It’s been a decade, since the original economic turmoil that was said to be worse than the Great Depression that occurred in 2008. There were pervasive flaws within the economy that centered around the United States’ real estate market fueled by poor financing. In 2018, ten years after our original real estate bubble the credit or financing markets are thawing. Thus, there is a return of some old practices that were common in 2008.
Firstly, I’d like to address vocabulary terms that have changed in the last decade. Subprime is now a taboo word that is akin to radioactive, when spoken. Thus, a term that has replaced subprime is now “Non-Prime.” The logic behind this loosening of credit and the creation of “non-prime” mortgages are Millennials or Americans born between 1980 and 1996.
Millennials are said to be burdened with higher levels of student debt, thus they’re unable or hindered from taking loans to purchase their homes. “Non-prime” mortgages were created to allow this class of Americans to afford a home. In theory, this is an understandable loosening of market lending standards.
The concern is that it requires lenders and borrowers to make responsible financial decisions. The problem is that lenders are incentivized to churn transactions because they’re earnings are significant influenced by volume. Borrowers are incentivized to borrow because most Americans dream of owning their home. Lastly, with interest rates remaining at such low levels it is possible that another bubble could brew in the next 5 to 10 years.
Craig Repmann, Senior Executive at Heritage Mortgage, is a leader in the industry that survived the original subprime markets because his portfolio did not rely on toxic debt. His company was able to forecast the potential liability that affected most of America to avoid closing his doors like many of his peers that made financially poor decisions. Repmann explains that the market has changed over the last 10 years.
Repmann explains that large lenders such as Bank of America, Chase and other retail banks are lending with a keen eye towards high-net worth individuals. Lending is being used as a loss-leader to generate substantial deposits into their banks. Thus, large lenders are willing to offer significantly discounted lending interest rates under the requirement that you transition depository institutions. Lending has become part of a larger business that has moved away from profiting through earning interest due to the risk that is involved. Thus, a large section of the Americans are underserved because large lenders are focused on lending to the wealthy.
In this vacuum, Repmann has received notice from various sources that lenders are offering the return of “0% down-payment loans.” This type of lending practice screams like a reminder of the 2008 real estate bubble. The lending market is thawing and it is going to be up to every individual to make the right decision whether they’re really ready to buy a home.
Another issue that may temper the potential of growth is the lack of inventory. There is a lack of real estate inventory in various levels. The market of buyers is outstripping the sellers. Normally, this would increase the cost or price of homes. But, buyers are often looking for entry level homes and seriously considering their home’s affordability. The 2008 bankruptcy epidemic is still fresh in everyone’s mind. We can only hope that Americans will not make the same mistakes that nearly wrecked our economy.