The Great Recession was an enormous disaster, and nobody wants a repeat of it. And, yet, we’re perched on precisely that precipice. Because for some reason, the pieces of the crisis are being allowed to reform themselves. And the only thing stopping it from all happening again? Millennials are smarter, and, well, broker than people buying houses in the mid-2000s.
To understand the problem, you need to grasp what happened with the mortgage crisis in 2007. Ream after ream of subprime mortgages were issued, thanks to a low federal funds rate. Essentially, banks didn’t have to charge each other to lend each other money. Many had an “adjustable” rate; if the federal funds rate went up, so did the mortgage’s interest rate. But the federal funds rate was never going up, right?
This hyper-cheap lending arrived right when mortgage-backed securities came into vogue, meaning banks bought financial instruments made of little slices of all these mortgages. Banks began to specialize in underwriting mortgages; they could borrow the money for nothing and rake in enormous profit in return. That put tremendous upward pressure on housing prices, because the fatter the mortgage, the tastier the slices you could work into your mortgage-backed security. Everything hummed along swimmingly until the Fed started increasing the funds rate. All those “adjustable rate mortgages” soon saw their interest rates go up, and homes Americans could barely afford in the first place became impossible to make payments on, right as the value of these same homes suddenly plummeted. Once mortgages went into default, it knocked over a series of dominoes that cost the world economy billions.
After Obama took office, a string of reforms, most notably the Dodd-Frank financial reforms package, were enacted to ensure that this wouldn’t happen again. The Obama administration then spent eight long years building a slow but steady recovery. Housing has risen, but it hasn’t recovered to its wildly-inflated heights.
The problem is, the Trump administration doesn’t seem to grasp what happened. They’ve been attempting to chip away at Dodd-Frank in ways large and small. So it only makes sense that we’re seeing a nascent return for the crisis.
In a Financial Times piece, it’s revealed that subprime mortgages, rebranded as “non-prime” mortgages, have returned. Not only that, a lot of financial operators involved in the first crash are right back at it, right down to selling those securities made from slices of mortgages. Some involved in the industry argue, fairly, that subprime with the correct controls is a good thing. It lets renters shift to homeownership, and housing is one fifth of the economy.
Lurking behind all this is the fact that the banks have much bigger competition. Fannie Mae and Freddie Mac, the government-sponsored companies in the mortgage industry, exist solely to get Americans into homes, and have steadily been lowering their underwriting standards as a result. Currently, you only need a credit score of 620, just one point above what’s considered “bad,” and a 3% to 3.5% down payment. Keep in mind, if Fannie Mae and Freddie Mac see another collapse, it’s going to be the American taxpayer covering the bill (again).
At the moment, home prices are rising, with a new wrinkle: Only the rich can afford them. As Kiplinger tells us, luxury homes are selling, but first-time buyers and those who want to trade up are faced with ballooning home prices:
A lot of homeowners who might trade up still haven’t regained enough equity to cover the cost of selling their current home and making a down payment on the next one. And because most of those homeowners have entry-level homes, the inventory for first-time buyers remains paltry. Even homeowners with enough equity to sell are delaying because they fear they won’t find (or haven’t found) something they want to buy. Some are balking at giving up the low mortgage rate they nabbed when they bought or refinanced previously.
In other words, anybody who can find a “first-time” home will need to borrow more to cover it. Meanwhile, the federal funds rate, amazingly, is roughly at the same place as it was during the boom. And with that, on paper, all the pieces are in place for a massive collapse. All that needs to happen is a “pro-business” administration to undo Dodd-Frank, and for a whole bunch of buyers to turn up.
That’s where Millennials come in. The 20-35 generation’s endless economic murder spree has included “not buying a house” for quite a while. The thing is, Millennials do want to buy homes, but, unsurprisingly, the $1.3 trillion in student loan debt sitting on a generation’s collective bank ledger makes home-buying a distant prospect. Even renting an apartment is becoming tougher.
As of right now, a thin framework of regulation, and the fact that Millennials are broke are the two things keeping us from another mortgage crisis. Of course, society being what it is, Millennials can’t expect any credit. Instead, they’ll likely wind up being yelled at for not buying the homes of Boomers, which they don’t want and can’t afford.
Sorry friends, we, as a generation, really can’t win.