Big Short’s version of the housing bubble is fun but reality disappoints | US mortgages

One of the contenders for Best Picture at this year’s Oscars is The great short, the saga of how we cheerfully ran to the side of a financial precipice in the years leading up to 2007.

The film somehow manages to make fun of the madness behind both the housing bubble and the golden years on Wall Street that accompanied it. He talks about how some naysayers saw the writing on the wall, recognized that the lending frenzy to subprime borrowers was likely to come to a grisly end, and bet against the trend, massively.

Even as the film’s stars and producers prepare to parade on the red carpet, however, worries about a new housing bubble are mounting.

Whatever is waiting to pounce, however, will not be close to what we saw in 2007. The New York Fed Quarterly Report on Household Debt and Credit noted that mortgage debt remained substantially unchanged over the past three years, and it has fallen as a share of total debt, from nearly 80% in 2008, at the height of the subprime crisis, to just 72% at the end of 2015.

The confirmation comes from the banks. Mortgage lending has remained flat and underwriting standards are stricter, although banks sometimes complain about the impact it is having on their profits.

In other words, we have done well so far, or the banks have forced us to do well.

But will it continue? What pressures exist for this to change?

Quicken – one of several “non-bank” lenders that are increasingly dominating the mortgage lending space – raised eyebrows with the Super Bowl ad for his Rocket mortgage. The product name suggests how quickly Quicken promises to align your funding – just eight minutes, if all documentation is in order. It’s not that they’re going to violate lending standards, the lender insists – it’s just that they want to make it easier for qualified lenders to jump through hoops.

Simplifying the whole process is the mantra that Bank of America has adopted with its new product, Affordable loan solution, which requires buyers to only lower 3% of a home’s value and still qualify for a mortgage of up to $ 417,000. The bank’s public relations team went to great lengths to point out that these will not be like the infamous “liar loans” of yore. In fact, every application will be handled by real people, not just automated systems, which means humans will analyze and judge the finances of every low-income applicant (who will need to have good credit scores to qualify).

“This time it’s different” is the refrain we’re starting to hear a lot in the mortgage industry. Equifax found that in the first 10 months of 2015, 50.7 billion new subprime mortgages were underwritten, a 28% in the number of mortgages originated and a 45% increase in sales. But don’t worry, lenders are focusing more on repayment capability.

It remains to be seen how long the behavior will remain rational. The real estate industry is not known for balanced buyer behavior at the best of times, and in many areas of the country, this is not the best time.

Fitch Ratings already has rang some alarm bells, based on the forecast that the Federal Reserve will continue to raise interest rates this year and that such increases will push mortgage rates higher. This, in turn, will give mortgage lenders an incentive “to expand loan eligibility requirements, as the refinancing volume is likely to dry up.”

Translation: When the cheap rewards fade – customers with good credit scores, good earnings and disciplined payment histories, or those who need to refinance – lenders will still need to generate new business. They will have every reason to push the envelope on factors such as credit quality.

These lenders are already under financial pressure for make the mortgage loan more profitable – perhaps by cutting personnel costs, one of the biggest expenses they have to face. And what does that staff do? If that were to happen, it would be bad news, since that staff are the people who do the due diligence on mortgage loans.

Then there is the fact that some urban markets – San Francisco and the Silicon Valley area – already seem dangerously overrated from any point of view. Zillow.com has set the rise in average property values ​​in San Francisco over the past three years at 67%, a spike that cannot be traced back to anything other than speculation.

Even nationally, some opponents argue that the accessibility crisis many homebuyers experience – when they find that rent makes financial sense because the average home price is simply too high – is part of a real bubble. Mark Hanson, who may yet to become the voice of the Big Short version 2.0, has preached that a wave of all-cash buyers, or what he calls “unorthodox question with unorthodox capital”Inflated the ratings from 25% to 60%.

Even imagining what might happen to some of these new borrowers who lowered a $ 400,000 home by 3%, if the value of that home drops by even 10%, it gives me a headache. They might have the cleanest credit in the world and the most stable jobs, and their lender would still have a panic attack.

And that’s assuming nothing else goes wrong: that there are no job losses, that the lender hasn’t pushed the envelope in terms of loan criteria, or hasn’t decided to go back to some of those bizarrely structured loans. to convince people who otherwise might not buy to consider it: a 0% teaser rate, for example, followed by a floating rate?

This brings us to the intentions of homebuyers and borrowers themselves: always the wild card.

LoanDepot, one of the emerging lenders in the non-bank and mortgage lending industry, recently interviewed American homeowners. He found them even more optimistic than they expected about the value of their homes. The extent to which the 2007-2008 subprime crisis failed to make them more cautious in tapping into their real estate assets also took the people of LoanDepot by surprise.

It seems that nearly half of Americans with mortgages expect the value of their home to rise this year; 85% expect it will increase by at least 10%. (LoanDepot notes, carefully, that industry insiders predict a gain of less than half that.)

New buyers are the most optimistic of all when it comes to price gains, but they may be more cautious about taking out loans against any equity in their home. But only 14% said the crisis made them more cautious in taking out a home equity loan, and nearly 6% said they still didn’t believe that having a high level of equity in their home would protect them if they did. crash.

If we can avoid the recurrence of the events recounted in The Big Short, it will be because some sort of rationality emerges and prevents all of us – bankers, home lenders and homebuyers alike – from behaving like reckless lemmings ready to rush to the edge of the road. next financial cliff.

There are no bright lights and arrows flashing now, pointing straight into the next crisis; just a few indicators of patterns of behavior that, if they continue in the same direction and persist over time, could lead us in the wrong direction.

It is good to ensure that homes become more affordable and mortgage financing more affordable. What’s not good is having someone on a low income buy a property in an area where property prices have soared over the past four or five years, with a minimal down payment, in the name of that goal. Or for a bank, desperate to bolster its profits, loosen its standards, and structure a mortgage product that will only work for, say, 75% of its borrowers.

History probably won’t repeat itself, but the echo alone could be deeply unpleasant.

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About Myra R.

Myra R.

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