Corporate & Securities Law

By Brett Sherman

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!

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• 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.

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