Mortgage Lenders Loosening Credit Standards as Home Prices Spiral Upward
Remember back when mortgage lenders loosened credit standards making it easier to get a loan and blew up a giant housing bubble?
That’s happening again.
According to a report released by Fannie Mae, lenders facing lower profit margins are trying to expand the borrower pool.
Facing constrained mortgage demand and a negative profit margin outlook, more lenders say they have eased rather than tightened home mortgage credit standards, according to Fannie Mae’s third quarter 2017 Mortgage Lender Sentiment Survey. Across all loan types — GSE Eligible, Non-GSE Eligible, and Government — the net share of lenders who reported easing credit standards over the prior three months reached a new high since the survey’s inception in March 2014, after climbing each quarter since Q4 2016.”
To put this in starkest terms, mortgage companies are lending out a lot of money that probably won’t get paid back.
The demand for mortgages is dropping. According to the report, demand over the past three months has dropped to the lowest third-quarter reading in the past two years. Meanwhile, demand for mortgage refinance has also dropped off a cliff.
Overall, the refinance market remains a stark contrast from a year ago, when the net share reporting rising demand over the prior three months hit a survey high.”
The report says revised, more favorable guidelines for Government Sponsored Enterprise (GSE) loans such as Fannie Mae have “helped to bring about more easing of underwriting standards for those loans.”
In other words, it’s easier for people to get loans they won’t be able to pay back.
So, why is demand for mortgages falling. Part of it likely has to do with rising home prices, according to a recent article on Wolf Street. The S&P CoreLogic Case-Shiller National Home Price Index for June jumped 5.8% year-over-year. At 192.6, the index has surpassed by 5% the peak in May 2006 of the housing bubble.
The Federal Reserve insists there isn’t enough inflation. It apparently doesn’t know where to look. We’re certainly seeing it in the housing sector. Not to mention the giant stock market bubble.
It’s interesting that housing prices have increased so much under the radar. We haven’t heard a whole lot about it in the mainstream media. But there are clearly some parallels between what we’re seeing today and the dynamics in play leading up to 2008. Of course, you never know how such things will play out, but it should cause at least a little concern.
The loosening of credit standards in the mortgage world is taking place within a broader context. Consumer debt in the US has skyrocketed. According to the latest quarterly household debt and credit report by the Federal Reserve Bank of New York, aggregate household debt increased for the 12th consecutive quarter. It now sits at $12.84 trillion, a level $164 billion higher than the previous peak of $12.68 trillion set in the third quarter of 2008.
The New York Fed recently issued a red flag warning on credit card delinquency. The bank said both early and serious delinquencies went up from last year, and called it “a persistent upward movement not seen since 2009.”
We’ve seen this film before. And like a lot of sequels, followup doesn’t promise to be any better than the original. It certainly appears we are heading toward the end of the latest up cycle. When it will crash, which bubble will pop first, and how it will all play out remains to be seen, but it certainly looks like all the dominoes are in place.
Get Peter Schiff’s latest gold market analysis — click here for a free subscription to his exclusive monthly Gold Videocast.
Interested in learning how to buy gold and buy silver?
Call 1–888-GOLD-160 and speak with a Precious Metals Specialist today!