The Big Mortgage Fiasco and the Ninja Crisis

US Banks are expected to take over a record 1.2 million homes this year, up from about 1 million last year and just 100,000 as recently as 2005!

Now Chase and Bank of America, the biggest US lenders, are considering a moratorium on foreclosures after findings that employees preparing those foreclosures had submitted affidavits to judges containing information they did not personally verify, and some are starting to believe that some documents have been fabricated.

This is the last chapter in the Mortgage Fiasco that started several years ago when the big banks started to look for more profitable ways, breaking all the rules of the game, to take advantage of the housing bubble.


Leopoldo Abadia, a 77 y/o retired professor of IESE in Spain, posted in 2008 in his blog a definition of the Ninja Crisis, explaining why the banking system was in trouble and the reasons that created the current financial crisis. Basically he pointed out a series of events that lead to the current situation:

  • 2001: the Internet Bubble explodes.
  • The Federal Reserve lowers the interest rate from 6.5% to 1% in two years
  • This makes the housing market jump with access to low interest mortgages
  • In 10 years the average price of a house doubles in the US.
  • This makes the banks look for different ways to make more money since the operating margin is low.
  • Banks start to give more expensive loans to “NINJAS: no income, no job, no assets” betting in the increase value of the properties. Sometimes offer loans over the current value of the property, the “subprime mortgages”
  • Since they are short on cash they sell those mortgages to other financial institutions as MBS (Mortgage Backed Securities), breaking the Basel rules.
  • 2007: the housing market is saturated and the bubble explodes, and prices fall dramatically.
  • Most “NINJAS” decide to stop paying the mortgages, since the property has less value than the loan.
  • Nobody wants to buy the MBS’s from the current holders.

What is the moral of this story? When the Ninjas stopped paying their mortgages, the financial world came crashing down like a house of cards!

Please see the original blog entry (in Spanish) from Leopoldo Abadia here, and a good translation from Leslie Please here.

Also, if you have 40 minutes to spare, please watch the video “Money as Debt”, by Paul Grignon below (If you receive this post by email and the video does not show, click here):

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