What is a NINJA loan?

Japanese swords in home
A ninja loan is a subprime mortgage loan offered to borrowers without proof of income, employment, or assets.

The word ninja is a nickname for a loan product available during the subprime market of the early 2000’s. Ninja loans are another name for NINA which stands for no income, no assets, and was coined in a book by Charles Morris.

The loans are also referred to as liar loans, according to Rick Sharga, executive vice president of Ninja loans were issued to unqualified borrowers who were likely approved only because they submitted false information on their applications. The loans usually required no downpayment and were given to borrowers with poor credit scores.

During the subprime lending boom, hundreds of thousands of unqualified borrowers received this type of fraudulent and risky mortgage loan.

“Traditional underwriting standards were too often ignored, and these falsified loan documents unfortunately made it through the system,” Sharga said.

Although many borrowers knowingly submitted false information, other borrowers were approved for ninja loans due to their profession.

Katherine Hoagland, mortgage processing manager at McGraw-Hill Federal Credit Union, said these loans allowed borrowers to avoid the traditional verification process and were offered to those who fell outside the normal taxation categories. The borrowers were often in professions associated with the service industry, or they were self-employed workers who did not claim their entire annual earnings on their taxes.

“It was used as a vehicle for more aggressive lenders to avoid the lengthy and sometimes painful mortgage approval process for borrowers who fell into these professions,” she said.

This home loan product, which is no longer offered by major lenders, was risky for both the mortgage lender and the borrower.

“It does not give the lender a full snapshot of the borrower’s ability to repay and also allows the borrowers to provide false information to qualify for a loan that they may not qualify for by disclosing their actual income and asset information,” Hoagland said.

As a part of new regulation to prevent another subprime housing crisis, this type of mortgage loan will be outlawed soon. The new requirements for Regulation Z, under the Ability to Repay and Qualified Mortgage Standards ruling, will make ninja loans illegal on January 2014. The updated Regulation Z prohibits creditors from making a mortgage loan unless the borrower can repay the loan.

Hoagland said this new ruling is entirely positive.

While Regulation Z will put an end to ninja loans for good, Sharga said that ninja loans have technically always been illegal but wasn’t until the meltdown that active prosecution actually began. The new regulations will make it virtually impossible to write a mortgage loan without documentation.

These limitations are good for both consumers and the industry.

“Giving a borrower a ninja loan is the equivalent of handing a five-year-old a loaded bazooka,” Sharga said. “Nothing good is going to happen and you can only hope that no one gets seriously injured.”