Bankers’ Hours column: We may be heading to another mortgage crisis
The following isn’t a prediction of doom and depression. Over the past few years, it’s become evident that anybody who predicts anything about economics or politics doesn’t have a clue about what’s happening.
However, in the following commentary, keep in mind the old Chinese proverb: “He who does not change direction will get where he is going.”
The prime accelerant in the Great Meltdown of 2008 was — surprise, surprise — greed. And the Great Greed Mother of all the little greedlings down the line was a ravening appetite for yield on the part of investors worldwide, from individuals to sovereign funds. U.S. mortgage-backed securities had traditionally been gilt edged investments with an attractive return. The housing market was booming, and it appeared that real estate values might make a pit stop at Mars and then keep going to the next galaxy.
Lenders worked feverishly to fill the demand for securities backed by home mortgages. There weren’t enough loans underwritten within traditional guidelines, so lenders created new programs, products and, sort of, guidelines. There were NIV (No Income Verification) loans; Stated Income products, meaning the borrower could pick the number, and stated assets, which led to the Lamborghini of free money, a lovely machine described by professional loan originators as: No Income, Stated, Stated.
Towards the end of this feeding frenzy, the underwriting tool of choice might as well have been a clinical thermometer. Instructions for use: “Put this in your mouth while you fill out this short app.” If, when the form was finished, if the reading was 98.6, with a bit of tolerance either way, the loan was approved.
Eleven years later (A bit of eerie music here): The stock market is in fibrillation. Yield has practically disappeared for investors in any kind of relatively secure asset. U.S. Treasury Bills are at their lowest point in history. Precious metal prices are spiking. So called Qualifying Mortgages (QMs), those that are purchased by Fannie Mae and Freddie Mac, as well as FHA and VA loans, are being made at a rate well below 4%, the lowest ever. These, when packaged, make for a very attractive yield when 30-year Treasuries are at below 1%.
But there aren’t enough of these QMs. And the investor itch for return on capital is almost unbearable. Thank heaven the Non-QM Lenders are ready with a backscratcher.
Since rates are low, and home values high, homeowners are flocking to take out equity through refinancing. Mortgage wholesalers are companies that buy loans from banks and mortgage companies, or fund deals for mortgage brokers. These operations report that refi apps are breaking all records. The wholesalers are fiercely competing for loans from every origination source: banks, credit unions, mortgage companies and mortgage brokers.
Daily, origination sources get messages touting products, and citing difficult deals done, that nobody else can do. Some examples:
• A 95% loan to Value (LTV) up to $1.5 million, no private mortgage insurance
• 90% loans up to $5 million.
• Debt to income ratio, 55%
Particularly arresting are the thumbnail descriptions of done deals, like this one
$4,000,000 loan; cash out, meaning the applicant wasn’t just refinancing for a lower rate.
The borrower’s income didn’t qualify. However, it was learned that, after applying, the applicant got a sizable raise. So the new income was used, with one pay stub to verify it, and as a buffer to supplement debt service, the borrower’s stock portfolio could be tapped if necessary.
But, when the recession comes, and it may be imminent, the borrower’s company may be in the midst of a cash and revenue crunch, the paycheck could get smaller, or disappear entirely, and that stock value has gone south. Oh, and the house isn’t worth as much as it was.
Real estate values can go up or down, income can rise and fall, but debt is immutable. It doesn’t fluctuate, and disappears only with amortization, pre-payment, or payoff when the collateral is sold.
A mammoth mortgage debt is being taken on by Americans on the cusp of some very uncertain times.
“The definition of insanity is doing the same thing over and over, and expecting a different result.”
— Albert Einstein
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
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