Refinance volume is at its lowest level since June of 2009. With lenders desperate to increase volume and President Trump showing a strong desire to deregulate financial markets, people are wondering if we could return to the wild sub-prime lending days of pre-2008.
The answer is: No way.
Would you buy a bond that was backed by a pool of 90% loan-to-value mortgages with no income or asset verification? Neither would anybody else.
There is simply no market for those loans. There was a market prior to 2008 for several reasons, including:
1. The rating agencies (Moody’s, S&P, etc.) were inexplicably giving mortgage backed securities “AAA” ratings, so small Norwegian pension funds felt safe buying them. (There was a famous story after the meltdown about a small Norwegian town that went broke after investing in mortgage backed securities.)
2. There was a huge artificial market created by gov’t affordable housing programs and Fannie and Freddie, as they were buying sub-prime securities en masse. These artificial markets no longer exist.
3. Investors were desperately chasing yield any way they could find it b/c the Fed was holding rates artificially low.
Reason #3 is still a partial problem, but #1 and #2 are long gone. Sub-prime lending is returning to the market, but it is far more rational this time (and healthy for real estate overall, as it provides opportunities for non-prime borrowers to obtain reasonable financing not previously available).
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167
