{"id":41510,"date":"2017-01-20T08:00:01","date_gmt":"2017-01-20T13:00:01","guid":{"rendered":"http:\/\/www.ino.com\/blog\/?p=41510"},"modified":"2017-01-23T09:33:12","modified_gmt":"2017-01-23T14:33:12","slug":"are-you-ready-for-the-next-mortgage-crisis","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2017\/01\/are-you-ready-for-the-next-mortgage-crisis\/","title":{"rendered":"Are You Ready For The Next Mortgage Crisis?"},"content":{"rendered":"<p style=\"margin: 0 0;\"><img loading=\"lazy\" decoding=\"async\" src=\"\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350.png\" alt=\"George Yacik - INO.com Contributor - Fed &amp; Interest Rates\" width=\"350\" height=\"131\" class=\"alignleft size-full wp-image-30496\" style=\"padding-top: 10px;\" srcset=\"https:\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350.png 350w, https:\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350-300x112.png 300w, https:\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350-270x100.png 270w\" sizes=\"(max-width: 350px) 100vw, 350px\" \/><\/p>\n<p style=\"margin: 0 0;\"><br style=\"clear:both;\"><\/p>\n<p>As an avid observer of the U.S. residential mortgage scene, I couldn\u2019t help but take a keen interest in one of the lead articles in the Wall Street Journal on Thursday. The article was headlined, <a href=\"http:\/\/www.wsj.com\/articles\/the-mortgage-markets-1-trillion-pocket-of-worry-1484827201\" target=\"_blank\">\u201cThe Mortgage Market\u2019s $1 Trillion Pocket of Worry.\u201d<\/a> <\/p>\n<p>According to the article, bonds backed by \u201ccertain risky single-family mortgages topped $1 trillion for the first time in November.\u201d I wasn\u2019t sure what \u201ccertain risky\u201d mortgages they were talking about, so I read on. It turns out they are mortgages insured by the Federal Housing Administration (i.e., taxpayers) which, as the Journal noted, \u201ctypically go to borrowers with small down payments and lower credit scores.\u201d<\/p>\n<p>While I certainly know what FHA mortgages are, who they go to, and that their market share has been growing sharply since the mortgage meltdown eight years ago, the Journal article was useful in telling a wider audience about yet another government financial crisis in the making. But the article largely skated over another fairly important aspect of the story.<!--more--><\/p>\n<p>Just a week earlier, in another act of last-minute taxpayer-funded generosity proffered by the outgoing Obama Administration, the FHA announced that it is cutting its annual mortgage insurance premiums for most new borrowers by 25 basis points. Yes, you read that correctly. The FHA is cutting premiums, not raising them, even as the risk pot is growing.<\/p>\n<p>If you had read a similar article that said that automobile insurance companies were suddenly hit with an influx of bad drivers, and their response was to lower insurance premiums, not raise them, wouldn\u2019t you think the insurers were nuts? <\/p>\n<p>Yet, what\u2019s going on in the mortgage market has attracted relatively little notice, until the Journal finally reported it. In fact, the general response among mortgage lenders to the FHA premium cut was positive. And why shouldn\u2019t it be? It creates more business for them, never mind the risks.<\/p>\n<p>In a statement announcing the premium cut \u2013 which, by the way, is the FHA\u2019s second such reduction in the past two years \u2013 outgoing HUD Secretary Juli\u00e1n Castro said that the cut aligns FHA pricing with \u201ctoday\u2019s risk environment\u201d and \u201ccomes at the right time\u201d for borrowers, who now face higher mortgage interest rates.<\/p>\n<p>\u201cAfter four straight years of growth and with sufficient reserves on hand to meet future claims, it\u2019s time for FHA to pass along some modest savings to working families,\u201d Castro said. \u201cThis is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers.\u201d<\/p>\n<p>Castro was referring to the fact that the FHA\u2019s mutual mortgage insurance fund, which backs the loans it insures, reached 2.3% of loan outstandings in fiscal 2016, well above its Congressionally mandated threshold of 2%. In other words, what\u2019s the problem?<\/p>\n<p>But according to the Journal story, \u201cFHA loans have been the worst performers among all major mortgages for years. Just over 4% of FHA mortgages were at least 90 days past due in October, according to the FHA.