painting this with such a very large brush it will be gone. And in reality that doesn't help anyone and just hurts the people the program was intend for.

[Wall Street Law Blog]

Per K: Thanks as always for the comments.
Just a clarification - We were not trying to
tell the whole story of the crisis or even of
subprime lending. We try to take one bite at a
time. Here, we were just looking at the "logic"
of low doc low verifcation and/or ninja loans.
We also did not intend to make it seem like blame was
With the borrower - just that the net effect is a higher cost
loan for the ninjas.

Thanks as always

Wall Street Law Blog

[Per Kurowski]

This, although absolutely true, is such a small portion of the whole truth, that it is almost a lie.

Not one, I repeat not one single Ninja mortgage would have come into existence had it not been for the fraudulent risk-transformation machine which allowed making investors believe that securities backed by Ninja mortgages were sufficiently good so as to be rated AAA.

“NINJA borrowers bribed lenders”… B.S.! The lenders never lent a Ninja loan at Ninja rates. They acquired AAA rated securities at little better than AAA rates.

The brokers convinced “risky” Joe to take out a $300.000 mortgage 30 year at 11 percent and then, with a little help from the credit rating agencies they convinced risk-adverse Fred that this mortgage packed together with other similar was so safe it merited an expected return of 6 percent, and so they sold Fred that mortgage for $510.000 and pocketed an immediate profit of $210.000. Who could resists the temptations of such a powerful mean and lean money making machine?

Read more at:
AAA-bomb http://bit.ly/gNemy
Subprime Regulations http://bit.ly/1wj8V
Tea with FT http://bit.ly/nWgP6
Finance for Development http://bit.ly/4yX7k1