A really long, long time ago, well before most of today's wall street analysts made it through puberty, the entire international financial system almost collapsed courtesy of a mortgage lending bubble that allowed anyone with a pulse to finance over 100% of a home's purchase price...with pretty much no questions asked.
And while the millennial titans of high finance today may consider a decade-old case study on mortgage finance to be about as useful as a Mark Twain novel when it comes to underwriting mortgage risk, they may want to considered at least taking a look at the ancient finance scrolls from 2009 before gleefully repeating the sins of their forefathers.
Alas, it may be too late. As Black Knight Financial Services points out, down payments, the very thing that is supposed to deter rampant housing speculation by forcing buyers to have 'skin in the game', are once again disappearing from the mortgage market. In fact, just in the last 12 months, 1.5 million borrowers have purchased a home with less than 10% down, a 7-year high.
- Over the past 12 months, 1.5M borrowers have purchased a home by putting down less than 10 percent, which is close to a seven-year high in low down payment purchase volumes
- The increase is primarily a function of the overall growth in purchase lending, but, after nearly four consecutive years of declines, low down payment loans have ticked upwards in market share over the past 18 months
- Looking back historically, we see that half of all low down payment lending (less than 10 percent down) in 2005-2006 involved piggyback second liens rather
than a single high LTV first lien mortgage
- The low down payment market share actually rose through 2010 as the GSEs and portfolio lenders pulled back, the PLS market dried up, and FHA lending buoyed
the purchase market as a whole
- The FHA/VA share of purchase lending rose from less than 10 percent during 2005-2006 to nearly 50 percent in 2010
- As the market normalized and other lenders returned, the share of low-down payment lending declined consistent with a drop in the FHA/VA share of the purchase market
On the bright side, at least Yellen's interest rate bubble means that today's housing speculators don't even have to rely on introductory teaser rates to finance their McMansions...Yellen just artificially set the 30-year fixed rate at the 2007 ARM teaser rate...it's just much easier this way.
"The increase is primarily a function of the overall growth in purchase lending, but, after nearly four consecutive years of declines, low down payment loans have ticked upward in market share over the past 18 months as well," said Ben Graboske, executive vice president at Black Knight Data & Analytics, in a recent note. "In fact, they now account for nearly 40 percent of all purchase lending."
At that time half of all low down payment loans being made involved second loans, commonly known as "piggyback loans," but today's mortgages are largely single, first liens, Graboske noted.
The loans of the past were also far riskier – mostly adjustable-rate mortgages, which, according to the Black Knight report, are virtually nonexistent among low down payment mortgages today. Instead, most are fixed rate. Credit scores of borrowers taking out these loans today are also about 50 points higher than those between 2004 and 2007.
Finally, on another bright note, tax payers are just taking all the risk upfront this time around...no sense letting the banks take the risk while pretending that taxpayers aren't on the hook for their poor decisions...again, it's just easier this way.