Mortgage Market Reopens to Risky Borrowers (Strict Lending Requirements Put In Place After Financial Crisis Are Starting To Erode)

This is a surprising story …. NOT!

(Wall Street Journal) The risky mortgage is making a comeback.

More than a decade after home loans triggered the worst financial crisis in a generation, the strict lending requirements put in place during its aftermath are starting to erode. Home buyers with low credit scores or high debt levels as well as those lacking traditional employment are finding it easier to get credit.

The loans have been rebranded. Largely gone are the monikers subprime and Alt-A, a type of mortgage that earned the nickname “liar loan” because so many borrowers faked their income and assets. Now they are called non-qualified, or non-QM, because they don’t comply with post-crisis standards set by the Consumer Financial Protection Bureau for preventing borrowers from getting loans they can’t afford.

Borrowers took out $45 billion of these unconventional loans in 2018, the most in a decade, and origination is on track to rise again in 2019, according to Inside Mortgage Finance, an industry research group. Such mortgages aren’t guaranteed by government agencies and typically charge higher interest rates than conventional loans.

Proponents of unconventional loans argue that mortgages became too hard to get in the aftermath of the crisis and that their proliferation will open the housing market to sound borrowers who had been shut out of it. But some worry that the competition for customers could drive lenders to loosen standards too much.

Right now, unconventional loans are largely being extended by nonbank mortgage lenders. But big banks have found another way in: JPMorgan Chase & Co., Credit Suisse Group AG and Citigroup Inc. have in recent months been arranging mortgage bonds backed by unconventional loans.

Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007, according to Inside Mortgage Finance. There was $1.9 billion worth of subprime mortgage bonds in the second quarter.

Fannie Mae and Freddie Mac (FF) back about half of new mortgages in the U.S. 

Actually, it is no surprise to learn that credit standards have been eroding.

FF are seeing debt-to-income (DTI) ratios rising again (back to 2005/2006)/

Screen Shot 2019-08-21 at 12.28.02 PM.png

Average credit (FICO) scores have been declining since 2012.

Screen Shot 2019-08-21 at 12.28.13 PM.png

While DTI and FICO are eroding in terms of credit quality, average LTV is higher now than during the housing bubble era of 2005-2007. That is called “chasing risk.”

Screen Shot 2019-08-21 at 12.28.32 PM

Let’s see how FF behave after the “patch” is lifted.



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