The Housing Bubble

A weekend topic starting with Mortgage News Daily. “Federal Housing Finance Agency Director Melvin L. Watt focused much of his speech to the National Association of Real Estate Brokers on its five-year goal of creating two million new Black homeowners. There were ‘The unsavory practices that set the stage for our homeownership rates to get worse, especially subprime and predatory lending that disproportionately targeted minorities with mortgages that were designed to fail,’ and the generally irresponsible practices in the real estate and mortgage finance sector that ultimately led to the meltdown.”

“Efforts to increase credit access are underway and some have borne fruit. Fannie Mae has made several changes to calculating student loan debt in DTI ratios and both GSEs are considering how to better verify income for self-employed applicants and people who take part in the so-called gig economy.”

“Watt said FHFA and the GSEs have also worked to assess the role of debt-to-income (DTI) ratios and creditworthiness. The Dodd-Frank Act ‘ability to repay’ rule which gave rise to the qualified mortgage or QM standards established a regulation which lenders can meet in part with loans that have DTIs that do not exceed 43 percent. However, the GSEs, while they remain in conservatorship, can purchase loans with higher DTIs and do so for otherwise creditworthy borrowers with DTI rations up to 50 percent.”

From Fox 10 Phoenix in Arizona. “Getting a mortgage loan isn’t the easiest thing, especially for those student loan debt. Changes coming to mortgage loans, however, may make the process easier. For many millennials like Tyler McKirgan, home ownership is that American dream they just can’t reach just yet. The culprit? Student loans. ‘It definitely is a big burden, because millennial wages are low, and student loans are high,’ said McKirgan.”

“Mortgage lender company Fannie Mae, however, is revising their loan requirements, which could ease the burden of debt. As of now, the threshold for debt-to-income ratio is 45%, and if an applicant is over that threshold, they’re not likely to qualify for a conventional loan. For McKirgan, who is a recent grad school graduate, he knows that feeling of potential rejection all too well.”

“‘I’m at 46% right now, so on Saturday, I’m gonna be jumping for joy,’ said McKirgan. Saturday is the day when that threshold will be raised to 50%. ‘I think its great opportunity for someone who felt like they can’t buy a home, because they’re so burdened with debt, especially student loan debt.’”

From KPBS in California. “If you applied for a mortgage last month and didn’t quite qualify, you might want to try again this month. Some lending standards have been eased to allow more people to get into the market. Government controlled mortgage giant Fannie Mae is allowing borrowers to have higher levels of debt and still qualify for a home loan. Previously, the debt-to-income ratio was capped at 45 percent. Now it’s at 50 percent, making room for a larger house payment.”

“For example, for a household making approximately $7,000 in gross income a month, with a few hundred dollars in debt payments, it could mean a significant loan increase, said Mark Goldman, senior loan officer with C2 Financial Corporation and real estate instructor at San Diego State University.”

“‘Their ability to afford a home with 10 percent down went from about $455,000 up to about $540,000,’ Goldman said.”

From WTOP in Washington DC. “The D.C. region is one of four metro areas real estate firm CoreLogic Inc. now considers ‘overvalued,’ based on its analysis that includes disposable incomes and median prices. ‘The Washington area overall is a very high-cost market, and prices have risen much more over the last few years than incomes for regular families,’ CoreLogic chief economist Frank Nothaft told WTOP.”

“He says it is a simple mathematical equation. ‘Just over the last year in the Washington, D.C. area, home prices have risen an average of 5 percent over the last year, and mortgage rates are up a half percentage point over the last 12 months. That means to buy the same house with the same down payment today compared to 12 months ago, the homebuyer is looking at a monthly mortgage payment that is about 12 percent more than it was just a year ago,’ Nothaft said.”

From The National. “The biggest financial crisis for 80 years started 10 years ago when the French investment bank BNP Paribas, citing the ‘evaporisation of liquidity in certain sections of the US securitization market,’ froze withdrawals from three of its funds which had substantial holdings of American mortgage-backed securities. The funds were relatively small - less than US$2 billion - but it was the bank’s accompanying statement that terrified the markets.”

“BNP said it found it ‘impossible to value certain assets fairly, regardless of their quality or credit rating,’ which meant that no bank or fund in the world could know the value of the trillions of dollars of mortgage-backed securities they held on their balance sheets.”

“The real carnage, which turned the market rout into an economic recession, was in the global credit markets, or interbank lending market where banks extend credit to each other on a daily basis. Mortgage securities hardly moved - the market simply froze, with trading in many securities halted. The sub-prime crisis, which had been building since the US housing bubble had burst in the summer of 2006, had begun. The rest is history.”

“A decade on the world has still not fully recovered. On Monday this week Eurostat announced that unemployment across the euro zone fell to 9.1 per cent in June, the lowest since February 2009, but still below its pre-crisis levels. Unemployment, particularly in the 18 to 24-year-old “youth” category, in countries such as Spain, Portugal and Greece, is still above 30 per cent. Ireland, which took a huge 17 per cent hit in GDP post-crisis, has only recently got back to where it was after a full decade of lost growth.”

“Could it happen again? Yes, although probably not in the same form. Generals always fight the last war and the threat this time around may come from a different direction. On Monday Moody’s warned that UK household debts are rising to worrying levels at a time of economic uncertainty. The same trend is appearing in the United States where the Fed looks certain to raise interest rates. China, worried about its level of consumer debts, has put the brakes on and may be heading for a hard landing. An economic downturn, all too possible given the political chaos in the US and Britain, could tip many households over the edge. A lot of lessons have been learned in 10 years. They just may be the wrong lessons.”