Will We Ever Learn? Risky Mortgages are Back!


Just over 10 years ago, the US experienced a recession like none it had seen since the Great Depression of the 1930s.  Much of the blame for the recession fell on the mortgage industry.  Our brilliant politicians supposedly put checks and balances in place to prevent people from taking out mortgages they could not afford.  Apparently, lenders and borrowers have figured out ways around these regulations.  From the Wall Street Journal:

More than a decade after home loans triggered the worst financial crisis in a generation, the strict lending requirements put in place during its aftermath are starting to erode. Home buyers with low credit scores or high debt levels as well as those lacking traditional employment are finding it easier to get credit.

The loans have been rebranded. Largely gone are the monikers subprime and Alt-A, a type of mortgage that earned the nickname “liar loan” because so many borrowers faked their income and assets. Now they are called non-qualified, or non-QM, because they don’t comply with post crisis standards set by the Consumer Financial Protection Bureau for preventing borrowers from getting loans they can’t afford. (Emphasis added.)

Borrowers took out $45 billion of these unconventional loans in 2018, the most in a decade, and origination is on track to rise again in 2019, according to Inside Mortgage Finance, an industry research group. Such mortgages aren’t guaranteed by government agencies and typically charge higher interest rates than conventional loans. https://www.wsj.com/articles/mortgage-market-reopens-to-risky-borrowers-11566379802?mod=searchresults&page=1&pos=9

As I read this article, I thought about a meeting that occurred early in my career at I.D. Images.  We were talking about rebranding our “error” reports.  Internally, they had developed a bad reputation and we were considering using a different name to report mistakes we made.  We were debating the issue and a colleague finally said, “You can call it what you want but poop is still poop.” 

We can call these mortgages what we want but they’re still not conventional mortgages.  At the peak in 2005, over $600 billion in subprime mortgages were originated in the US.  That didn’t end well in 2007.  We’re a long way from that number, but the trend is not our friend.  Pay attention to subprime mortgage originations.  If they keep going up, it will be time to get worried. 

https://www.researchgate.net/figure/Subprime-Mortgage-Originations-Annual-Volume-and-Percent-of-Total_fig1_46469138

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