The resurection of dead mortgage programs
The financial innovations that lead to the 2008 financial crisis return with the prospect of inflating another painful housing bubble and crash.
Proverbs 26: 11
It was inevitable. Cajoled by the real estate street preachers with their fever swamp sermons of “buy now, before rates go up!”, endlessly tempted by 24/7 remodel / flip porn on nearly every channel, all the while simmering over how the lucky few who bought in 2010 are watching their equity rise, home buyers today are rushing headfirst back through the looking glass, into a 2005-2006 style market of inflated values and crap inventory to pick from. They aren’t the only ones. Lenders have begun to race down that same road to ruin and I’m afraid it’s going to end the same way as it did before: tearfully.
Some context first to frame our story. The 1990’s saw a similar peak, valley, peak of home prices as we have seen in the past 10 years. After the 1991-1994 recession, the Real Estate market turned positive again. From 1996 on, values were increasing, and mortgage originations began to experience rapid volume gains. No trees grow to the sky of course, and in the later part of the decade, home prices amd sales volume began to stall. In 1999 a mid-sized mortgage company based in Calabasas, California, decided to rev up their market share by relaxing what had been decades of prudent underwriting standards. The devil’s been called many things. In real estate, he became to be known as “Fast and Easy”. The race to the bottom had been sparked. Thus, as
Countrywide begat “Fast and Easy”.
as Fannie / Freddie begat “Alt-A”
while World Savings begat “low doc pick a payment”
and Franklin Mortgage begat 80/20 no down
then IndyMac begat “No-Doc”
finally the anti-christ of mortgage lending rose from a humble manger nestled in the Emerald City: Washington Mutual’s Stated income, 100% financing, Option ARM. It was a rare and beautiful thing. The ungodly spawn of zero underwriting controls, “made” appraisals provided by in-house staff, and sustained by suckling at the teat of holy mother realtor, guider of homebuyers eager to worship this unholy beast: the miracle of cheap, question free financing.
We know how this chapter ended. Schumer, Dodd, Frank, and an alphabet soup of regulators did their best to kill off this abomination, regulating the banks in the hopes that they would never be able to create a monster like the one our nation suffered through again. Still, it’s hard to keep a good thing down forever….
A lethal combination of good intentions, bad policy, and moral hazard bring us forward to today. HAMP modded loans have kept buyers in homes they still can’t afford. HARP refinances have locked home owners into staying put with comfortable payments. These two programs have kept thousands of homes from market. The Bernanke’s ultra low cost financing has empowers an invigorated investor class capable of sweeping the majority of affordable homes off the market. All cash purchases in most areas of the nation still represent over 30% of all transactions. With so few homes available to buy and the refinance mortgage market nearly dead, mortgage origination levels are off by half. Just as in 1999, when volume stalls, what’s a bank to do? Resurrect the dead.
Private investors and mortgage bankers have begun weaving enchantments, teasing buyers with “Bank Statement Lending”, “No 4506 required” advertisements. You won’t hear He Who Shall Not Be Named (Stated Income) in any of these ads, but the message is unmistakable.
Foreclose on a Monday, re-buy on a Tuesday.
Mortgage alchemists are opening the door again to risky lending. Banks are watching closely I can assure you. They aren’t yet willing to take on much risk – which is why FHA insured lending has blossomed – but don’t expect standards to hold. Union Bank has set up portfolio funding products that are very forgiving to the recently foreclosed. Wells Fargo (1 out of every 3 loans funded today) has reduced their FICO score minimums for some product:
While it can be reasonably argued that these new programs are not Government backed, that this rise in private lending is limited, focused on a narrow set of buyers. On the other hand, a single cancer cell in the right environment can spread faster than a San Diego wildfire. A skilled surgeon, or a battalion of firefighters, regulators can hold back this growing problem of alternative financing for only so long. I have my doubts they can win this time around. That dog is looking mighty hungry once more, and there just isn’t much around to eat.
PS: OBEY MY DOG