\u201d That\u2019s about double the 2% delinquency rate on loans eligible for purchase by Fannie Mae and Freddie Mac, which have tighter underwriting guidelines.<\/p>\n<p>At the same time, the FHA\u2019s share of the overall mortgage market has grown far larger than it was before the housing bust. FHA market share since then has been averaging in the low to mid-teens, compared to less than 5% before the bust. Likewise, the amount of mortgage-backed bonds the government guarantees has jumped significantly. Back in 2007, the agency guaranteed only $272 billion of mortgages, compared to today\u2019s $1 trillion. That doesn\u2019t include another $700 billion from other government insurance programs, like the VA mortgage program.<\/p>\n<p>There\u2019s an additional wrinkle the Journal article did focus on. Commercial banks have largely abandoned the FHA market, citing increased risk, leaving it to nonbank mortgage lenders to fill the void. According to Inside Mortgage Finance, an industry publication, banks now account for less than 10% of the FHA market, compared to more than 60% six years ago, while nonbanks\u2019 share has grown to 80%. <\/p>\n<p>\u201cThis is the biggest shift in mortgage lending since the savings-and-loans debacle in the 1980s,\u201d Ted Tozer, the head of the Government National Mortgage Association, which guarantees the bonds backed by FHA loans, told the Journal.<\/p>\n<p>If things are so rosy, why are the banks leaving the market? No less a figure than JPMorgan Chase chairman and CEO Jamie Dimon said in a letter to shareholders last year, \u201cIt simply is too costly and too risky to originate these kinds of mortgages.\u201d<\/p>\n<p>So which version of the story are we supposed to lend greater credence to? The Journal\u2019s article about the burgeoning risk and size of the government-insured mortgage portfolio, or the all-is-well version from the outgoing Obama Administration?<\/p>\n<p>When Ben Carson\u2019s nomination to HUD secretary was announced a few weeks ago, many people hooted it down. What does a retired neurosurgeon know about the mortgage and housing business, they asked? We need \u201cexperts\u201d to run HUD, they said. I say Dr. Carson can\u2019t get here fast enough. <\/p>\n<p>Visit back to read my next article! <\/p>\n<p><a href=\"http:\/\/www.ino.com\/blog\/meet-george-yacik\/\" target=\"_blank\">George Yacik<\/a><br \/>\nINO.com Contributor - Fed & Interest Rates<\/p>\n<p><span style=\"font-size: 12px; font-style: italic;\">Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n<!-- AddThis Advanced Settings generic via filter on the_content --><!-- AddThis Share Buttons generic via filter on the_content -->","protected":false},"excerpt":{"rendered":"<p>As an avid observer of the U.S. residential mortgage scene, I couldn\u2019t help but take a keen interest in one of the lead articles in the Wall Street Journal on Thursday. The article was headlined, \u201cThe Mortgage Market\u2019s $1 Trillion Pocket of Worry.\u201d According to the article, bonds backed by \u201ccertain risky single-family mortgages topped [&hellip;]<!-- AddThis Advanced Settings generic via filter on get_the_excerpt --><!-- AddThis Share Buttons generic via filter on get_the_excerpt --><\/p>\n","protected":false},"author":16,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[8764,8768,8769,6938,8767,7330,8766,8770,8765],"class_list":["post-41510","post","type-post","status-publish","format-standard","hentry","category-ino-com-contributors","tag-federal-housing-administration-fha","tag-fha","tag-fha-loans","tag-george-yacik","tag-hud","tag-mortgage-crisis","tag-mortgage-insurance","tag-mortgage-backed-bonds","tag-single-family-mortgages"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v23.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Are You Ready For The Next Mortgage Crisis? - INO.com Trader&#039;s Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2017\/01\/are-you-ready-for-the-next-mortgage-crisis\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Are You Ready For The Next Mortgage Crisis? - INO.com Trader&#039;s Blog\" \/>\n<meta property=\"og:description\" content=\"As an avid observer of the U.S. residential mortgage scene, I couldn\u2019t help but take a keen interest in one of the lead articles in the Wall Street Journal on Thursday. 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