An exotic and dangerous financial animal – one assumed to have gone extinct in the flames of the 2008 recession – has returned, and many of those for whom that financial crisis remains an acutely painful memory are none too happy about it.
A CNBC.com article is reporting that a beast no less fearsome than the subprime mortgage – considered the single biggest reason for last decade’s global recession – is now back, not only for the benefit of borrowers with checkered credit histories, but for investors – including hedge funds and even insurance companies – once again excited about rolling the dice on riskier mortgage-backed securities.
According to the CNBC piece, the principal catalyst for the return of subprime loans – renamed “nonprime” to be less stigmatizing – is the inability of an even heavier debt-laden consumer to access the mortgage market.
One particular target of nonprime loans is the millennial. Millennials have famously been shut out of the housing market in recent years largely because of the massive student loan obligations with which many are burdened.
The lenders making these nonprime mortgages available are quite aware of the history that characterizes them, and stress that things will be different this time around. “We’re not going back to the bad old days of ninja lending, when people with no jobs, no income, and no assets were getting loans,” Rick Sharga, executive vice president of Carrington Mortgage Holdings, told CNBC.
Borrower Credit Scores Are Declining, While Debt-to-Income Ratios Are Rising
Maybe not, but with the return of these loans, borrowers with FICO scores as low as 500 will be able to access a mortgage. And while some might breathe a sigh of relief that it looks to be exclusively nonbank lenders offering the loans, not so fast. It turns out that big banks, including Wells Fargo and Citigroup, are getting back in this game by lending to the nonbanks (also called “shadow banks”) that, in turn, make loans directly to borrowers.
Another issue compounding the worry is that debt-to-income (DTI) ratio thresholds have started climbing again. The DTI ratio represents the percentage of a consumer’s monthly income that goes to paying the sum of their debt obligations, including the expected mortgage payment. For example, if someone making $5,000 per month must shell out $2,000 of that to pay their monthly debt obligations, their DTI ratio is 40 percent.
DTI maximums are creeping back up. Last year, Fannie Mae raised the DTI limit from 45 percent to 50 percent, and not merely for people with the most pristine credit.
Many are starting to wonder if it’s one more ominous sign that we’re heading toward another 2008-type financial crisis.
Mortgage Debt in America Is Once Again on the Rise
Gold and Silver Can Help Protect Your IRA or 401(k) from Another Mortgage Crisis
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