Lately, the “American Dream” is starting to look a bit different than it did for previous generations. The colloquial saying refers to a utopic idea, which often includes homeownership, a goal shared not only by young people in the United States, where the phrase is commonly quoted, but around the world. Many factors affect house prices, interest rates, and thus, the housing market. One factor rarely considered to have a significant effect on the market includes what happens to your mortgage after purchasing your home.
Mortgages have been securitized for years but were thrust into the public spotlight after the housing bubble they caused leading up to the financial crisis of 2008. At the foundation of the problem lie mortgages which homeowners cannot afford. Banks thought securitization hedged the risk of subprime mortgages by combining high risk loans with relatively low risk loans. This practice incentivized banks to write subprime mortgages to boost revenues. Mortgages are collateralized by homes after all. And as everyone thought they knew at the time; home values will only continue to rise. After this bubble burst, new laws were enacted to prevent the same over-lending practices. Today, we are seeing that not all lenders must play by the same rules.
Non-bank lenders have become increasingly popular since the 2008 recession. Non-banks now service roughly half of the entire US mortgage market, collecting roughly one trillion USD annually. As big banks move their focus toward high-net worth borrowers, new non-bank originators are filling the gap in the market which include first-time and lower-income borrowers. Many of these lenders are new companies which have not had to weather the storm of a deep recession. Making matters worse, these companies might be able to find ways around the capital and lending requirements to which conventional banks must strictly adhere. Often, their only lines of business include writing or refinancing mortgages. If, like in 2008, the housing market turns south, institutional banks could cut lines of credit to non-banks, which would have resounding effects in the banking sector.
Mortgages are then often sold before maturity for a variety of reasons. Often, big banks and federal mortgage servicers purchase these loans to package and securitize them. Other times, mortgage originators/refinancers sell their loans to raise capital. While banks have other sources of income, online non-bank lenders often do not participate in other financial activities which could keep them afloat during periods of high interest rates or high housing costs. Periods of housing slowdowns could significantly reduce their mortgage business. Additionally, changes in interest rates could push homeowners so far into debt that they can’t recover, adding pressure on non-bank lenders. This was often the case in the 2008 financial crisis when borrowers had been allowed to borrow more than they could afford.
Today, we are seeing a cooling housing market and rising interest rates. These signals, when combined with slowing growth in other sectors and the economy overall, are the warning signs which were ignored in the mid-2000s. Since the end of 2017, non-bank lenders have been dropping out of the market. About 3.5% of these lenders have been sold or closed their doors, while the number of mortgage analysts at such firms has dropped by 7% this year (about 11,000 jobs). Ultimately, the conditions in today’s housing market have made it more difficult than ever for young people to purchase a home. Indeed, many young people who remember 2008 are beginning to reconsider what the “American Dream” looks like. It may not ever include owning a home.