Surely, we learned our lesson during the peak of the housing crisis in late 2007 – right? Not so fast. According to recent indicators, we might be on the brink of another bursting bubble.
The world was a different place in early 2007. You could still purchase or refinance your home using largely stated income, property values seemed to be increasing at an exponential rate and if you weren’t moving into your next McMansion every two to three years you simply weren’t taking advantage of a “growing real estate market.” It wasn’t until late 2007 that the world saw just how transparent the real estate market was, and it all began to collapse – to the tune of just under a trillion dollars in delinquent loans, from 2008 to 2012. In fact, 2008 saw foreclosures up 81% over the previous year, and 225% higher than in 2006. Yes, it was a scary time but isn’t that behind us? Looking at some of the key indicators that foreshadowed the 2007 mortgage/housing crisis, it’s looking all too familiar compared to what we’re starting to see today.
What’s the Concern?
Private Mortgage Insurance Stats: According to Freddie Mac’s 2016 Annual Report, more than a third of the real estate loans (mortgages) that comprise its current obligations are what Freddie calls “credit enhanced” – meaning they carry private mortgage insurance. Borrowers who need private mortgage insurance (PMI) often have lower credit scores or were unable to secure a large enough down payment when purchasing a home – both factors consistent with borrowers who have a much higher propensity to default on the loan. Simply put, about a third of Freddie Mac’s loans are essentially subprime.
Credit Insurance Ratings: Not a big deal, right? These real estate loans are insured – which sounds like a good thing. The problem is, these “insured” real estate loans are only as strong as the underlying companies who insure the obligations, and there are none rated any higher than BBB+. If these mortgages begin to fail, the insuring companies likely will fail too.
Borrower Credit ‘Quality’ Redefined: During the lead-up to the housing crisis, subprime mortgages were generally defined as loans made to borrowers with a 660 FICO score or lower. While the likelihood of real estate loan default tends to go down precipitously as FICO scores increase, the 600-700 FICO mark is still considered moderately risky for any lender. These low credit scores were a big part of what fueled the housing market collapse, and you’d think we would learn from our mistakes. As of 2017, Freddie Mac and Fannie Mae, the nation’s two biggest firms housing the majority of America’s mortgages, redefined their subprime threshold as a ‘620’ FICO score. So yes, we essentially lowered the standards quite a bit since the mortgage crisis.
Today’s mortgage field looks different than it did just ten years ago. While newer regulations like Dodd-Frank and TRID have helped create a greater level of transparency in terms of the lender/borrower relationship, little has been done to minimize the easy access to credit and low overall standards set forth by most lenders. We hopefully will not see another housing market collapse, another burst bubble, or another uncontrollable financial crisis – but the unfortunate truth is we’re seeing many of the same indicators we should have been paying attention to in 2005, 2006 and early 2007.
If the market does take a hit, investors will likely look to commodities that act as a hedge against domestic and global financial instability – like gold and precious metals. Gold acts as the perfect counterpoint to a struggling market, and with the domestic housing market looking as “bubblish” as ever, there is a real case to be made for balancing out a portfolio with gold. For more information about gold IRAs and other gold and precious metals-backed investments, contact American Bullion today.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.