Back before the financial crisis we had some very exotic loan types that people considered standard. We had 110% loans where the lenders would actually give borrowers money to close on their house. We had no document loans where the borrower was not required to provide any documentation at all and was often discouraged from doing so. Most people are also familiar with the ARM loans or adjustable rate mortgages that would adjust to the current market rate after 3 or 5 years, before 2008 many of these had payoff clauses where the entire amount would come due after 15 years. The NINJA loan however was one of the most exotic we saw at The Reeves Team. The NINJA loan stood for No Income, No Job and no assets required, this loan took off pretty heavily in the hey day as a large portion of the population could qualify.
Well would you believe not much more that 10 years after the financial collapse we are back at it again. 360 Mortgage group just announced its plans for the NINA loan. This loan does not include a requirement for a borrower to prove their income or their assets. They are calling this a pilot program, but its going to be pretty large for a pilot as they intend to allow for as much as 1 billion in these NINA loans.
So with these very loose requirements you would expect only the borrowers with the best credit scores to be approved right? Well you would be wrong as the program is allowing credit scores as low as 620 to be approved for these new loans.
One thing to note is that these loans will not be backed by Fannie Mae or Freddie Mac, these loans will instead be backed by private capital. If Fannie or Freddie decided in the future to back these types of loans again that would open the flood gates for other lenders to start offering similar mortgages. 360 Mortgages have been on the forefront of pushing the lending envelope since the financial crisis. They were also one of the first banks to offer 97% loan to value options in 2015.
So the question is, are we heading down the same path we did previously with reckless lending standards that will inflate the housing market again an cause another giant bubble? The reality is one of the biggest problems that caused the bubble last time was that lenders were able to get rid of their sub prime mortgages and were not left on the hook if the borrower defaulted. Now that the credit default swaps have been cleaned up and lenders are more responsible for borrowers that default we shouldn’t see as much of a bubble. This still doesn’t mean that lenders wont get over exuberant and lend to much money to those who shouldn’t be purchasing, but it does mean that if things go bad it shouldn’t be as catastrophic as last time.
So what do you think? Have we learned our lesson and this is just one example of a lender getting a little carried away? Or are we poised to make the same mistakes again only a decade later? Let us know what you think in the comments section below.
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