Subprime Mortgages: The Dog Returns To Its Vomit

Other people’s money is always more fun to play with recklessly than your own.  As such there’s been a quiet escalation in number of  private capital pools offering mortgage (and auto) financing to subprime quality borrowers.  “Special Circumstance Lending” is one such lender in Denver.  It constantly runs ads on Denver radio.

The proprietor of Special Circumstance Lending was an aggressive participant in the junk mortgage underwriting business and dumped more than his fair share of subprime crap into the Wall Street mortgage securitization scheme that led to “The Big Short.” SCL doesn’t need to see your tax returns.  It will give you a mortgage based on bank account statements.

The big Wall Street banks appear to have retreated from risky mortgage lending.  But have they? Though new regulations are intended to limit the amount risk the big banks take underwriting mortgages , the banks instead extend large lines of credit to private “non-bank” mortgage lenders, like Exeter Finance.  The average credit score of Exeter underwritten paper is 570.   If Exeter doesn’t get repaid, the big banks extending the funds to underwrite that garbage won’t get repaid.

The Government, via Fannie Mae and  Freddie Mac, has been underwriting de-facto  subprime mortgages – though they are still labeled “prime” for securitization purposes – for a couple of years.  Let’s face it, a 3% down payment mortgage – where the 3% does not have to come from the pocket of the homebuyer – with a 50% DTI (50% of pre-tax monthly income is used to service debt) is not a prime-grade piece of paper. I don’t care what the credit score is attached to that underwriting.

But Freddie Mac is taking it one step further down the sewer. A Short Seller’s Journal subscriber who is involved with an investment fund that invests in difficult financings sent me the flyer he received for the new Freddie Mac dog vomit mortgage:  “I occasionally process residential mortgages, so I stay on top of the underwriting guidelines…As of July 29, you can buy a single family / condo (there has to be a first time homebuyer on the deed), with ZERO DOWN AND A 620 CREDIT SCORE, WITH NO INCOME RESTRICTIONS. I had a stroke when I read that!”

There is no minimum borrower contribution from borrower personal funds.  Furthermore, borrowers who put down 5% do not have to have a credit score.

The mortgages now offered by the Federal Government are beginning to look and smell like the same sub-prime sewage that was proliferated by Countrywide, Wash Mutual, etc in the mid-2000’s.  True, as of yet we have not seen a widespread issuance of the adjustable-rate ticking time bombs that triggered the financial crisis. But the U.S. Government, using your taxpayer dollars, has become the new subprime lender of first resort for first time homebuyers who have little financial capability of supporting the cost of home ownership for an extended period of time.

Like the dog returning to its vomit, the U.S. financial system has returned to the business of underwriting the next financial crisis.   Only this time around the Federal Government is providing a large share of the “rope” with which new homebuyers will eventually hang themselves.  The financial explosion that is going occur will be worse than 2008 because the average household has significantly more debt relative to income now, with more than 75% of all households living from paycheck to paycheck.  One small hiccup in the economy will trigger an avalanche of debt defaults.

Despite what seems like a strong housing market and buoyant stock market, the XHB homebuilder ETF is down 15.4% since mid-January. Many individual homebuilder stocks are down a lot more. My subscribers and I are making a small fortune shorting and trading puts on homebuilder stocks.  You can learn more about my subscription newsletter here:  Short Seller’s Journal information


10 thoughts on “Subprime Mortgages: The Dog Returns To Its Vomit

  1. Is it really no income verification? I saw a similar flier that has no income restrictions, but not no income verification.

    1. According to my subscriber, who processes these things, there’s no income verification. For sure there’s no income restrictions on the 97% LTV product because I just looked it up on the Freddie Mac website. Also, on 95% LTV mortgages (i.e. 5% down payment) a credit score is not required.

  2. I think I need to vomit. The part that makes me most sick is that while the federal government eventually bailed out many homeowners, this time around, since they own the mortgages, there will be immediate bailouts. There cannot be a housing crash with the government fully propping it up, just like there has been no decline in the price of education. The government is fully complicit in creating high levels of inflation. Isn’t that lovely?

    1. How about Fannie Mae giving non-recourse 80% mortgages to multi-family property owners? You built a building in 2009
      and it’s appraised up 30% from then, you can cash out a huge gain, not pay taxes on it because there was no sale,
      and walk away from the mortgage when the housing market shits the bed.

  3. Dave,

    I look forward to your effective and succinct articles. However, there are some that have grammatical errors. There is just one in this article.
    If you want a great proofreader, I’d be glad to.



    1. LOL – thanks. As an English major in undergrad, I had to be anal about grammar. But grammatical standards have disappeared from journalism and I write a shit-load of content every week (my newsletters have 10x the content of my blogs in any given week) so I have to skip worrying about grammatical perfection. I’ve come around to accepting that content substance is more important than presentation form. Thanks for the offer though.

  4. Looks like all the debt monetization, that sat at the Fed as excess reserves of the big banks, is now pouring into the economy and markets, including, as you mentioned, lines of credit to the mortgage companies. How far is the cartel prepared to go in stoking asset inflation?

  5. One of the reasons i enjoy your writing so much! Reading about the Chicago fed’s idea to raise property taxes one per cent in Illinois was thinking-rob productive Peter to pay collective Paul.

  6. The SCL guy, Larry Lindsey, has a Saturday morning show on 104.3 The Fan, and co-hosted by a well-respected guy in Denver sports talk radio. If you had little to no financial background (like most Americans), you’d think he was providing a great service. I’m guessing the co-host is in that category, and thinks it’s a great deal – but probably getting paid a good chunk of change as well.

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