In many ways, 2008 feels like a distant memory. LeBron was finishing his first stint with the Cavs before taking his talents to South Beach, the country had just elected Barack Obama, and we were friends with Canada and enemies with Russia.
But something in the air feels eerily similar to the run up to the 2008 mortgage meltdown. Increased pricing combined with rising interest rates is ushering in a climate in which demand for refinances and purchases is limited. And when the mortgage industry gets squeezed, we see a spike in “exotic” financing. These exotic instruments helped turn the American dream of homeownership into a nightmare and played a key role in popping one of the largest bubbles in financial history.
To prevent another nightmare for unwitting borrowers and the financial markets, the government went to great pains to regulate the mortgage industry. In response, the U.S. mortgage industry splintered into origination by highly regulated banks and far less regulated non-bank mortgage originators. While in 2007 non-banks accounted for 20 percent of originations, by 2016, these non-banks accounted for half of all mortgage originations.
Non-banks are now signaling that there may be issues ahead. Anthony Hsieh, the CEO of LoanDepot, the sixth-largest mortgage originator and a non-bank, recently wrote:
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Mortgage rates highest in 7 years. Margins compressed with increased competition, particularly in the fragmented purchased market. Higher compliance cost due to Dodd-Frank. Reduced refinance volume at only 400B. No relevant return of capital to non-banks for non-agency products. Higher loan officer comp this cycle as compared to any previous cycle. Somethings got to give... will be an interesting rest of the year to set the stage for the next cycle. #notmyfirstrodeo
Without a robust refinance market, new homeownership must significantly grow to sustain the mortgage market, but it is not a buyers’ market. The median price of a home has risen from just under $150,000 in 2016 to approximately 200,000 in 2018. This median house price is now roughly the same as it was in 2007. As of May 2018, in the capital of mortgage fraud — a k a Miami, the median price rose 7.7 percent year over year to $350,000 while the demand for homes decreased 8.5 percent year over year.
Pricing is not the only factor curtailing the supply of ready, willing and able homeowners. Historically, outside of the great financial crisis, the homeownership rate in America fluctuates between 62 percent and 65 percent. Over the past several years, the homeownership rate has been steadily increasing to its current level of 64.2 percent — on the high end of the historical “healthy” homeownership rate. As this number rises, the number of unqualified homeowners increases.
With the rise of unqualified homeowners comes products ripe for fraud (again). Subprime mortgages are back and have been rebranded as “noprime loans.” Kyle Walker, the former head of Fremont, a mortgage originator that capsized during the crisis for having unsafe lending practices, is lending under a noprime shop called HomeXpress. He is not only the only one. In fact, $4.1 billion of securities backed by subprime loans were issued in 2017, and $1.3 billion of these kinds of securities were issued in the first quarter of 2018 (more than double the first quarter of 2017).
The continuing trend towards sluggish demand for mortgages portends a significant increase in mortgage fraud. Mortgage brokers only earn a living if people are buying homes or refinancing. As we reach the saturation point of qualified home buyers, brokers get desperate to fit square pegs into round holes — i.e., fraud. In 18 months, borrowers may very well be looking back and asking: How did I end up with a mortgage that I can’t afford for a house that is not worth the price? Correspondingly, lenders will wonder as to how they are inundated with borrowers who are unable to pay and collateral that is worth far less than advertised.
Current South Florida market conditions are forcing brokers/banks to use their creativity, ethical or not, in loan processing to get homeowners qualified. This, ultimately, will give rise to fraudulent market conditions that are already showing signs of life.
Josh Migdal is partner with Florida boutique litigation law firm Mark Migdal & Hayden. He represents clients in multiple jurisdictions and is known for his work on behalf of the FDIC in the wake of the mortgage meltdown.
▪ This is an opinion piece written for Business Monday’s “My View” space in the Miami Herald. The views expressed do not necessarily reflect those of the newspaper.
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