Question

Briefly describe one of the following kinds of mortgage and 1) identify who might benefit from this kind of mortgage and 2) explain why widespread use of this kind of mortgage might create risks for banks (do not repeat or reproduce information and commentary already presented in the thread; move on to TOPIC TWO if what you want to say about TOPIC ONE has already been adequately explained):

2/28 ARM (or other forms of subprime mortgages that reduce monthly payments e.g. “interest only loans”)

Low doc or no doc loans

NINJA loans

Answer 1

NINJA LOANS:

It is a slang term used for loans that are extended to borrowers with no income, job or assets etc. Whereas most lenders seek for some sufficient income stream to insure payments by borrower. The Ninja loans skip the verification process.

Beneficiaries of this kind of mortgage:

1. The beneficiaries out of this kind of loan are greedy bank officials who want to make quick money and achieve their targets forgoing the society and bank's interests. Generally these kind of fictitious loans are granted by the bank officials when they are under pressure to complete their year end targets.

2. The person taking the loan will benefit the most as otherwise he would not be eligible for loan but due to this he can take the loan, default the payment and keep the money in his pocket without the fear of any court proceedings.

Widespread use of this kind of loan may create a lot of risks in the financial system just like subprime mortgage crisis because as the borrowers default the Income stream from the loan stops and this directly affects the derivative or bonds issued on this kind of loan such as CDO's and CDS which use these loans as their backing, the money flow in the market will stop paralyzing the entire market.