Here We Go Again: No Income, No assets? No Problem

Back before the financial crisis we had some very exotic loan types that people considered standard.  We had 110% loans where the lenders would actually give borrowers money to close on their house.  We had no document loans where the borrower was not required to provide any documentation at all and was often discouraged from doing so.  Most people are also familiar with the ARM loans or adjustable rate mortgages that would adjust to the current market rate after 3 or 5 years, before 2008 many of these had payoff clauses where the entire amount would come due after 15 years.  The NINJA loan however was one of the most exotic we saw at The Reeves Team.  The NINJA loan stood for No Income, No Job and no assets required, this loan took off pretty heavily in the hey day as a large portion of the population could qualify.

Well would you believe not much more that 10 years after the financial collapse we are back at it again.  360 Mortgage group just announced its plans for the NINA loan.  This loan does not include a requirement for a borrower to prove their income or their assets.  They are calling this a pilot program, but its going to be pretty large for a pilot as they intend to allow for as much as 1 billion in these NINA loans.

So with these very loose requirements you would expect only the borrowers with the best credit scores to be approved right? Well you would be wrong as the program is allowing credit scores as low as 620 to be approved for these new loans.

One thing to note is that these loans will not be backed by Fannie Mae or Freddie Mac, these loans will instead be backed by private capital.  If Fannie or Freddie decided in the future to back these types of loans again that would open the flood gates for other lenders to start offering similar mortgages.  360 Mortgages have been on the forefront of pushing the lending envelope since the financial crisis.  They were also one of the first banks to offer 97% loan to value options in 2015.

So the question is, are we heading down the same path we did previously with reckless lending standards that will inflate the housing market again an cause another giant bubble?  The reality is one of the biggest problems that caused the bubble last time was that lenders were able to get rid of their sub prime mortgages and were not left on the hook if the borrower defaulted.  Now that the credit default swaps have been cleaned up and lenders are more responsible for borrowers that default we shouldn’t see as much of a bubble.  This still doesn’t mean that lenders wont get over exuberant and lend to much money to those who shouldn’t be purchasing, but it does mean that if things go bad it shouldn’t be as catastrophic as last time.

So what do you think?  Have we learned our lesson and this is just one example of a lender getting a little carried away? Or are we poised to make the same mistakes again only a decade later?  Let us know what you think in the comments section below.

How Quantitative Tightening and Quantitative Easing Affect Gilbert Real Estate

We have been on a wild ride financially speaking since the last financial crisis in 2008.  The crisis and the ensuing years were no picnic for the American Public.  The financial hardship that was felt could have been far worse if it were not for a tactic the federal reserved used called Quantitative Easing.  This is a phrase that sounds harmless, and also pretty confusing.  Quantitative easing is the introduction of new money into the money supply by a central bank.  The federal reserve buys up government bonds and other securities and puts what it owes on its “balance sheet”.  Central banks have the unique ability to purchase without actually having the money and this is what is sometimes refereed to as “printing cash”

 

Did quantitative easing affect real estate prices

Yes it did.  Many economists will say that quantitative easing is a new methodology and we don’t know yet if that is the reason for the economic upswing. However, we have years of data that show a correlation between the money that was injected into the economy and the prices of housing as well as the stock market.  Take a look at the chart below and you will see just how correlated the money the fed spent and the stock market prices have become. 

You can see that the fed was able to propel the economy forward and continued to do so through February of 2015. From February of 2015 the federal reserve stopped injecting money when the balance sheet hit 4.5 Trillion dollars.  The economy continued to do well for some time beyond that as the federal reserve also kept interest rates are near zero.

So isn’t the federal reserve reversing quantitative easing now?

Well yes and no.  The federal reserve began to raise interest rates and sell off some of its assets in 2018.  If you followed the stock market closely in 2018 you will know that the dow jones was down over 5 percent for the year.  So the first time that the United States economy didn’t have near zero interest rates and money being pumped into it from quantitative easing it lost money.  The federal reserve raised interest to 2.5 percent less than half of what the rates were before the economic crisis of 2008. When the markets began to freak out the announced they would not raise rates for the remainder of 2019.  They have been vague about quantitative tightening but many economists believe they will put that on hold as well. 

So what does this mean for real estate prices?

We are at an inflection point in the U.S. Economy.  We have what looks to be very weak economic data.  We can’t get the federal funds rate above 2.5 and when the federal reserve reduces the massive balance sheet it has, the economy starts to tank.  So this sounds bleak right?  Well its slightly more complicated than that.  The trump administration just recently stated that it would like to see a half a percent drop in the interest rate. This would bring the federal fund rate down to 2 percent.  If the economy shows signs of weakness the federal reserve could also just start to ramp up quantitative easing again.  It would stand to reason that easing will not be as effective as it was last time, but it would be foolish to think it would have no effect at all.  So it really comes down to judging how weak the economy is and how much the federal reserve is willing to do to keep a recession from becoming a reality.  Another thing to keep in mind is that we have an election being held in November of 2020 and we are already seeing signs that the administration wants the federal reserve to keep the easy money party going at least that long. 

So what do you think?  Are we going to continue moving up like we have been for the past 10 years?  Or are we due for a recession? Let us know in the comments section below.