The Return of the Ninja Mortgages to Canada: Buffett Rides to the Rescue

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In 2008, the US housing market had risen to artificially high values because mortgage lenders gave out bushel baskets of money to people who clearly could not repay it. These completely unqualified borrowers became famous as ninjas — no income, no jobs and no assets.

Non bank mortgage lenders topped the list of offenders. Countrywide Financial, a non-bank lender, was the biggest mortgage lender in the US. It was also one of the biggest provider of ninja mortgages.

In June 2017, the public learned that Canada’s largest non-bank mortgage lender, Home Capital Group — it’s equivalent to Countrywide Financial — had been caught at the same scam: giving out ninja loans on a big-time scale.

Home Capital was near bankruptcy. Warren Buffet stepped in to provide life support funding.

The pattern in Home Capital was the same as in mortgage lenders before the 2008 Financial Crisis. It began with mobile mortgage brokers.

There is a great example in The Big Short. Mark Baum (Steve Carell) goes on-site to interview a couple of these brokers. After he hears them talk, he shakes his head in disbelief as he tells his associates that these guys were not complaining about the poor quality of the loans, they were bragging about getting away with passing them off and getting their commissions.

However, the brokers were not really fooling the banks. The banks knew and were assisting in the cover up.

In 2011, a former vice president of Countrywide Financial, Ellen Foster, told Steve Kroft of 60 Minutes of an inspection of one of its departments: “All of the — the recycle bins, whenever we looked through, those they were full of, you know, signatures that had been cut off of one document and put onto another and then photocopied, you know, or faxed and then the — you know, the creation thrown — thrown in the recycle bin.”

Of course, she reported it up the line, and, of course, she was fired.

Despite all the media coverage about ninja loans in the aftermath of the 2008 crisis, it wasn’t the regulators who caught the continuing fraud in Home Capital, an outside whistleblower gave the tip.

There is a good reason why the regulators do not probe thoroughly enough for ninja loans. The banker lobby, assisted by Wall Street friendly economists, did the analysis of the 2008 Crisis carefully confusing ninja mortgages with subprime mortgages. The standard analysis never reveals that there were lending standards for these mortgages.

Banks do not make money the way most people think that they do. After the Great Depression of the 30s, the government wanted to help low income people buy homes. Thus, Fannie Mae (Federal National Mortgage Association) was born. For simplification I will refer to Ginny and Freddie within the name Fannie.

By about the early 1980s a financial genius (perhaps Fannie CEO David Maxwell) conceived of a way to help banks make more loans to the lower income people who comprise the subprime mortgage market. Fannie would buy and package the subprimes into groups of say 100 and resell them to high-end investors with an implied guarantee by the government on their worth.

The bank shifted all risk of loss on the mortgages to Fannie Mae. It was a win for the banks.

The banks have restrictions on how many loans they can make, so this new process would give the banks some immediate profit on the loans at a slight discount. At the same time, it would allow the banks to immediately go out and make more loans to low income earners. A double win for the banks.

The customers didn’t know about this arrangement because the banks kept the management of the loans. They collected the monthly payments, sued on default and such. The banks got an extra fee for this. A triple win for the banks,

More low income people could buy homes, which would also stimulate the economy. It was a win for the government.

The government did not have to put up an excess of money to buy these mortgages. It could arrange the timing for their immediate sale and the funds would flow from wealthy investor to bank. It was a super double win for the government.

High-end investors got a government backed guarantee of a riskless investment that paid more than government bonds. A win for high-end investors.

(So with all this government help and no risk of loss, how could bank executives so screw up the management of banks that in 2008 they were on the brink of bankruptcy — and at the same time claim genius level competence at bonus time?)

Canada has an insurance system to a similar effect with similar lending standards. Mortgage lenders, both non-bank and bank, can ensure subprime mortgages. Thus, the borrowers pay the premiums and the banks have no risk.

Ninja loans were not subprime loans. They were in the third-tier credit category, more accurately described as no-primes. They could be validly called sub-sub primes; but the deception is achieved by labelling them sub primes.

This win-win-win-win-win situation carried on for some 60 years. Subprime mortgages came to mean those that met Fannie’s standards. And, while there were certainly some economic ups and downs, there was no massive meltdown of the economy like the scare in 2008.

Now, Fannie Mae had lending standards. We all know them: a job history, income four times the mortgage installment amount and all the other common sense factors. The main difference between prime and subprime mortgages was that the sub primers only needed a 5% down payment not a 20%. Otherwise, they still had a good, but only a slightly lower, credit rating.

Bank lobbyists falsely claim that Fannie lowered her lending standards for subprimes. This is not true. There’s an accurate explanation of Fannie’s lending requirements in All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joseph Nocera. These journalists tell the usual story about a government agency — which means screw ups squared. But one thing Fanny did not do was lower her lending standards for subprimes despite pressure to do so.

Some time, it’s anyone’s guess when, but certainly by the year 2000, the banks ran out of true subprime mortgage applicants, so they sent out the mobile mortgage brokers to search. And for the easy commissions, and with blood hound prowess these mobile mortgage brokers sniffed out warm bodies that were literate enough to sign their names. Thus began the ninja loan deception.

The investment banks had also gotten into packaging and reselling mortgage-backed securities to high-end investors in investments called Collateral Debt Obligations (CDOs). The debt obligation is the loan; the collateral is the house.

Soon the investment banks started to hide ninja loans in the CDOs by sophisticated means.

So now we had large non-bank mortgage lenders (also called shadow banks), regular commercial or retail banks, and investment banks all falsey peddling ninja loans as if they met the lending standards for subprime mortgage loans.

If you can stomach more details about this see my earlier blogs: https://medium.com/@JanWeir1/the-greatest-fraud-ever-part-1-740610a4c2c9

https://medium.com/@JanWeir1/the-greatest-fraud-ever-part-2-a42aab787b69

We don’t need a big city telephone books size set of regulations to catch banks that are giving out ninja loans. All we need is a two liner which says that every mortgage application must contain a consent allowing the regulator to obtain a copy of the applicant’s tax return directly from the tax department. The regulator can do unannounced spot audits, select a random sample and get the best evidence of whether the applications are accurate.

But what’s the chance of penetrating the bank misinformation with a new analysis and getting a simple, uncomplicated regulation with no loopholes passed?

It’s a serious problem. Undetected for a decade, ninja mortgages were the root cause of the housing market crisis.

Ninja loans are financial cockroaches. If we see one, we’ve got many.

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Trial lawyer, has taught Business Law at the University of Toronto, Author, Critical Concepts Canadian Business Law @JanWeirLaw | http://jdweir.com

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