Is it time to party like it’s 2006 all over again? The stock market is surging, subprime borrowers are getting into massive levels of debt, the Republicans are controlling the Congress, a sitting president is compared to Adolf Hitler, and the housing market is ballooning into a big, fat bubble. In fact, you could refer to it as the housing bubble 2.0, and things are just getting started.
A small savings bank in Michigan is offering its customers a zero-down mortgage and up to $3,500 in closing costs. These were the hallmarks of the previous housing bubble, which led to nationwide financial destitution and the triggering of the Great Recession.
Despite government and banking measures aimed to tighten the credit market in the fallout of the economic collapse, the U.S. has returned to its 2006 form with subprime borrowing. Sponsored by the Federal Reserve’s printing presses, the housing market is booming, but this won’t Make America Great Again. It will just make the Land of the Free poor again.
Michigan Bank’s Zero-Down Mortgages
Flagstar Bank, a Michigan-based small savings bank, is looking to help low- and middle-income borrowers obtain the American Dream.
According to the Detroit Free Press, the financial institution established a new program earlier this week that does not require a down payment for a mortgage. Flagstar will “gift” the necessary 3% down payment to the borrower, and there is no obligation for any of the qualifying applicants to pay back the down payment present.
Is this too good to be true? Well, that isn’t all. Flagstar will also provide up to $3,500 that will be used for closing costs.
Beverly Meek, Community Reinvestment Act director at Flagstar Bank, told the newspaper that saving up for a down payment and covering the closing costs are the hardest parts to achieving homeownership.
“Two of the biggest hurdles to homeownership are saving money for a down payment and then being able to afford the closing costs.
This program takes on both head on and opens up opportunities to borrowers who may have thought they couldn’t afford to own a home.
A low-to-moderate income person who is looking for a home can get into that home with zero down. It’s a really good time to buy a home — the economy is better.”
The bank noted that borrowers who may qualify for its new product would have an income ranging between $35,000 and $62,000, while the home price would range between $80,000 and $175,000. The mortgage rate would hover around 4%, which is in line with the typical U.S. mortgage rate today.
Housing Bubble 2.0 in the Works
The second housing bubble this century didn’t just spring up out of nowhere. It has been gradually getting bigger each passing year since around 2014. And, no, it isn’t President Donald Trump’s fault.
In October 2014, mortgage agencies Fannie Mae and Freddie Mac announced that they would secure loans to low-income homebuyers who put down only 3%. A year later, the White House directed the Federal Housing Administration (FHA) to decrease annual mortgage insurance premiums from 1.35% to 0.85%.
This leads to a moral hazard: private lenders will then impose lax mortgage standards, risking high rates of defaults in the future.
The U.S. government was commended for these efforts by private mortgage lenders. Rohit Gupta, CEO of Genworth Mortgage Insurance and co-chair of U.S. Mortgage Insurers, said at the time that the U.S. should never deter low-income families from buying a home. He told Bloomberg:
“Fully documented, low down-payment loans with the right credit score and right debt-to-income ratio have performed in this cycle. We have empirical data that those loans can be insured.”
History does, indeed, repeat itself.
As expected, banks curtailed tight credit controls and restrictions. Wells Fargo and Bank of America made business headlines last year when they launched 3% down payment mortgages of up to $417,000. The financial heavyweights did say that applicants should still have good credit scores, but they conceded that they are willing to be flexible with income and credit requirements.
Remember when homeowners were tapping into their equity at the peak of the housing bubble? That’s happening again, except this time it’s millennials who are getting trapped into this pecuniary scheme, not the Baby Boomers.
According to an April 2017 TD Bank survey, one-third of millennials reported applying for a home equity line of credit (HELOC). This is double that of Generation X homeowners and nine times that of Baby Boomer property owners. Home remodeling and debt consolidation were the two primary reasons for tapping into equity at the fastest pace in eight years.
Credit Access is Only Growing
The surge in credit isn’t just concentrated in the housing market.
Last year, the New York Federal Reserve reported that subprime borrowers are getting new $1,000 credit cards at “alarming rates.” Since 2009, the issuance rate of new credit cards, particularly to the nation’s lowest-scoring borrowers (credit scores under 660) have approached pre-recession levels. This is a terrifying trend in an era of rising interest rates – the latest central bank rate hike will cost Americans $1.6 billion in additional credit card finance charges.
By the end of 2017, total U.S. credit card debt will top $1 trillion. WalletHub, a personal finance website, summed up the situation of Americans today: consumers are “flirting with financial disaster.”
As the holiday season approaches, Americans’ personal debt levels will only intensify. They plan to spend on average $660 – the final tally is usually higher after Christmas – and most are taking on debt to cover the cost. What makes matters worse is that a quarter of consumers say they are still paying off last year’s Christmas debt.
This wouldn’t be bad if consumers were saving, but they are not. The personal savings rate stands at a 10-year low of 3%.
Let’s not get started on student loans!
The fiscal patterns of 2006 were truly frightening. But the financial troubles of today are insane – the definition of insanity is doing the same thing over and over again expecting different results.
The Alan Greenspan-coined irrational exuberance is here again. Like the Roaring Twenties, the dot-com boom and the housing bubble, many think today’s economic expansion will linger in perpetuity. But it won’t. We are in a moribund economy; a fiscal reckoning is coming. Until then, we can only party like it’s 2006 – where are your Sam Brownback for President bumper stickers?
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