Mortgage Market Updates

You might remember the subprime mortgage crisis that began around 2007 and might be wondering to yourself if that could ever happen again. I have been reading and researching lately about mortgage default rates and trends which leaves me wondering if the United States could ever have a mortgage crisis like the one that occurred in the early/mid 2000s. 

It's no secret that foreclosures are still occurring throughout the United States. Bankrate.com publishes these rates periodically. According to Bankrate.com, “Foreclosure Filings increased 5.3 percent nationally from April to May 2017.” The national average for May was 1 in every 1,636 housing units is in foreclosure. The Top 10 states are as follows:

Rank State Total housing units Ratio of homes in foreclosure*
(1 in every …)
1 New Jersey 3,577,942 515
2 Delaware 414,416 753
3 Maryland 2,410,256 1,006
4 Illinois 5,303,675 1,057
5 Oklahoma 1,689,427 1,081
6 Nevada 1,192,083 1,108
7 Florida 9,094,999 1,140
8 New Mexico 909,565 1,168
9 Ohio 5,140,902 1,176
10 South Carolina 2,174,319 1,186

In a recent article in USA Today, ‘A Bad Idea’: More New Mortgages are Risky Ones’ indicated that trends are toward home loans guaranteed by the Federal Housing Administration that typically require down payments of just 3-5%. These FHA-backed loans are increasingly being offered by non-bank lenders with more lenient credit standards than most major banks. In addition, the article goes on to say that there are early signs of trouble in the mortgage market which add to concerns generated by recent “increases in delinquent subprime auto loans, personal loans and credit card debt.”

FHA loans comprised 22% of all mortgages for single-family purchases in 2016. The nations biggest banks have largely pulled out of the FHA market leaving non-banks like Quicken Loans and Freedom Mortgage to fill the void. According to the article, the worry is that if home prices peak and then dip, homeowners who put down just 3-5% will owe more on their mortgages than their homes are worth, increasing the incentive to default. The article presents other insights including one the publisher of Inside Mortgage Finance who basically says the fears of another housing crisis are unfounded, ‘noting Federal Reserve officials have complained that FDA loan standards have been too rigorous.’

In another article posted on CNN.com entitled, “Are we Heading Toward Another Subprime Mortgage Crisis,” Mr. William Poole (former president and CEO of the Federal Reserve Bank of St Louis) provided commentary and opinions on the current mortgage market.

“According to Freddie’s 2016 annual report, Expanding access to affordable mortgage credit will continue to be a top priority in 2017. Fannie/Freddie have redefined ‘subprime’ to a credit rating of below 620; previously these firms and banking regulators had used 660 as the dividing line that define a subprime borrower. Now by using the lower number, they may be buying even weaker mortgages than before the financial crises.”

Mr. Poole is concerned that we are headed to another housing crisis.

While the increase in defaults, delinquencies and foreclosures may alarm some, as note investors, this presents us with an opportunity to help. As we invest in non-performing notes, we can help home owners stay in their homes and work with the borrower who wants to make payments, but may not have been able to work with the bank or the bank may not be willing to work with the borrower. By helping the borrowers stay in their home and getting them to re-perform on their note, we are helping our communities stay healthy and free of blighted properties.