04
Jun
10

A subtle but critical distinction

Arnold Kling on the (in)famous NINJA loans:

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.

The usual narrative is either that (a) those dirty awful banks suckered poor people with insufficient assets into variable-rate mortgages by way of NINJA loans or (b) those dirty awful politicians legislated extraordinarily bad incentives that left banks no option but to offer loans to poor people with insufficient assets.  As Kling points out, those are both wrong: the “NINJA” part of a NINJA loan is in the verification of income, jobs, and assets, not the presence thereof.

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?

[…]

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.

That changes the story a bit, doesn’t it?  As should be facepalmingly obvious from that first italicized “verification“, NINJA loans were immense incentives for one or both parties to commit fraud.  I have a hard time imagining a credible bank offering NINJA loans and honestly expecting them to come out above-board, and I have just as hard a time imagining a credible borrower being offered a NINJA loan and not asking “what’s the catch?”

My sympathy for both sides just ratcheted down a few points.

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