From 2007 to 2009, the world experienced the most severe economic meltdown since the Great Depression. Dubbed the “Great Recession,” various factors like the mortgage crisis would result in this difficult period for millions of people. While the effects were not felt equally worldwide, continents like North America, South America and Europe bore the brunt of the damage. One of the casualties of this event was a specific type of loan known as NINJA loans.
What are they?
NINJA is an acronym for “No Income, No Job, and No Assets.” ‘NINJA loan’ is slang for a loan extension to a borrower with the lender not attempting to validate the applicant’s repayment ability. Most of the time, lenders require loan applicants to prove their stable stream of income or sufficient collateral. A NINJA loan, on the other hand, does not abide by that verification process. These loans differ from most conventional loans, which typically require applicants to provide proof for loan qualification. Specifically, proof that they earn satisfactory income or have adequate collateral.
NINJA loans were more commonplace before the 2008 financial crisis. After the recession, the U.S. government would issue new regulations to make improvements on standard lending practices. These new rules include tightening loan grant requirements. Nowadays, NINJA loans are extremely rare; in fact, they are practically extinct.
How they work
Financial institutions offering NINJA loans base it on a borrower’s credit score with no income. There is also no asset verification through pay stubs, income tax returns, or statements from the bank and brokerage. Borrowers need a credit score surpassing a certain threshold in order to qualify. Because subprime lenders typically provide these loans, their credit score requirements are probably lower than those of mainstream lenders, like major banks.
The structure of NINJA loans has varying terms. Some offer an appealingly low initial interest rate that will grow over time. Borrowers must repay the debt in accordance with a specific time frame on schedule. Failure to make those payments can result in the lender taking legal action so they can collect the debt. This will lead to a decline in the borrower’s credit score, as well as their ability to acquire future loans.
- With NINJA loans, from the lender’s perspective, a lesser verification means a higher number of loans. Assuming the loan granting procedure is flexible, more people will apply for the loan regardless of their credit score. The lender grants a higher number of loans, which will simultaneously garner higher interest costs to the lender.
- A large number of borrowers guarantees low costs for marketing and sales for the lender. This is because the lender is getting its business through a substantial number of customers. Specifically, those who already went through registration due to low verifications.
- The flow of business will continue so long as there is punctual loan repayment.
- The lender could probably receive a higher interest rate courtesy of the smaller amount of paperwork and process of verification. Because the borrower has a poor credit score, obtaining a loan seems very unlikely. Therefore, there is ample risk in association with the overall quality of the loan. It is for this reason that the lender takes risks and charges a higher interest on the given amount.
- When the economy flourishes, most of the population does well regarding income. Moreover, they can afford a much higher rate of interest in the event of loans being taken. However, should the reverse happen, the lender needs to stress collecting the principal amount.
- NINJA loans are primarily offered to those who have a short-term credit score. These loans come without the mortgage amount and they bear a higher amount of risk concerning the payment. The risk is comparatively higher because there is a more probable chance of default from the borrower’s point of view.
- There is no full verification process when it comes to NINJA loans, hence they carry a higher interest rate. The lender is not aware of the source of the borrower’s income. Likewise, they are not sure if the borrower can pay it or not. These types of loans have the highest chances of turning into assets that are essentially non-performing.
- A small ticket size is adequate for granting these particular types of loans. In the case of a higher amount, there is a much better chance of default. This is mostly because the lender does not possess a proper background verification of the borrower.
- In the event of a loan default, the entire amount is put at risk. This will in turn cause a sudden increase in non-performing assets. Be that as it may, most of the time, the lender may realize some of the principal amounts of the loan granted.
- Granting this loan was only possible when the lender has excess capital. Moreover, it was when they wanted a higher return in investment through boosting the loan’s interest rate. A person with a fixed amount of income and a good credit score will not pay a higher rate of interest as compared to the standard interest rate dominating the market.
2007-2008 Financial Crisis
NINJA loans were typically a part of the subprime mortgage market. Over time, they would create a burden on the credit markets prior to the financial crisis. Underwritten subprime loans were later put up for sale to “big banks” and went into an asset-backed security. One that would form a fraction of a collateralized debt obligation (CDO).
An increase in mortgage delinquency rates in 2007 would lead to the value of the underlying asset (the mortgages) decreasing. Before this, the 2007 Bankruptcy Bill was passed by the U.S. Congress. This makes it possible for individuals in debt to file for bankruptcy without recourse. Soon enough, more individuals would find themselves unable to pay their mortgages before stopping payments altogether. Several markets and economies would collapse as a result of this.
In 2010, a strict lending and loan application standard would come from the Dodd-Frank Wall Street Reform and Consumer Protection Act. These new regulations demanded that lending institutions obtain more comprehensive information from a borrower. These include credit scores and employment documents. Only with this information could they extend the loan.
Because of this, NINJA loans are almost – if not completely – extinct in the present day.