has he explamo for you NINJA Loans This chapter is concerned with regular, periodic cash flows. In your personal life, the most import- ant periodic cash inflow you will encounter is, probably, your paycheque. Your most important periodic cash outflow will probably be a series of mortgage payments. About a decade ago, mortgages in North America became much easier to obtain. Bankers dis- covered that, rather than lending money to house buyers and waiting to be repaid, they could instead sell the debt to someone else as a "mortgage-backed security." Since getting repaid by the borrower was no longer the bank's problem, banks relaxed their lending standards so that even people with no regular job or income could qualify for a loan. These loans became known as "No Income, No Job, and no Assets," or NINJA, loans. The increased number of people who could qualify for a mortgage led to an increase in the demand for housing, pushing up house prices. This, it was thought, made the whole enterprise safe-even if the borrower could not pay back the loan, the bank or the purchaser of the mortgage-backed security would still have a claim on their house, which was sure to go up in value. Unfortunately, though perhaps not surprisingly, it turned out that many of the NINJA borrow- ers were not able to keep up their mortgage payments and defaulted on their loans. It became clear that the acronym NINJA was particularly appropriate, since, like a ninja, the borrowers were stealthily vanishing. A large number of repossessed houses now appeared on the market. As a result of this oversupply, house prices dropped dramatically. Many of the borrowers now found that the amount they still owed on their house was more than the house's market value, an undesirable condition known as being "underwater." The holders of mortgage-backed securities discovered that the backing for the security was now worthless. This crisis then spread to the rest of the econ- omy, creating the crash of 2008. As an engineer, you may encounter mortgages in both your personal and professional life. In today's housing market, most young people find it necessary to borrow money from the bank before they can buy their first house, which they will then gradually repay over the first few dec- ades of their working life. Another growing expense many young people face is the repayment of their student loans. In some parts of North America, this can overshadow the cost of a first home. In your professional life, you may have to advise your company on the advisability of borrowing money to purchase a building or piece of equipment. Lastly, it may happen that, after years of working for a larger company, you and some of your fellow employees decide to create a start-up company of your own. Second mortgages on your individual homes are one, high-risk way to generate the initial funding you will need. QUESTIONS TO CONSIDER 1. What differences were there between the US and the Canadian banking systems before the 2008 crash, and how did these differences affect the seriousness of its consequences in the two countries? 2. What has been done to prevent a recurrence of the 2008 crash? 3. Estimate how much you expect to earn each month in your first job. After deducting necessary living ex- penses, how much can you afford to put into mortgage payments each month? How much will it cost you to buy a home to your liking, and how long will it take you to pay for it? 4. You have two possible sources of funding for a house purchase. One requires regular monthly payments of $A for 10 years, the other requires regular monthly payments of $B for 20 years. You calculate that 120A > 240B, and decide that the second alternative is therefore cheaper overall. Is this correct