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10 years after the financial crisis, is the (US) housing market still at risk?

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10 years after the financial crisis, is the (US) housing market still at risk?



But lending today is stricter. It is so strict, in fact, that some in the real estate industry believe it’s contributing to a housing shortage that has pushed home prices in most markets well above their pre-crisis peaks, turning younger millennials, who came of age during the crisis, into a generation of renters.


How has mortgage finance changed—or not—since the crisis?

Deregulation of the financial industry tends to be followed by a financial crisis of some kind, whether it be the crash of 1929, the savings and loan crisis of the late 1980s, or the housing bust 10 years ago. But though anger at Wall Street was at an all-time high following the events of 2008, the financial industry escaped relatively unscathed.

In fact, much of the mortgage securitization chain remains intact today. Lenders still sell their mortgages to Fannie Mae and Freddie Mac, which still bundle the mortgages into bonds and sell them to investors. And the bonds are still spread throughout the financial system, which would be vulnerable to another American housing collapse.

While this understandably elicits alarm in the news media, there’s one key difference in housing finance today that makes a financial crisis of the type and scale of 2008 unlikely: the riskiest mortgages—the ones with no down payment, unverified income, and teaser rates that reset after two years—are simply not being written at anywhere close to the same volume. It is much harder to get a mortgage today.

The “qualified mortgage” provision of the 2010 Dodd-Frank reform bill, which went into effect in January 2014, gives lenders legal protection if their mortgages meet certain safety provisions. Qualified mortgages can’t be the type of risky loans that were issued en masse prior to the crisis, and borrowers must meet a certain debt-to-income ratio.

Fannie Mae and Freddie Mac, which have been under government conservatorship since the federal takeover in September 2008, will only buy qualified mortgages for mortgage bonds. At the same time, banks aren’t issuing MBSs at anywhere close to the same volume as they did prior to the crisis, because investor demand for private-label MBSs has dried up.


Macroeconomic events like a recession would certainly impact the bonds just as they would any financial instrument, but the mortgage market itself is more stable because of the qualified mortgage provision. As a result, serious mortgage delinquency rates and foreclosure rates have dwindled to practically nothing since the crisis.

Subprime mortgage bonds, the most toxic of the MBSs during the financial crisis, are virtually nonexistent in the market today (although there is still roughly $400 billion in outstanding subprime MBSs issued before the crisis). In 2006, subprime MBS issuance topped out at $933 billion. There’s been a slight uptick in subprime mortgage bond issuance in the last two years, but in 2017 it was still just $5.6 billion.

The MBS derivative instruments received their fair share of the blame for the crisis, as repackaging mortgage bonds into opaque and unregulated financial instruments made the crisis harder to see coming. Those instruments went extinct almost overnight after the crisis; versions of them still exist, but they typically don’t contain mortgage bonds.


With MBSs behind them, Wall Street players have found new ways to capitalize on housing. Private equity firms bought foreclosed single-family homes in bulk after the crisis and formed companies like Invitation Homes and American Homes 4 Rent to rent them out. While these companies currently own a fraction of the total number of single-family rental units in America, they have eyes on expansion by buying homes or even entire neighborhoods from home builders.

Having a single-family home with a white picket fence has been the image of American success since the GI bill sought to increase homeownership in the aftermath of World War II. But tight mortgage credit, skyrocketing student loan debt, and a housing shortage have caused a fundamental shift toward renting. Homeownership, once deemed a requirement for economic mobility in the U.S., may no longer be an attainable part of the American dream.


Edited by Saving For a Space Ship

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