AFSCME 3357-HOF'S BLOG

Ninja Loans, Neutron Loans, Roach Motel Loans
Borrowers are Playing Chicken with Foreclosure - and Winning - Here's why:

Recently increased press attention to the problem with predatory sub-prime loans has uncovered some terms that insiders have long been using to describe the loans that they sell/sold. Neutron Loans, for example, are loans that kill the homeowner but leave the house standing (for the lender). A Ninja loan is "no income, no job, (no) assets." The Ninja loan overlaps with the "liar's loan" or stated income loan. Finally, there is the "Exploding ARM." An Exploding ARM is an adjustable rate mortgage with an initial teaser rate but with an indexed adjustment that virtually guarantees a high long-term rate. Exploding ARMS lock in the customer with high loan/value ratios based upon inflated appraisals, and they usually have prepayment penalties just to make sure the borrower can't go elsewhere. I have my own term for exploding ARM loans written for 100% or more after an inflated appraisal. I call them "Roach Motel Loans" because you can get in, but you can't get out.

In the case of some of these loans, the borrowers may have the last laugh, because, after months or years of trying to make payments they really can't afford, they just give up and pay nothing. Borrowers are daring the lender to foreclose. Surprisingly, in many cases the borrowers aren't being foreclosed on, at least not for many, many months. There are a number of reasons why. The first is that there appear to be many ways to hide a non-performing loan in a securitized pool. The second reason, is that even after a problem loan is identified in a securitized pool, it can take a long time to get the loan documentation straightened out to identify a proper owner to foreclose. This is especially true now that many states are refusing to allow MERS foreclose on the loan. MERS claims to be the owner of record on many securitized loans, but in most/many cases MERS can't prove it. The third reason is that the foreclosure industry, the foreclosure attorneys, and all of the other service providers to the foreclosure industry, are already swamped, and they can't quickly take on more business. The fourth reason is that some of these loans are so outrageous that the lender is subjected to counterclaims that are nontrivial. Each time one of these loans is foreclosed, there's another embarrassing tale of overreaching that potentially does great harm to the lender's reputation. Many of these loans are simply illegal, even under the junky laws that applied when the loans were written. Subprime lender Ameriquest is facing over a thousand lawsuits.

Ironically, the reason why the financial markets are all in a tizzy is not that the subprime loans are sapping up all of the consumers' money; it's that some of the consumers are starting to "just say no", and are stopping payment entirely. They finally realized that not paying a housepayment they can't afford is more rewarding than having credit that they didn't know how to use responsibly in the first place. In many cases, there's no good reason to keep paying on a house that's worth less than the balance of the loan, and given the perpetual loan balance, always will be.

Last Friday, the Fed cut short-term interest rates half a percent on an emergency basis to quell panic in the financial markets and to build liquidity. You would have expected mortgage rates to fall today. It didn't happen. What I think is that many lenders are stepping back and rethinking whether they really understand the mortgage business. I think they understand mortgages little better now than they did six months ago. There are a lot of lessons left to learn.