Teaser Rate

AKA: adjustable-rate mortgages (ARMs), ninja loans or liar loans.

Back in 1996, 65 percent of subprime loans had been fixed-rate, meaning that typical subprime borrowers might be getting screwed, but at least they knew for sure how much they owed each month until they paid off the loan. By 2005, 75 percent of subprime loans were some form of floating-rate, usually fixed for the first two years.

When the borrowers get to the end of the teaser rate period, they'd have to refinance, so the lenders can make more money off them. Thirty-year loans were thus designed to be repaid in a few years.

Source: Michael Lewis. The big short: Inside the doomsday machine. WW Norton & Company, 2011. [B020]

There was an adaptive [assortment] of new mortgage types: adjustable- rate mortgages, “pick- a- payment” mortgages, and even the infamous NINJA loan (“No Income, No Job, no Assets”).

Source: Andrew W. Lo. Adaptive markets: Financial evolution at the speed of thought. Princeton University Press, 2017. [B116]

There were interest-only loans for those who wanted to pay only the interest portion of a loan and push off principal payments. Ever­ popular adjustable-rate mortgages featured superslim teaser rates that eventually rose. Piggyback loans provided financing to those who couldn't come up with a down payment. Borrowers hungry for riskier fare could find mortgages requiring no down payments at all, or loans that were 25 percent larger than the cost of their home itself, providing extra cash for a deserved vacation at the end of the difficult home-bidding process. "Liar loans" were based on stated income, not stuffy pay stubs or bank statements, while "ninja" loans were for those with no 45 income, no job, and no assets. Feel like skipping a monthly payment? Just use a "payment-option" mortgage. By 2005, 24 percent of all mortgages were done without any down payments at all, up from 3 percent in 2001. More than 40 percent of loans had limited documentation, up from 27 percent. A full 12 percent of mortgages had no down payments and limited documentation, up from 1 percent in 2001. For those already in homes, lenders urged them to borrow against their equity, as if their homes were automated-teller machines. Citigroup told its customers to "live richly," arguing that a home could be "the ticket" to whatever "your heart desires."

Source: Gregory Zuckerman. The greatest trade ever: The behind-the-scenes story of how John Paulson defied Wall Street and made financial history. Broadway Business, 2010. [B184]

In a negative amortisation loan, the principal actually increases as interest is not covered. There were “teaser’ rates – 2/ 28 mortgages where there are artificially low rates (as low as 1%) for the first 2 years with the loan interest being reset at the end of the ‘honeymoon’ period. [...] By 2007, the sub-prime market accounted for 20% of new mortgages and 10% of all mortgage debt. NINJAs (‘no income, no jobs, or assets’) [meant that] in 2006, Casey Serin, a 24-year-old web designer from Sacramento, bought seven houses in five months with US$2.2 million in debt. 

Source: Satyajit Das. Traders, guns and money. Pearson UK, 2020. [B177]