NINJA Mods

If they weren’t the root cause of the subprime mortgage crisis, NINJA loans certainly fueled the flames.

NINJAs are No Income, No Job, no Asset loans. As the names imply, these loans were given to people based on income they claimed to make with no requirement that borrowers back up their assertions with pay stubs or tax returns. A credit score was often enough documentation to get a borrower qualified.

It’s easy to see how this led to an onslaught of people living in homes they simply couldn’t -- and still can’t -- afford. If you wanted the new house in the nice neighborhood, this was a great way to get into it. The shortsightedness of such a financial move is stunning, of course, because as soon as you move in, there is the awful reality of the mortgage payment, along with the insurance, taxes and upkeep.

If you couldn’t afford the house to begin with, what are you going to do when all those bills come due? What if the home owner experiences a financial hardship, is forced to take unpaid time off or, common in this economy, loses his job? The most likely result is a default that leads to foreclosure. That’s how we arrive at historic foreclosure rates that continue to climb. (The latest report from the Mortgage Bankers Association estimates that 14 percent of mortgage holders in this country are either behind on payments or in foreclosure.)

So now we have mortgage modifications. Mods are offered by the government and by the private sector and have come a long way in the past six months. There are still long queues to get someone to take your call and to find out if you qualify for a program. And there are frustratingly long delays and complicated document requirements to qualify. The documentation requirements are so stringent and complicated that well intended, and most likely qualified, applicants often fail to get final approval because they can’t come up with the paperwork.

I should clarify. To the normal, responsible, home-owning population, these requirements really aren’t all that difficult to meet. But if your life is coming undone and your document filing system is lacking, this part of the process can be daunting. Many people don’t save pay stubs. Others have ongoing income from another source than a steady job and never contemplated that they would have to prove that income. All of it can keep someone from getting a mod.

A solution to this predicament that I hope does not become a reality, but that I have heard quiet reference to, is the “NINJA mod”.

This is dangerous territory. We want to fix the problems created from such irresponsible lending and borrowing, not pile onto them. So lenders should be very careful.

I do think borrowers who don’t qualify for mods should have access to trial modifications, allowing them to make reduced payment on a trial basis to prove their ability and willingness to stay in their homes. Investors will agree – a loan paying something is better than a loan that goes to certain loss through foreclosure. At the end of the trial period, these borrowers will have shown that they are good for the modified loan, and at that point, they can qualify for a modification without the full documentation requirements. But these borrowers should not receive the same benefit of a permanent principle reduction or permanently modified loan based on verbal qualifications, alone. In that case, we’d reach a day we at Allonhill are working very hard to help government agencies, investors and other avoid: Groundhog Day.