While news services proclaim the foreclosure rate is falling drastically and there is no reason for the public to be concerned about the housing market- the New York Federal Reserve is warning investors that the subprime mortgage industry is heating up. House prices peaked in most markets last year and now there is a nationwide decline in home prices as the market corrects.
The problem with the mortgage meltdown this time around is that these worthless loans (with major standing issues) are now guaranteed by the government- and the federal government is continuing this predatory practice by insuring subprime mortgages written by Wells Fargo and Bank of America in order to stimulate the flattening housing market. The federal government relies on illusion to keep people buying into bubbles and the depleted taxpayers to bail out the mega-banks.
Just like those who purchased homes prior to 2008, homeowners who purchased during the “recovery” of 2012 to 2016- will soon find themselves upside down with mortgages they can’t afford. When this occurs, the market correction will leave homeowners with no equity and with payments they can’t afford. The homeowner will typically quit paying until forced to vacate the property- and then large investment funds come in, buy up the distressed properties and rent to those victimized by irresponsible lending practices and their own ignorance. This time around- there is no excuse for homeowners who failed to learn from the mortgage debacle of 2000-2012.
Default rates on subprime mortgages spiked to 25% in 2007, according to the New York Fed report. Those who invested in Mortgage backed securities based on subprime mortgages imploded and the losses are still unknown since the empty trusts have not been audited.
The problem with the federal government is that as long as the wealthy are making money no policy changes occur. The average American cannot influence policy EXCEPT by refusing to engage in commerce with that entity. The federal government deliberately allowed the subprime market to inflate again in order to “fix” the first bubble that burst- creating the appearance of a recovery. Mortgage-backed securities that are imbedded within the tranches of worthless subprime mortgages, are hot commodities because the American taxpayer is on the hook if the securities fail.
From 2000 through 2006 the government mortgage insurance programs insured less than 3% of all subprime mortgage originations, while private mortgage insurers covered over 20%. However, post-bust private-mortgage insurance of subprime mortgages dropped to zero-percent. The all benevolent Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the USDA’s Rural Housing Service (RHS) stepped in to fill the vacuum created and insured these subprime mortgages. By 2009 government entities insured almost 35% of newly originated subprime mortgages. Recent numbers reflect that almost 22% of new subprime mortgages are insured by a government or quasi-governmental (Fannie/Freddie) housing entity.
The New York Federal Reserve’s chart shows a massive decrease in volume for privately-insured subprime mortgages (red line) post-bubble, and how the government (blue line) entities took over this business:
The issue is, according to the report, that almost all government insured mortgages are securitized by Ginnie Mae who guarantees the principle and interest of all of these loans to the investors who purchase these mortgage-backed securities. Unless the government fail, the investor is completely covered by the American taxpayer who takes on the credit risk of these predatory and designed to fail mortgages.
The increase in subprime mortgage guarantees from 2007 through 2009 when prices were plummeting caused borrowers to carry deep negative equity in their homes. As homeowners became overleveraged, many lost their jobs and the default rates rose astronomically. The Federal Housing Association would have to step in and receive bailouts from the taxpayers in 2013 when the Mutual Mortgage Insurance Fund was exhausted.
The policies of the federal government (QE1, 2, and 3, TARP, and other settlements) soon contributed to another housing bubble that began in 2012. Housing prices rose dramatically, homeowners signed up for overpriced mortgages they couldn’t afford and the market achieved some type of faux-equilibrium.
The loans issued post-bust resulted in the homeowner’s with poor credit scores taking on significant leverage to purchase the “American Dream”. The Federal Housing program allowed mortgages with an original loan-to-value (LTV) ratio of up to 96.5% (3.5 % down which has now dropped to 3% down) and these loans required borrowers to pay a upfront mortgage insurance premium that is/was typically rolled into the loan balance, further raising the initial LTV.
Because the FHA homeowners are highly overleveraged up-front, they present a greater risk of default than conventional mortgage borrowers who normally put at least 20% down at closing.
These highly leveraged government-insured loans can be blamed for the current inflated costs of housing and the rocketship increase in home prices. Borrowers with weak to poor credit scores, and little “skin in the game” are at a higher risk of default and foreclosure. Borrowers with poor credit and few financial resources are vulnerable to even small income upsets. Overpaying for a home and being financially vulnerable creates a high risk of default.
In 2007 these subprime mortgages began defaulting at an astronomical rate during the housing bubble and it doesn’t take a rocket science to realize that the same pattern is already repeating. People with credit scores in the low 600s are able to take out government insured loans on homes that exceed 100% loan to value. What could possibly go wrong?????
Meanwhile the vultures of Wall Street are lining up for another mortgage carnage to occur. The banks aren’t worried about it because they are exempt from prosecution and already sold the note to some other poor sucker. The only party carrying the risk is the American taxpayer who already has 40% of his pay taken by force- and the American people do nothing. A “Brexit” could never occur in the United States because we have become a complacent and passive people.
According to the New York Federal Reserve, the five-year cumulative default rate for subprime mortgages that were originated in 2001 was 5%. For subprime mortgages that were originated in 2007, the default rate was 25%, and for borrowers with FICO scores below 600, it was over 40%! Subprime mortgages originated in 2010 have a five-year default rate of 8.4% despite the booming housing market over the period.
The government plays another little game of illusion because these default rates actually underestimate the number of borrowers in default because the loans that are refinanced with the Federal Housing Administration are, “treated as a successful payoff, even if the refinanced loan that replaces it subsequently defaults.”
As long as housing prices keep going up, and there are buyers to purchase them, the government can keep up this charade indefinitely. However, when housing prices stall and begin to decline- all hell breaks loose. The New York Fed is prepping investors by revealing cloaked issues like “sustainability” of home-ownership and proposing some limitations. However, it is way too late for that to do much good.
This time, the problem of the housing bubble is the government and taxpayers problem, and with that guarantee, institutional investors have invested heavily in subprime, mortgage-backed securities that were never delivered to the trusts because they are immune from the inevitable losses that have appeared on the horizon. It’s good to be one of the wealthy and the government’s protected breathen.