Final answer:
A zero-down mortgage doesn't require any down payment, negative amortization means the loan balance can increase over time, and no documentation loans do not require income or asset verification. These risky lending practices culminated in an increase in defaults and foreclosures contributing to the 2007 financial crisis.
Step-by-step explanation:
The student is referencing zero-down, negative amortization, and no documentation home mortgages, which are elements associated with the subprime lending practices that were prevalent prior to the financial crisis that began in 2007. A zero-down mortgage is one that does not require a down payment from the borrower. Negative amortization occurs when the monthly payments are not enough to cover the interest of the loan, causing the loan balance to increase. No documentation refers to loans where lenders do not verify income or assets before granting the mortgage. These types of risky loans appeal to borrowers who might have difficulty obtaining traditional mortgage financing.
Financial institutions during the mid-2000s engaged in subprime lending often with features like low or no initial down-payment, minimal income verification, and variable interest rates that could lead to significantly higher payments after initial teaser rates expired. These loans, sometimes called NINJA loans, escalated the risk of defaults as they were made to borrowers with No Income, No Job, or Assets. The assumption that property values would continuously rise allowed banks to feel secure in providing these loans, but when the housing market collapsed, many homeowners were left with properties valued significantly less than their owed mortgage, leading to widespread foreclosures and contributing to the financial crisis.