Not all conversations and panel discussions at the Mortgage Bankers Association's servicing conference held recently in Dallas were about onerous regulatory compliance and the shrinking profits for servicers. Many of the people I spoke with are in agreement that another round of increasing default rates are on the horizon. Apparently, many people in the mortgage industry have short memories, or weren't in the industry just eight years ago.
As evidence, many of the discussions I had with attendees centered around Fannie Mae's decision to offer 97% products, the fact that FHA loans have become the "new subprime" loans and their share of the market has grown exponentially, no-doc loans are being offered again in some corners, and more.
In other news, as reported recently by several industry trade publications and newspapers, BBVA Compass is introducing a new loan program that will allow borrowers to put down even less than the 3% down payment mortgage programs to be offered by Fannie Mae and Freddie Mac. This move and others like it, while laudable, will no doubt ensure increasing default rates.
BBVA Compass announced the start of a new program, which they call Home Ownership Made Easier, which is designed to help low- and moderate-income borrowers become homeowners by helping them overcome the hurdle of having to save up enough money for a down payment.
According to BBVA executives, in the HOME program, qualifying borrowers will be eligible to finance 100% of the home's value. Not only that, but BBVA says it will also contribute up to $4,500 toward certain closing costs.
While not every potential home buyer will be eligible for BBVA's HOME program, due to specific requirements, such as the subject property must either be located in a low- to moderate-income census tract or the loan applicants can't have an income greater than 80% of the median income for the area, this new program will help many people get home loans they would not otherwise be able to.
On the other hand, many believe this will also mean that some homebuyers will purchase homes that they might not be able to afford in the long run. These borrowers will have very little skin in the game when defaults lead to foreclosure. Sound familiar? It should.
According to BBVA Compass, the HOME program is part of their commitment to put $11 billion in lending, investments and services toward supporting low- and moderate-income individuals and neighborhoods. Again, a laudable pursuit, but one would certainly hope that stringent underwriting guidelines and requirements will be in place to minimize potential defaults. If one cannot save up even a 3% down payment it is conceivable that they are one or two paychecks from financial disaster, just as with the last housing bust.
By the way, under the HOME program, there will be no requirements for private mortgage insurance.
Furthermore, in 2010 over 40% of all mortgages were financed with FHA backing and in the years since the number of FHA loans has skyrocketed. It can be argued that many of these loans are riskier. Some have very low down payments or are adjustable-rate loans. Higher risk loans simply means more people have received mortgages on homes they cannot afford. That translates into more and more loans going into default. That should certainly sound familiar.
Additionally, millions of loans that went through the Home Affordable Modification Program are soon to be recast. Some economists are predicting that 30% or more of those loans will go back into default. Many others believe that government agencies will not let that happen. If those economists who believe the government will continue to intervene are right, the outcome would further fuel a false demand for available housing — once again prolonging the inevitable. But will this government or even a new one want to step in again to bail out consumers?
Haven't we learned anything over the past six years? Much of what we covered here contributed to the housing crash of 2008, and an artificial recovery. Surely I am not the only one who sees this latest potential bubble coming — perhaps not simmering up to the boiling point as did the last one, but a bubble nonetheless. Short memories, indeed.
Lynn Effinger is a veteran of more than three decades in the housing and mortgage servicing industries. He currently serves as senior vice president, institutional services for RIO Software Solutions Inc.