Final answer:
Title theory states involve lenders holding property titles until loans are repaid, impacting applicant scrutiny, with risks evident in subprime and NINJA loans during securitization.
Step-by-step explanation:
Definition of Mortgage Concepts: The concept mentioned refers to a situation in title theory states, where when a mortgage is created, title to the mortgaged property is transferred to the lender until the mortgage is paid off or otherwise satisfied. This is different from lien theory states, where the borrower retains the title to the property, and the mortgage is considered to be merely a lien on the property. The issue of banks being incentivized to ensure loans are repaid if they retain them—as opposed to selling them in a process called securitization—is a significant concern in the mortgage industry. This concern grew particularly significant in the context of the rise of subprime loans and so-called NINJA loans before the 2008 financial crisis.
Subprime loans are characterized by features such as a low or zero down-payment, minimal scrutiny of the borrower's reliable income, and initially low payments that escalate after an introductory period. This structure led to risky financial practices and contributed to the mortgage crisis. In contrast, more scrupulous lending practices are incentivized when banks hold onto the mortgages because their financial well-being is directly tied to the borrower's ability to repay the loan.