To understand what the next mortgage crisis will look like we need to review the last mortgage bubble that crippled the economy which led to the “Great Recession”. Unemployment reached 10% with over 7 million jobs lost. The first investment bank to go down was Lehman Brothers the 4th largest at the time followed by a consolidation with back door deals and mergers with other major players.
At the time lenders were selling an abundance of 2- and 5-year adjustable rate mortgages with no document income loans and often made up work history not verified by the underwriter. Subprime mortgages had little credit score requirements going down to 500. Toss in 100% financing and you have a brewing mess on your hands. To get a loan you needed a heartbeat and a pen to sign at closing.
Now lets fast forward to the aftermath. Lenders immediately increased credit score requirements into the 600’s, higher down payments, and eliminated “no doc loans” requiring a real job. This appeased the congressional leaders at the time with regulatory implementation of the Dodd-Frank Consumer Protection Act, named after Barney Frank and Chris Dodd. What did this do to the market? It basically eliminated 1/3 of the business and forced people to rent instead of buy.
Banks don’t make money when people can’t qualify
After years of sitting idle banks and non-banking lenders have now let time pass and time to heal. New leadership in these banks and a turnover of fresh new loan products are here. With a bull market going on 10 years, low unemployment and a booming economy the builders are building homes as fast as they can. There is a ton of money sitting on the sideline in the form of buyers and we all remember Gordon Gekko from the Wall Street movie: “greed is good”. It is this greed for more profits that has now led to updated 3% down payment mortgage options, lower credit score requirements which used to be 660 and 640 post-crash are now 580 and something called “non-qualified mortgages” have now emerged. There are bank statement programs, no income loans and some programs that require no verifiable work history. The main difference is lenders for these “subprime loans” are now requiring a larger down payment, main stream banks are no longer upselling adjustable rate mortgages and 0 down loans are non-existent.
We aren’t at our next mortgage crisis yet but, it will happen with new players and non-banking lenders leading the charge. Lending requirements are loosening year by year allowing a new market of homeowners in the form of millennials to qualify on easier terms than 5 years ago and everyone from banks, builders, to realtors, contractors and laborers depend on it including the big name retail stores. Like it or not when people buy homes, they buy goods and services that create a circle of business for everyone. That fact is scary to think about – your job all comes back to the bank saying “yes” to your neighbor moving in. Lenders are 100% more cautious now than at the time of the collapse yet, the slow easing of requirements will ultimately lead to the next housing crisis. Stay tuned because I’ll let you know when it’s here before CNBC!
Written by Steve Head, Mortgage Expert and Top Producing Loan Officer.
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