The Fed printed $2.5 trillion to prop up the mortgage market and the Government “refurbished” all of the mortgage programs it sponsors (Fannie Mae, Freddie Mac, FHA, VHA, USDA) in a way that positioned the Government/taxpayer as the new subprime lender of choice. The two programs combined inflated a new housing bubble – one that ended up fueling housing price inflation more than sales volume. The FHA program was the first program to replace the collapsed subprime mortgage lenders of the mid-2000’s with a 3.5% down payment program. It’s market share of mortgage underwriting rocketed from 2% in 2008 to around 20% currently.
As home sales began to falter in mid-2014, the Government rolled out a revision to the Fannie and Freddie programs in early 2015 that reduced the down payment requirement from 5% to 3% and reduced the monthly cost of mortgage insurance. The VHA and, believe it or not, the USDA (U.S. Dept of Agriculture) programs provide low interest rate mortgages with zero down payment.
Fannie and Freddie permit the borrower to “borrow” the down payment or receive down payment assistance from a home seller willing make price/fee concessions in an amount up to the 3% down payment. In other words, under FNM/FRE, a homebuyer can close a conventional FNM/FRE mortgage with zero down payment. These alterations to the taxpayer guaranteed mortgage programs provided another short-term bounce in home sales volume and sent home prices soaring.
The housing market is headed south again. Just in time, the Government is making it even easier for a potential buyer to load up more debt to leverage into the American dream. Fannie Mae is raising the debt-to-income ratio on its 3% down payment product from 43% to 50%. DTI is the total household monthly debt payments divided by pre-tax income. While the credit standards are not quite as insane as during the last housing bubble, the current mortgage underwriting standards facilitated by the Government do not allow any cushion for household financial instability. This is especially true considering more than 50% of all households can’t write a $500 check to cover an emergency.
The latest iteration from the Government reeks of desperation. But wait, it gets even better. Some mortgage companies are now offering a 1% down payment mortgage that includes a 2% “gift” from the mortgage company in order to conform to the 3% FNM/FRE underwriting convention. The mortgage lender pays the 2% portion of the down payment.
However, this is not a free lunch “gift.” The mortgage lender assesses a higher rate of interest to the borrower than would be otherwise available from a standard FNM/FRE 3% down-payment mortgage. The mortgage lender, as the servicer of the mortgage, keeps the difference between the interest rate on the mortgage paid by the borrower and the amount of interest payment “passed-thru” to FNM or FRE. Over the life of the mortgage, assuming the borrower does not default, the mortgage company makes substantially more than was “gifted” to the borrower.
If a homebuyer does not have enough capital to make a 3% down payment, the odds are that the buyer also does not have the financial strength to maintain the cost of home ownership. Home-buyers who are “gifted” 2% of their down-payment do not need down-payment assistance, they need earning assistance.
Some people may find this money in the form of early inheritance giving which they have received from their parents. In order for their children to secure a mortgage or down payment on a house, parents may make the decision to financially gift their children with this money now, instead of waiting until a later date. This could help more people to have a house of their own, but not everyone has the right amount of strength to do this, as they may need earning assistance.
This is going to end badly, especially for the taxpayer. Obama promised after his mult-trillion dollar Wall Street bailout that the Government would not bail out the banks again. This “promise” guarantees that it will happen again. Only this time the source of financial nuclear melt-down will be many: mortgages, auto loans, unsecured household debt (credit cards) and student loans. Oh ya, then there’s the derivatives. The sell-off in the banking sector since March 1st reflects the market’s awareness of the rising degree of risk lurking in the financial system from an orgy of reckless debt creation.
I don’t know when the this giant Ponzi bubble will blow, no one does, I just know that it will be worse than 2008 when it does blow. The balloon latex is stretched so tight at this point that any systemic “vibration” not anticipated by the Fed could impale the thing.
The above commentary was partially excerpted from IRD’s latest issue of the Short Seller’s Journal. Two financial sector stocks and one auto sector stock, all three of which have been falling and could easily get cut in half from their current level by year-end with or without a market “accident” were presented. To find about more, click here: SSJ Subscriber Information.
I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K, and in the U.S – James
Something really bad is coming our way.
Agree. And there’s BIG move coming in the pm sector. Juniors are starting to pop like popcorn in an popcorn-maker again, just like in December 2015
Hi, I diligently read all of your articles and appreciate your well-thought out research. I miss you and Rory doing Shadow of Truth and was curious if it will no longer continue. You guys have a great vibe together and hope that there will be more. Thank you!
Thanks for the feedback – we both really appreciate the spiritual support. Unfortunately, Google has used “back door” censorship devices to drastically reduce the amount of ad revenue we can earn from the shows. At this point we’ve shelved the show for now because we both spend too much time producing the show to do it for free. Like most Youtube content, if we charged an “admission fee” I’m sure our audience would scatter quickly.
Sending you an email now to sign up for your paid mining stock journal. I would like to show my support for all of the free articles that i have taken advantage of. I realize that a lot of other youtubers have been turning to Paetreon (i think that is how you spell it), maybe throw your hat into that ring? Also, i would love to see you as a guest on Greg Hunter, Dr. Dave Janda, team up with TFMetals report, or even Jimmy Dore (more political based). I feel that they speak to truth, or at least offer differentiating points of views that are challenging to mainstream thought and also have a good following. I think that your personality and personal truths come through when you speak. Thanks again.
Thanks John! You’ll make enough from the MSJ in the next 3 months to pay for 10-years of the subscription. All of my subscribers who have followed the recommendations have made a lot of money. GSV is up 15% (25 cents on $1.65) since I recommended it last Thursday.
You should have the welcome email with all the back-issues in your in-box. If they’re not there, check in Gmail’s “promotions” folder.
FYI, I’ve never been invited on to Greg Hunter or Janda. But Turd has me on TF Metals A2A show a couple times a year and I’m on Silver Doctors quite a bit.
I have already made back my money from listening to you for years to come and am appreciative of forthcoming information. Look forward to potentially hearing you somewhere again because you brought some laughs that can’t be bought with fiat.